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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: elmatador who wrote (19107)	6/1/2007 5:09:04 AM
From: TobagoJack	Respond to of 220602

more laughable rubbish from stratfor Global Market Brief: How Not to Slow a Runaway Stock Market The Shanghai Stock Exchange plunged 6.5 percent May 30 after the Chinese government announced a tripling of stock trading taxes to 0.3 percent. The following day the market shrugged off early losses to close up 1.4 percent. Despite protectionist sentiments in many states, it is rather rare for governments to attempt to directly protect share values. In China the issue has been turned on its head: Rather than fearing that the markets are crashing without reason, the government fears the markets are surging without reason. Luckily for Beijing, getting markets to fall is much easier than propping them up, as the Thai well know. However, China's markets not only do not trade on their fundamentals, but most of the tools a state could use to suppress stock trading will not work in China. The easiest way to contain a runaway stock market is to let it self-destruct. When a speculative bubble forms, sooner or later it will pop and the market will suffer a series of cataclysmic crashes. Such events are traumatic, but they are essential to both restoring rational values and impressing upon overenthusiastic investors that the stock market is not a one-way trip to riches. That is critically important when one considers that cadres of individual investors in China -- holding more than 70 percent of shares on the Shanghai Stock Exchange -- have invested their entire livelihoods into their equity stakes. Thus, the potential for social unrest and violence is much higher for disgruntled Chinese than U.S. investors. Avoiding that catastrophic crash requires some sort of mechanism to slow the exchanges' rise, but Chinese exchanges have not had time to develop self-regulating or built-in cool-down mechanisms to shape expectations. Unlike the New York Stock Exchange or Germany's DAX, where accurate information flows regularly and provisions against insider trading are rigorously enforced, in China the stock exchange is a cauldron of manipulation by the politically connected. Thus, any statistics used to evaluate equities in the rest of the world have very little meaning in China, disguising the nature and scope of the bubble already in place. Consider some of the characteristics of the Chinese stock and financial markets: Immature market structure: The Chinese stock market really only sports a decade of stuttered operations since reopening in 1991, after more than 40 years of no action. Lack of established regulatory framework: The Chinese government has proven unable to set up guidelines to establish multiple investment channels, whereas in the United States 401k or individual retirement account programs proliferate in order to offer more structured investment options with lower risk. Lack of effective oversight: Most of the stocks on the Chinese exchanges have been handpicked by the government as the "fastest risers" -- either in terms of operating revenues, profit and the like or in terms of good political connections. Simply put, the quality of the equities has been vetted by connected government personnel, not the market. Immature buyers/investors: Western investors are very active because information is easy to come by and the system's structure mitigates risk; they can easily trade online or via large brokerages or funds. Those Chinese investors who are not politically active must invest directly into specific stocks with minimal guidance, making their investments far more volatile. Immature sellers: Chinese listing firms do not follow a set standard, some break what rules there are, and others do not even know what rules exist. Beijing's problem in dealing with such characteristics, however, is that the "normal" tools to rein in an overheated stock market would actually cause more problems than they would solve. Perhaps the most reliable way to cool off any portion of an economy -- stock markets included -- is to jack up interest rates. Reducing access to capital slows investments of all types and certainly makes dubious practices that are common in China -- like taking out a second mortgage or other loan to purchase shares -- less attractive. It also would make traditional savings accounts far more appealing. But such an obvious option is a nonstarter in China. The defining characteristic of the Chinese economic system has traditionally been cheap capital made possible by interest rates held below the rate of inflation. This cheap capital in turn is used for two key objectives: first, to prop up any and all state bank-funded projects that help ensure maximum employment and thus contain social pressures; second, to fund Chinese government purchases of U.S. Treasury bills, which helps contain the pace of the yuan's appreciation. Though benchmark interest rates have been increased four times in the last year alone, such increases have been minor and aimed exclusively at dampening lending, not at changing savings patterns. But the cheap capital ultimately has to come from somewhere -- in this case, the famed Asian savings rate. Some of that cash has obviously leaked out of urban dwellers into the stock market in a manner that is flirting with disaster, but should the core cash that China's millions of savers funnel to the state via their deposits actually pay meaningful interest the result would be disastrous. Should China lose the ability to capture that cash, interest rates would have to climb to maintain the size of this deposit pool. The subsequent shortage of cash would make it more expensive for banks to issue loans to loss-making state-owned enterprises, potentially causing some state-subsidized sectors to screech to a halt if not collapse outright. Which means the only real way to slow the surge of liquidity into the stock markets is to offer more options. Of course the question then becomes: What options? Products like the U.S. 401k require a far deeper, more sophisticated and better regulated system. There are always property markets, but they already are suffering from a bubble more dangerous than the stock markets. China does not yet have a corporate bond market at all, and its derivatives market and commodity markets are so new and underdeveloped that a large surge of capital into them now would simply institutionalize all of the stock market's shortcomings into them as well. This leaves Chinese investors with few options -- and Beijing with a stock market that simply cannot slow down without collapsing altogether