Waiting for the man

The stock market had another bad day today, with the SSE Composite trading more or less straight down to 2657, before rallying in the last 30 minutes to close at 2706, down 2.65% for the day.  According to Bloombergextlink_3.gif, China has overtaken Vietnam to become the world’s worst performing stock market year to date.

Several things drove the decline.  The market is still very worried about the threats of a slowing economy and rising costs, and their impacts on corporate profits.  On the positive side, this has seemed to suggest in the past that the authorities would loosen up on money and credit conditions.  But the market is also nonetheless very concerned that the financial authorities will maintain a “tight” monetary policy – i.e. raise interest rates, hike minimum reserve requirements, or otherwise constrain lending growth.  According to today’s >China Dailyextlink_3.gif, “Chinese shares declined for the second day on Wednesday, led by property developers and banks on concerns they would be further pressured by the continuing tightening monetary policies.”

There continues to be a lot of confusion about government intentions.  Recent statements by several very senior leaders seemed to suggest that they were downgrading inflation as their top concern and turning more worriedly to slowing economic growth.  I still think this to be true, but the RMB has continued to rise and we continue to hear very hawkish statements about inflation and the currency.  We get a bunch of economic data tomorrow, and I hope these new numbers will provide us with a better sense of what is happening in China.

As an aside I had lunch with a group of investment bankers today to discuss monetary policy and financial risk.  At one point, perhaps a little impatiently, one of them turned to me and said, “Look. I am a very direct woman. I just want to know if the stock market will go up or down before the Olympics.”

Well, I am a pretty direct man.  I really don’t know.  Predictions about the direction of the stock markets are usually anchored in some notion of value, but in purely speculative markets like those of China, notions of value, even coming from someone as subtle as Warren Buffet, don’t really mean much except over a very long horizon.  In the immediate term, the markets are going to be affected almost wholly by government action, abrupt changes in monetary conditions, and sentiment.  I am not sure I would want to predict any of those things.  Overall, however, I am not very bullish.  I understand that a lot of investors are still desperately hanging onto losing positions begging for a chance to recoup their losses so that they can bail out.  This kind of trading strategy usually limits the upside and drags out the downside.  If forced I’d rather be short than long, but in fact I’d rather be in cash.

On a separate note eagle-eyed Jonathan Lerner sent me the following very interesting article from today’s Bloomberg:

Xia Says Yuan Should Rise Quickly, Then Level, Journal Reports

July 16 (Bloomberg) — Xia Bin, a former official at the People’s Bank of China, said the nation’s exchange rate policy should be aimed at disrupting expectations of continued currency appreciation, the China Securities Journal reported.

Xia said the government should allow the yuan to rise against the U.S. dollar to “a certain level” in a “relatively short” period of time, then keep it stable and allow for depreciation when the dollar strengthens, the newspaper reported today. Xia now heads the financial institute of the State Council’s Development Research Center.

I searched Bloomberg and Xinhua and wasn’t able to find it, so I can’t link it.

Originally published at China Financial Markets and reproduced here with the author’s permission.