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2 Markets: Brace for a
China-led chill By Chan Akya
Eighteen years ago, Chinese students and
intellectuals massed in Tiananmen Square to push
through their vision of democratic reforms, egged
on by an apparently conflicted central government,
where the forces loyal to Deng Xiaoping were
seemingly marginalized by those loyal to Zhao
Ziyang initially, with tragic results for both the
students and China in general.
While the
comparison of the events of June 4, 1989, to
today's
stock markets appears overly
sensational at first, the thrust of recent
articles on China, including my previous one, [1]
has been on the apparent loss of policy efficacy
by the central People's Bank of China (PBoC) in
recent months.
Six months ago, total
transaction volumes on the Shanghai and Shenzhen
exchanges were less than US$5 billion per day.
That figure now stands 10 times as high, at $50
billion per day. This volume is something China
can be proud of, barring one minor detail, namely
that the central bank and various policymakers
would much rather not see it happening.
Even as central bankers exhort the
country's citizens to beware of bubble-like
conditions in the stock markets, investors appear
unruffled, reversing the policy impact of any
announcement. Be they students, farmers or
construction workers, every Chinese living in the
two big cities of Shanghai and Shenzhen appears
now to have a brokerage account. Conversations in
the normally noisy dai pai dongs [2] in
Guangdong province and Hong Kong drop to a quick
hush whenever the subject of stock tips comes up.
In short, the stock market today represents a
revolution against the diktat of the PBoC,
questioning its very authority.
A
symphony of bubbles Experience from the
rest of the world shows that stock-market bubbles
are neither infrequent nor unpredictable; in most
cases, they are compounded by the mistakes of
policymakers. The technology bubble of the 1990s
is a case in point, as investors chased the dream
of a new economy that could offset the apparent
physical constraints imposed on the functioning of
the real economy, ie, bricks and mortar.
Initially, the promise of new technologies wasn't
accompanied by enough listed companies, thereby
concentrating the bets of investors. It took a few
years for enough listings to appear, but by then
the damage had been done to the long-term
prospects of the sector.
The dotcom era's
little experiment failed because investors mistook
the medium for the message, in other words, that
emerging new technologies merely helped to
rearrange the habits of consumers but did not
necessarily alter the physical provision of
products and services. Thus, while book lovers
would move away from their local bookshop to an
Internet store, they would still be buying books,
and perhaps in higher quantities.
To that
extent, the zero-sum game was the right strategy
for investors, which was to sell the stocks of
traditional stores while buying into online
stocks. Meanwhile, a number of fancy technologies
had no underlying cash flows, thereby rendering
guaranteed losses for anyone purchasing them.
As the bubble burst in the early part of
this decade, the US Federal Reserve cut interest
rates and attempted to shift the consumption
dynamic to the housing market. The result was a
rapid expansion in house prices across the United
States, fueled by a sharp relaxation in lending
standards. Starting with the two coasts, the
home-price boom moved rapidly inland like a
wayward hurricane, uprooting economic assumptions
in its wake.
Eventually, the market will
have to come to terms with the reality of too many
houses for a declining group of richer immigrants
and lower-quality employment for anyone remaining
in the hinterlands. I have previously written
about what is likely in store for the US housing
market; [3] recent observations with respect to
prices of higher-end residences in New York only
serve to strengthen that view. I am well aware
that the article upset a number of bullish
readers, but such is the problem with propagating
unpopular views.
The US housing and stock
bubbles positively pale in comparison to the ones
being observed in many other markets,
including
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