By Chan Akya
Treasury Secretary Hank Paulson has the toughest job in the world now. Taking over as the US dollar"s cheerleader proved problematic enough for much of this decade, but to do it in the last few months of an unpopular and lame duck Presidency was perhaps adding too many variables in itself. Billed as the China Expert who would get Beijing to float his currency, Paulson soon found himself less welcome in the Great Hall as Treasury Secretary than in his previous job as head of a Wall Street brokerage.
Then along came the financial market crisis, and with all his old friends from Wall Street hankering for bailouts, the poor chap must be getting very little sleep these days. The instinct to preserve people from one's own past is almost impossible to avoid, seeing as the process only validates one's own credentials. Thus, jobs for the boys have remained the hallowed tradition in both government and business for centuries.
The financial system meltdown of last year has been too dramatic to condense into one essay, and in any event I have written many articles on the subject previously, which are available in the online archives. The salient points to note are that bankers messed up by tying together the egregious greed of the common man to the grand design of Asian governments in running up large foreign exchange reserves. The results are now there for everyone to see.
The reaction from the favored few that stand atop the banking world's pyramid has much in common with what you'd expect if you cut the lunch money of an obese kid. A lot of tantrums, followed by pleading are the order of the day now, but eventually everyone settles down to indignant sullenness. That at least is the theory - trouble is there is always the one authority figure that decides to be "compassionate" and in so doing creates a much larger monster than ever before.
Before he opens the sluice-gates of government largesse that could help his old Wall Street buddies to find the keys to their Ferraris and Porsches though, perhaps the Treasury Secretary should spend some time thinking about the Old Continent. Yes, that one.
Like father like son
France's only claim to a last military victory involves the war it did not fight, namely the independence battle of America against the British. Inspired by French thinkers and receiving the Statue of Liberty in return, Americans had much cause to show gratitude to the French. Yet, the record of saving the French in World War II from a fate they had resigned themselves to changed much of the dynamic, while pushing America closer to its matriarchal tyrant, the British.
As the American economy started outstripping the war-ravaged European economies last century though, much of that admiration turned to crude humor, with particular emphasis on France's lack of a military record and its supposedly effeminate culture. Meanwhile, the Anglo-Saxon model of capitalism produced substantial economic gains for the US and much of Western Europe, leading eventually to the implosion of a Soviet Union that simply couldn't keep up with the Joneses.
At the same time, war-ravaged Europe followed a model of capitalism that involved significant levels of state intervention, much like Japan in the same period. In both groups, the process involved the grouping of companies into nuclear family pods, with each pod essentially competing against other pods while providing optimality in resources internally. This was, in other words socialism for the elite.
No group of people adapted to this system faster than the French, who eschewed the concept of family groups in favor of creating an elite group of insiders who ran the system. Knowing each other from their days in the various Grande Ecoles and other fine institutions, the French soon created a system of Mandarins that resemble Confucian China more than any other political system. Having control though isn't the same as doing anything useful with it.
As the decline of Japan in the late '80s showed, the family pods failed to adapt quickly enough to external environment changes and thus eventually failed. Their guiding hands in government, including the ridiculously powerful bureaucrats at Japan's Ministry of International Trade and Industry failed to understand the workings of modern finance to the same degree of proficiency as they understood six-valve engines. Germany suffered a similar fate albeit a much slower and drawn out one, with its market capitalization changes rarely showing the kind of growth seen in American stock markets for the past few decades.
The relative under-performance of German companies to their American counterparts persists today, as any comparison of market capitalization against top-line revenues or total assets would show. Despite being much bigger in terms of assets and / or revenues, these companies have lagged their American counterparts in profits and hence, share price.
Interestingly, the question of whether oligarchies can perform better than modern capitalism was addressed over many decades with a resounding victory for the latter group. Indeed, an often-quoted statistic is often misinterpreted: when investors talk about the companies that have survived in the Dow Jones Index for the past hundred odd years, they inevitably conclude that frequent changes in the index represent the value destruction endemic in the Anglo-Saxon model.
In fact, it shows the exact opposite, namely the constant improvement of some business processes that in turn produce the great monopolies of each age, that are then discarded by the inexorable move of technology and innovation. Thus, the most valuable technology company of 10 years ago now struggles to remain relevant, while the giants of the American automotive industry are firmly nailed to their deathbeds.
This "creative destruction" owes much to a European thinker, namely Joseph Schumpeter, who argued that it was in getting rid of the old deadwood that new life could flow through the economy. After having followed him almost religiously for the past few decades, the US today stands ready to discard the lessons right at the point when they are needed most, ie the unraveling of today"s global financial system.
Let Wall Street bleed instead
Since we are discussing financial systems, perhaps its even more important for Hank's team to examine how state intervention has failed to work in Japan, Germany, France or indeed any other country you can think of.
Just this week, Berlin has upped the bailout package for one of its moribund entities, IKB, while the financial regulator in Japan announced that Japanese banks had gorged themselves with over 1.5 trillion yen (US$14 billion) of collateralized debt obligation (CDO) structures which will probably cause losses of around 1 trillion yen eventually. Let that sink in for a moment - Japanese banks, after decades of state-guided control and serial rescues of the last decade, would likely manage to lose more than the top Wall Street firms combined.
Similarly, the big French banks that are products of serial shotgun mergers (even after the $7 billion trading debacle at Societe Generale debacle, see Rogue and the pogue, Asia Times Online, January 26, 2008, the first instinct of the French government was to find a suitable French buyer for the bank) have proved to be lousy at risk management. In large part, this is due to the overly complicated and horrendously difficult business models that come into being when organizations are merged; but the government doesn't allow anyone to be fired nor any business to be discarded.
That kind of thing only happens because of the dead hand of the State that stifles innovation and perpetuates bad habits. It is understandable that Paulson and his partner in crime (Ben Bernanke, chairman of the Fed) would see the panic differently to armchair strategists such as myself. Yet, as I argued in the above article, the worst thing to do now is "something". The better choice would be to let Wall Street drown in its own morass of mis-labeled deals and mismanaged risk. Let the ones who failed to follow the Anglo-Saxon model of capitalism perish, and let the winners pick up the pieces and move on.
Monday, February 18, 2008
China stakes much on new stock board
By Candy Zeng
SHENZHEN - The Chinese government looks determined to press ahead with the launch of a growth enterprise stock market devoted to listings of small companies even as the country's main stock markets show little sign of pulling out of headlong plunges from last year's historic highs.
The proposed board, to be similar to Nasdaq or the Hong Kong stock exchange's Growth Enterprise Market, is regarded as a necessary part of development of a fully fledged capital market in China and an important potential booster of the private sector. Perhaps as important and more pressing, by attracting more funds from investors it may help to mop up the country's excess liquidity and support the government goal of cooling the economy.
Securities regulators hope to open the growth market in the first half of the year, Shang Fulin, the chairman of the China Securities Regulatory Commission said in Beijing on December 17, 2007. Shenzhen Stock Exchange - which is to host the new board - is making every preparation to ensure the smooth launch of the second board, the exchange's general manager Zhang Yujun said in a recent meeting.
Analysts had high expectations for the new board before the recent turbulence of the stock market in line with global trends. The Shanghai Composite Index, in spite of a brief recovery to 5,522 on January 14, has plunged about 27% since the October 16, 2007, historic high of 6,124. It touched 4,490 on Wednesday, the first trading day after the Spring Festival holiday break.
The People's Daily, the Communist Party's flagship newspaper, indicated on Wednesday that the target of establishing the growth market remains intact, with an editorial saying that it was one of two major events expected this year by the securities market, with the other the launch of index futures. The timetable for that has yet to be set, the editorial said.
''The timely launch of the board will push forward China’s economy and stock market,'' the People's Daily said.
Lower thresholds
The growth board, which will have lower thresholds than the main board, is intended to help small start-ups, especially high-growth, high-tech firms, to access funds. Companies in the service, farming, energy and materials sectors are also expected to take advantage of the new board.
According to the latest draft plan, companies to be listed in the board shall have net assets of not less than 20 million yuan (US$2.8 million) with accumulated revenue of no less than 10 million yuan in two consecutive years before listing.
The draft regulation approved by the State Council, China's cabinet, on August 22, 2007, lays legal foundation for the launch 10 years after an initial proposal calling for further development of China’s venture capital was submitted to the central government in 1998.
That proposal was shelved following the burst of the global dot-com bubble in 2000 and the bearish mainland A-share market at the time. In 2004, Shenzhen Stock Exchange launched a small and medium-sized enterprise (SME) board as part of its main board for companies to offer less than 100 million shares in their initial public offerings (IPOs). By the end of 2007, nearly 200 companies were listed, with total market capitalization of 883.6 billion yuan.
A source with the Shenzhen bourse said a first batch of 100 enterprises will be listed in the proposed new board and some 300 candidates are competing to be in the first batch. The plan may be adjusted according to demand in secondary market, he said.
It is expected in the industry that 500 companies will be listed in the first year and that the number of listings will exceed that of the main board (some 1,200) in two years. Wang Shouren, general secretary of Shenzhen Venture Capital Association, has previously said more than 1,000 enterprises intended to be listed in the growth board.
The People's Daily editorial, stating that the "stock market is the barometer of the economy", argued that "the fundamentals of China’s economy are still healthy. Although the economy faces restructuring, its internal momentum for long-term high-speed remains unchanged. Even if China's economic growth slows down a bit, its growth is still remarkable from a global viewpoint. Such high-speed growth and tendency should be the motive power to boost the stock market. Moreover, from annual reports, an absolute majority of listed companies recorded remarkable growth in profits.''
The country's state-owned enterprises posted a 31.6% rise in 2007 total profits, according to the Ministry of Finance, as the economy expanded 11.4%, the fifth consecutive year that GDP has expanded 10% or more.
Slowing growth
China's economic growth, the fastest last year among the world's major economies, may slow to 10% this year, International Monetary Fund managing director Dominique Strauss-Kahn said Friday. The World Bank this month cut its forecast for China's growth to 9.6%.
China is trying to cool the economy as inflation stays close to an 11-year high, even after interest rates were raised six times last year. The government has also steadily increased the minimum reserve ratio of commercial banks to curb lending. Allowing more companies to list shares should drain off cash in a country where residents have few places to park their savings other than banks, real estate and stocks and give small companies seeking funds an alternative to bank loans.
Increasingly affluent Chinese households, which according to the People's Bank of China own about half the country's more than 32 trillion yuan in local and foreign-currency savings, are enthusiastic share buyers, opening more than 25 million new accounts in the first half of last year alone.
In southern Shenzhen, home to the country's smaller stock exchange, director of the municipal technology and information bureau Liu Zhongpu said the bureau will enhance communication with Shenzhen Stock Exchange, to ensure early listing of local companies.
Liu said the exchange will set up a database of listing company resources to include 100 high-growth enterprises and guide and subsidize them for the listing. Shenzhen, part of Guangdong province and a key part in the country's rapid development over the past two decades, has 209,000 private enterprises or 70% of the total business entities.
The bureau made a "creative enterprise growth path scheme" in 2006 to help capitalization of private companies, offering a total subsidy of 3.1 million yuan to each company that is listed in the SME board. So far, it helps 14 Shenzhen corporations listed on the SME board, in addition to three in the US, one in Britain and one in South Korea. The bureau last week the names of five companies it will help to list this year and which are believed will on this occasion target the proposed growth board.
Shenzhen-based Chipsbank Microelectronics Co, Ltd, the world's largest supplier of flash memory controllers, in December said it aimed to list on the growth board, only six months after indicating plans to list on Nasdaq or in Hong Kong.
"Investors in overseas markets such as Nasdaq don't identity with pure Chinese IT companies," Chipsbank president Zhang Hualong told reporters. "The domestic capital market has been leaping forward in the last two years and [Chinese] investors will have passion for a local company like us."
Analysts said other high-tech companies will follow Chipsbank in dropping plans to float overseas and opt instead for the proposed growth board.
Broader benefits
That will bring other local benefits, according to Huang Yun, general secretary of Shenzhen Hi-Tech Industry Association, citing development of the high-tech industry in Shenzhen and the broader Pearl River Delta, already host to clusters of high-tech private companies.
More than 300 companies in Shenzhen alone meet the proposed listing requirement of the growth board, said Huang, citing a survey by his association.
Ba Shusong, a researcher with the State Council Development Research Center, goes further, predicting that a growth board would bring fortunes of more than a hundred million yuan to more than 10,000 business owners in the Pearl Delta if all qualified enterprises in the area were listed.
A bright future was also forecast by Wei Wei, an analyst at Huafu Fund in Shanghai. "We will have our own Google and Amazon in China after the establishment of the growth board. It will have a strong impetus on creative companies thorough market mechanism."
Beyond Shenzhen, securities dealers such as Zhejiang Securities and Changjiang Securities are hunting out potential investment targets in areas such as Chongqing and Zhejiang. In Zhejiang,108 enterprises have submitted listing plans including nine from Yongkang city involved in industries such as auto accessories and chemicals.
China's scores of high-tech industry parks will also be a major source of potential growth board companies. Zhongguancun Science Park, the largest in Beijing, hosts more than 700 enterprises whose annual revenue exceed ten million yuan each, said Dai Wei, director of the administrative office of the park in December. Among the 40,000 enterprises in more than 50 high-tech industry parks, at least 3,000 have annual revenue exceeding ten million yuan, according to official data.
The growth board will also encourage venture capitalists to back more young companies as it will give them a route to cash out from their investments. In Shenzhen alone, 35 new venture capital companies were set up in 2007.
Even so, enthusiasm for the board may be limited in the short term, said Ji Haitao of Shenzhen Capital Group.
"The launch of a domestic growth board means a new exit channel for us but there are other factors influencing the company's choice of listing market," he said. "Before the Shenzhen growth board is launched and accepted by investors, we will mainly help growth enterprises in overseas listings."
Amy Liu, manager of another venture capital in Shenzhen, said the lower threshold of the growth board also meant higher risks for institutional investors. She expects a general decline this year in the price-earnings ratios of A shares and slower economic growth in China, which might discourage institutions from making bold investments in small companies.
"It [the new board] is good news for domestic growth enterprises," Liu said. "As venture capitalists, we have to wait and see. There are already many good overseas markets."
Candy Zeng is a freelance journalist based in Shenzhen, China.
SHENZHEN - The Chinese government looks determined to press ahead with the launch of a growth enterprise stock market devoted to listings of small companies even as the country's main stock markets show little sign of pulling out of headlong plunges from last year's historic highs.
The proposed board, to be similar to Nasdaq or the Hong Kong stock exchange's Growth Enterprise Market, is regarded as a necessary part of development of a fully fledged capital market in China and an important potential booster of the private sector. Perhaps as important and more pressing, by attracting more funds from investors it may help to mop up the country's excess liquidity and support the government goal of cooling the economy.
Securities regulators hope to open the growth market in the first half of the year, Shang Fulin, the chairman of the China Securities Regulatory Commission said in Beijing on December 17, 2007. Shenzhen Stock Exchange - which is to host the new board - is making every preparation to ensure the smooth launch of the second board, the exchange's general manager Zhang Yujun said in a recent meeting.
Analysts had high expectations for the new board before the recent turbulence of the stock market in line with global trends. The Shanghai Composite Index, in spite of a brief recovery to 5,522 on January 14, has plunged about 27% since the October 16, 2007, historic high of 6,124. It touched 4,490 on Wednesday, the first trading day after the Spring Festival holiday break.
The People's Daily, the Communist Party's flagship newspaper, indicated on Wednesday that the target of establishing the growth market remains intact, with an editorial saying that it was one of two major events expected this year by the securities market, with the other the launch of index futures. The timetable for that has yet to be set, the editorial said.
''The timely launch of the board will push forward China’s economy and stock market,'' the People's Daily said.
Lower thresholds
The growth board, which will have lower thresholds than the main board, is intended to help small start-ups, especially high-growth, high-tech firms, to access funds. Companies in the service, farming, energy and materials sectors are also expected to take advantage of the new board.
According to the latest draft plan, companies to be listed in the board shall have net assets of not less than 20 million yuan (US$2.8 million) with accumulated revenue of no less than 10 million yuan in two consecutive years before listing.
The draft regulation approved by the State Council, China's cabinet, on August 22, 2007, lays legal foundation for the launch 10 years after an initial proposal calling for further development of China’s venture capital was submitted to the central government in 1998.
That proposal was shelved following the burst of the global dot-com bubble in 2000 and the bearish mainland A-share market at the time. In 2004, Shenzhen Stock Exchange launched a small and medium-sized enterprise (SME) board as part of its main board for companies to offer less than 100 million shares in their initial public offerings (IPOs). By the end of 2007, nearly 200 companies were listed, with total market capitalization of 883.6 billion yuan.
A source with the Shenzhen bourse said a first batch of 100 enterprises will be listed in the proposed new board and some 300 candidates are competing to be in the first batch. The plan may be adjusted according to demand in secondary market, he said.
It is expected in the industry that 500 companies will be listed in the first year and that the number of listings will exceed that of the main board (some 1,200) in two years. Wang Shouren, general secretary of Shenzhen Venture Capital Association, has previously said more than 1,000 enterprises intended to be listed in the growth board.
The People's Daily editorial, stating that the "stock market is the barometer of the economy", argued that "the fundamentals of China’s economy are still healthy. Although the economy faces restructuring, its internal momentum for long-term high-speed remains unchanged. Even if China's economic growth slows down a bit, its growth is still remarkable from a global viewpoint. Such high-speed growth and tendency should be the motive power to boost the stock market. Moreover, from annual reports, an absolute majority of listed companies recorded remarkable growth in profits.''
The country's state-owned enterprises posted a 31.6% rise in 2007 total profits, according to the Ministry of Finance, as the economy expanded 11.4%, the fifth consecutive year that GDP has expanded 10% or more.
Slowing growth
China's economic growth, the fastest last year among the world's major economies, may slow to 10% this year, International Monetary Fund managing director Dominique Strauss-Kahn said Friday. The World Bank this month cut its forecast for China's growth to 9.6%.
China is trying to cool the economy as inflation stays close to an 11-year high, even after interest rates were raised six times last year. The government has also steadily increased the minimum reserve ratio of commercial banks to curb lending. Allowing more companies to list shares should drain off cash in a country where residents have few places to park their savings other than banks, real estate and stocks and give small companies seeking funds an alternative to bank loans.
Increasingly affluent Chinese households, which according to the People's Bank of China own about half the country's more than 32 trillion yuan in local and foreign-currency savings, are enthusiastic share buyers, opening more than 25 million new accounts in the first half of last year alone.
In southern Shenzhen, home to the country's smaller stock exchange, director of the municipal technology and information bureau Liu Zhongpu said the bureau will enhance communication with Shenzhen Stock Exchange, to ensure early listing of local companies.
Liu said the exchange will set up a database of listing company resources to include 100 high-growth enterprises and guide and subsidize them for the listing. Shenzhen, part of Guangdong province and a key part in the country's rapid development over the past two decades, has 209,000 private enterprises or 70% of the total business entities.
The bureau made a "creative enterprise growth path scheme" in 2006 to help capitalization of private companies, offering a total subsidy of 3.1 million yuan to each company that is listed in the SME board. So far, it helps 14 Shenzhen corporations listed on the SME board, in addition to three in the US, one in Britain and one in South Korea. The bureau last week the names of five companies it will help to list this year and which are believed will on this occasion target the proposed growth board.
Shenzhen-based Chipsbank Microelectronics Co, Ltd, the world's largest supplier of flash memory controllers, in December said it aimed to list on the growth board, only six months after indicating plans to list on Nasdaq or in Hong Kong.
"Investors in overseas markets such as Nasdaq don't identity with pure Chinese IT companies," Chipsbank president Zhang Hualong told reporters. "The domestic capital market has been leaping forward in the last two years and [Chinese] investors will have passion for a local company like us."
Analysts said other high-tech companies will follow Chipsbank in dropping plans to float overseas and opt instead for the proposed growth board.
Broader benefits
That will bring other local benefits, according to Huang Yun, general secretary of Shenzhen Hi-Tech Industry Association, citing development of the high-tech industry in Shenzhen and the broader Pearl River Delta, already host to clusters of high-tech private companies.
More than 300 companies in Shenzhen alone meet the proposed listing requirement of the growth board, said Huang, citing a survey by his association.
Ba Shusong, a researcher with the State Council Development Research Center, goes further, predicting that a growth board would bring fortunes of more than a hundred million yuan to more than 10,000 business owners in the Pearl Delta if all qualified enterprises in the area were listed.
A bright future was also forecast by Wei Wei, an analyst at Huafu Fund in Shanghai. "We will have our own Google and Amazon in China after the establishment of the growth board. It will have a strong impetus on creative companies thorough market mechanism."
Beyond Shenzhen, securities dealers such as Zhejiang Securities and Changjiang Securities are hunting out potential investment targets in areas such as Chongqing and Zhejiang. In Zhejiang,108 enterprises have submitted listing plans including nine from Yongkang city involved in industries such as auto accessories and chemicals.
China's scores of high-tech industry parks will also be a major source of potential growth board companies. Zhongguancun Science Park, the largest in Beijing, hosts more than 700 enterprises whose annual revenue exceed ten million yuan each, said Dai Wei, director of the administrative office of the park in December. Among the 40,000 enterprises in more than 50 high-tech industry parks, at least 3,000 have annual revenue exceeding ten million yuan, according to official data.
The growth board will also encourage venture capitalists to back more young companies as it will give them a route to cash out from their investments. In Shenzhen alone, 35 new venture capital companies were set up in 2007.
Even so, enthusiasm for the board may be limited in the short term, said Ji Haitao of Shenzhen Capital Group.
"The launch of a domestic growth board means a new exit channel for us but there are other factors influencing the company's choice of listing market," he said. "Before the Shenzhen growth board is launched and accepted by investors, we will mainly help growth enterprises in overseas listings."
Amy Liu, manager of another venture capital in Shenzhen, said the lower threshold of the growth board also meant higher risks for institutional investors. She expects a general decline this year in the price-earnings ratios of A shares and slower economic growth in China, which might discourage institutions from making bold investments in small companies.
"It [the new board] is good news for domestic growth enterprises," Liu said. "As venture capitalists, we have to wait and see. There are already many good overseas markets."
Candy Zeng is a freelance journalist based in Shenzhen, China.
Asian market nerves ease
By R M Cutler
MONTREAL - Asian equity markets, which started the week in a mood of trepidation, followed the North American markets' reaction to world financial developments. They thus tracked the hopes and fears of the international credit markets, conditioned by the realization that the February 9 Tokyo meeting of Group of Seven (G-7) countries' finance chiefs only confirmed their inability to coordinate national fiscal policies and their unwillingness to do anything about exchange rates.
The markets' evolution during this period began on the downside amid trepidation over the financial sector coupled with increasing prices for oil and metal. They then hemmed and hawed for a few days. In contrast to the previous week, however, neither euphoria nor dysphoria in East Asia had knock-on effects rippling across the globe through Europe back to the United States and Canada.
Mainly unchanged through Wednesday, the Asian markets were up strongly on Thursday, February 14, as the Nikkei 225 had its biggest daily percentage spurt in six years. The Hang Seng gained 3.7%, and Chinese exchanges were up as well. The Thursday rise in Asia was driven partly by the psychological impact of Warren Buffett's Wednesday announcement of his willingness to assume the risk from the tax-free municipal part (US$800 billion) of the portfolios of the three major bond insurers - Ambac, MBIA and FGIC - for a 50% additional charge above their premiums.
It was almost immediately clear, however, that tax-free municipals are the only instruments preventing these bond insurers from sinking irretrievably under the quicksand of subprime mortgage debt.
Buffett's gesture was akin to an offer to snatch away the only rope that could possibly save them. So by midday Friday the main exchanges worldwide had lost over half their Thursday gains, particularly following Wall Street's downturn in response to Federal Reserve chairman Ben Bernanke's Congressional testimony, in which he warned of the danger of the US entering a period of stagflation (low growth combined with inflation).
Bernanke also warned that, given his expectation of "sluggish growth [over the next six to nine months], followed by a somewhat stronger pace of growth" towards the end of the year, he thought that the Fed would be less aggressive in subsequent rate cuts. Nevertheless, futures traders are still expecting the current rate of 3.0% to undergo at least another half-point cut on March 18, with even a another three-quarters-point cut possible, and with further cuts bringing the rate to 2.0% by summer.
A good question, if this expectation persists, is whether Bernanke and the Fed will follow expectations. They seem to have noticed that the quarter-point cut last October 31, in the face of half-point expectations, engendered an immediate and precipitous decline into the trading ranges that the main indexes now inhabit. And it was that drop which conditioned the psychology making the extraordinary three-quarters-point cut necessary on January 22.
If the markets remain in their current trading ranges for the next month, and if expectations inferred from futures markets do not change over that time, then anything less than another half-point cut could produce a dive through the floor of the current trading ranges in search of new lows. This purely technical and psychological danger will find a basis in world market fundamentals if for any reason more bad news about the international financial sector's liquidity crisis comes out at the wrong time.
Unfortunately, we can be fairly certain that some bad news will be coming out periodically, since the subprime crisis still requires months to unwind. Macro-economic indicators will not save market sentiment in the meantime, even if Asian production for the Asian market does not flag, and China and India continue their spectacular growth. A revaluation of the yuan is not in the cards, but an announcement of larger permitted fluctuations against the dollar could have a short-term positive psychological effect in summer.
Returning to this past week, the Australian All Ordinaries index (tracked closely by the other major Australian index, the S&P/ASX 200) showed typically greater volatility yet has not visibly responded to increasing indications that the Australian dollar might turn around against the American currency due to the strength of the country's primary materials sector and unflagging demand from East Asia for these goods. On the other hand, due mainly to metals and oils, the Toronto S&P/TSX Composite continues its outperformance of Wall Street and many European markets.
Indeed the Canadian markets, because of the heavy primary-materials weighting, have in the recent short term significantly outperformed not only the Australian exchange and Wall Street, but also the Shanghai SSE Composite, which it had lagged for most of the last six months, until the last three weeks. The financial sector in Canada still has its problems but these appear to have been shaken out faster than in the US and Europe, due partly to the smaller number of players, relatively less subprime exposure, and a genuine effort (even if not yet wholly successful) at transparency after the initial writedowns.
The important BSE Sensex 30 index in Mumbai has been holding onto much of the exuberant relative gain it registered last autumn but has begun again to track the other Asian indexes in percentage terms, opening down, in sympathy with them, 2% on Friday after an almost 5% gain Thursday but immediately beginning to recover towards its Thursday close, as the Nikkei closed Friday near its own open. The Indian index bears watching, as recent fluctuations suggest it may become a leading short-term or medium-term indicator for other Asian, especially East Asian, exchanges.
R M Cutler is a Canadian international affairs analyst.
MONTREAL - Asian equity markets, which started the week in a mood of trepidation, followed the North American markets' reaction to world financial developments. They thus tracked the hopes and fears of the international credit markets, conditioned by the realization that the February 9 Tokyo meeting of Group of Seven (G-7) countries' finance chiefs only confirmed their inability to coordinate national fiscal policies and their unwillingness to do anything about exchange rates.
The markets' evolution during this period began on the downside amid trepidation over the financial sector coupled with increasing prices for oil and metal. They then hemmed and hawed for a few days. In contrast to the previous week, however, neither euphoria nor dysphoria in East Asia had knock-on effects rippling across the globe through Europe back to the United States and Canada.
Mainly unchanged through Wednesday, the Asian markets were up strongly on Thursday, February 14, as the Nikkei 225 had its biggest daily percentage spurt in six years. The Hang Seng gained 3.7%, and Chinese exchanges were up as well. The Thursday rise in Asia was driven partly by the psychological impact of Warren Buffett's Wednesday announcement of his willingness to assume the risk from the tax-free municipal part (US$800 billion) of the portfolios of the three major bond insurers - Ambac, MBIA and FGIC - for a 50% additional charge above their premiums.
It was almost immediately clear, however, that tax-free municipals are the only instruments preventing these bond insurers from sinking irretrievably under the quicksand of subprime mortgage debt.
Buffett's gesture was akin to an offer to snatch away the only rope that could possibly save them. So by midday Friday the main exchanges worldwide had lost over half their Thursday gains, particularly following Wall Street's downturn in response to Federal Reserve chairman Ben Bernanke's Congressional testimony, in which he warned of the danger of the US entering a period of stagflation (low growth combined with inflation).
Bernanke also warned that, given his expectation of "sluggish growth [over the next six to nine months], followed by a somewhat stronger pace of growth" towards the end of the year, he thought that the Fed would be less aggressive in subsequent rate cuts. Nevertheless, futures traders are still expecting the current rate of 3.0% to undergo at least another half-point cut on March 18, with even a another three-quarters-point cut possible, and with further cuts bringing the rate to 2.0% by summer.
A good question, if this expectation persists, is whether Bernanke and the Fed will follow expectations. They seem to have noticed that the quarter-point cut last October 31, in the face of half-point expectations, engendered an immediate and precipitous decline into the trading ranges that the main indexes now inhabit. And it was that drop which conditioned the psychology making the extraordinary three-quarters-point cut necessary on January 22.
If the markets remain in their current trading ranges for the next month, and if expectations inferred from futures markets do not change over that time, then anything less than another half-point cut could produce a dive through the floor of the current trading ranges in search of new lows. This purely technical and psychological danger will find a basis in world market fundamentals if for any reason more bad news about the international financial sector's liquidity crisis comes out at the wrong time.
Unfortunately, we can be fairly certain that some bad news will be coming out periodically, since the subprime crisis still requires months to unwind. Macro-economic indicators will not save market sentiment in the meantime, even if Asian production for the Asian market does not flag, and China and India continue their spectacular growth. A revaluation of the yuan is not in the cards, but an announcement of larger permitted fluctuations against the dollar could have a short-term positive psychological effect in summer.
Returning to this past week, the Australian All Ordinaries index (tracked closely by the other major Australian index, the S&P/ASX 200) showed typically greater volatility yet has not visibly responded to increasing indications that the Australian dollar might turn around against the American currency due to the strength of the country's primary materials sector and unflagging demand from East Asia for these goods. On the other hand, due mainly to metals and oils, the Toronto S&P/TSX Composite continues its outperformance of Wall Street and many European markets.
Indeed the Canadian markets, because of the heavy primary-materials weighting, have in the recent short term significantly outperformed not only the Australian exchange and Wall Street, but also the Shanghai SSE Composite, which it had lagged for most of the last six months, until the last three weeks. The financial sector in Canada still has its problems but these appear to have been shaken out faster than in the US and Europe, due partly to the smaller number of players, relatively less subprime exposure, and a genuine effort (even if not yet wholly successful) at transparency after the initial writedowns.
The important BSE Sensex 30 index in Mumbai has been holding onto much of the exuberant relative gain it registered last autumn but has begun again to track the other Asian indexes in percentage terms, opening down, in sympathy with them, 2% on Friday after an almost 5% gain Thursday but immediately beginning to recover towards its Thursday close, as the Nikkei closed Friday near its own open. The Indian index bears watching, as recent fluctuations suggest it may become a leading short-term or medium-term indicator for other Asian, especially East Asian, exchanges.
R M Cutler is a Canadian international affairs analyst.
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