Just something to keep in mind when you listen to yet another big money guy tell you how dangerous China’s stock markets are now: they’re probably buying. Or will soon do so.
I had this thought as I listened Friday to a Bloomberg interview with George Soros from the Davos World Economic Forum.
China’s stock market is “overheating” and policy makers should seek to temper its gains, Soros said.
As readers know, I think fears that China’s government will miscalculate and slow the economy more than they intended are reasonable. Reasonable but over blown. (For why see my post https://jubakpicks.com/2010/01/28/the-rout-in-global-stocks-is-a-tempest-in-the-teapot-of-chinas-command-economy/ )
But it is important at this juncture, with China’s stocks at a four-month low, to remember that there’s a battle going on over when China will end its currency peg against the U.S. dollar and let the renminbi start to appreciate again.
And the existence of that battle should influence how you interpret any guru’s opinions on the dangers and opportunities in China’s stock market.
On the one side are officials in Beijing who want to delay the end of the peg until they’re absolutely sure that Chinese exports are strong enough to take a very gradual climb in the value of the renminbi that would make China’s exports more expensive in world markets.
On the other side, are big traders, who are betting that later or sooner China will have to allow its currency to appreciate again.
The bets right now say that the earliest would be mid-March to coincide with the National People’s Congress and to put as much space between the announcement and President Hu Jintao’s visit to Washington in April. The thinking is that no one in Beijing wants to give the impression that China had given in to U.S. pressure to let its currency appreciate by timing an announcement too close to the visit..
We’re not talking about a huge amount of appreciation when it happens. The consensus forecast says about 3% in 2010. China isn’t about to abandon its control of the currency and let it appreciate willy-nilly.
But with enough leverage, a 3% move can be very profitable. So the play now would be to borrow cheap in the yen market and then buy Chinese assets, the more liquid the better.
And while you’re buying it would be great if a constant stream of high profile negative pronouncements kept prices from climbing in reaction. Expressions of worry about the possibility of run-away inflation in China leading to more tightening would do the trick.
I’m not saying that there’s no danger in China’s stock market or that every bit of negativity should be discounted. (And I sure don’t know the trading position of Soros or anyone else commenting on a China bubble.)
But right now I’d sure make a big distinction between negative opinions coming from investors who are and have been in China for the long haul and from traders with shorter time horizons who are constantly scouring the world for situations where they can turn short-term fears to their advantage.
Jim,
still problems loging in.
Regarding banks, I don’t think there banks too big to fail.
Let the State give his garanty for activities we want to encourage (the boring ones), and let them go broke if they get too greedy and take mad risks.
No reproach of interfering, no problem of bonus.
By the way, I understood you wanted to update your views on the banks?
I’m a little sceptical of how much “independent innovation” will be allowed in China. I guess if it is referring to National/State-allowed innovation, then that may be true. But any true indivdual innovation will be very limited to those areas that are approved by the government. I am beginning to like India as a better Asian innovative play. I’m going to have to look for some ETF’s or funds to take advantage of this since individual companies seem somewhat few except on Indian exchanges.
Nuke
I got into GFA las week. Not one of Jim’s picks, but I think it’s solid.
George Soros aside, I learned one thing about the government in China – at the highest level (knowing only 5% of the population are members of the Party) – they are extremely adept, shrewd, and leaders with knowledge (irrespective of whether you disagree with their philosophy of governing 1.5 billion people). They are not likely to march to any drum but their own. Their position now is stronger than ever in a weak,fragile and highly complex global environment. From an investment standpoint, my opinion is trading the China market is like playing roulette in Macau. The bigger picture is that China is out to create economic value as an architect as well as a builder. President Hu once said, “China’s national strategy is independent innovation – it is impossible to buy core technology…China’s target is to develop a critical mass of extraordinary people and build world class companies around that mass.”
Bottom line – I think you play China for the long term or don’t play.
Thank you for saying that! Now I’m waiting to get back in Brazil . . . Is everyone?
BTW, I found that I was logged in as someone else before re-logging in.
OPPS, A GOOD WEEK TO…..
SOOOO WOULD THIS BE A GOD WEEK TO INVEST IN “HAO” OR THE “CYB” ??
I too was wondering how much of this is a “head fake”. Now that China knows that it can
reduce the price it pays for raw materials by simply saying that they are going to reduce lending, and address overheating, why wouldn’t they use that tool as often as possible?
Commodity prices have been in almost a free fall lately and all China had to do was talk a bit about what they might do…
If I could go to my electric company and tell them that I was thinking of putting a lock on all of my light switches, and making the wife and kids come to me to have the electric turned on, and I saw that immediately they started to reduce my rates, you can bet I would make use of that. I suppose the catch would be, at some point I would have to make good on my threats or I would lose credibility…..
I once heard a radio money guru saying that whenever you hear Soro talking, he probably had taken a position.
I still would like to see more correction in the emerging market particularly China.