Thursday, September 03, 2009

Effectiveness Of Chinese Decisions

As I switch on my monitors this morning, the Chinese domestic equity market stands out with stunning performance (it closed almost 5% up on a day) versus the other major Eastern markets like Japan (Nikkei 225) down 0.6% and Australia (S&P ASX 100) down 0.2% at official cash market close.

Well, I search my Reuters news service for some hints and find the following, among other issues:

China Securities Regulatory Commission Vice Chairman Liu Xinhua said late on Wednesday that the regulator would do its best to promote the steady development of the country's equity market.

State newspapers splashed Liu's comments across their pages on Thursday in an apparent effort to help talk up the market.

"These are signs that the government is loosening up after the month long drop in stocks. First they hiked gas prices and then these comments aimed at keeping the market calm," said Jackson Wong, investment manager at Tanrich Securities.

Liu's comments sparked market rumours of possible concrete government steps to support shares, including a suspension of initial public offerings before the 60th anniversary of the founding of the People's Republic of China on Oct. 1.

Well, I do not know, how it works in China? Probably, as some indicate, the Chinese people believe every word coming from the lips of St. Communist. However, the unusually high savings rates among Chinese households rather confirm the opposite?

Others talk of technical short squeeze? Well, I am not sure it is officially allowed there... But, of course, every "high priest of mechanical monetarism", or supply side economist will promote the "Buy on Dip!" philosophy, even Citi (of Sin) is not afraid to hit the "Wall" (of worry).

At the end of the day, I would rather lean towards the concept of "The World's Marginal Investor", described by economists at Societe Generale on Tuesday:
Most investment managers have had defensive overweight cash positions in the past year. Indeed, the worlds marginal investor, the China Investment Corporation, has perhaps been even more defensive than most. In figures released earlier this month, the CIC was holding nearly 90% of its assets in cash or cash equivalents.

CIC comprises two distinct elements; the investment management operation of CIC, which makes non-RMB investments globally, and Central Huijin Investment Ltd. (Central Huijin), a wholly owned subsidiary. Central Huijin was established to invest exclusively in domestic state-owned financial institutions on behalf of the state. While the stated rationale is that this investment is in order to improve governance and preserve and enhance the value of state-owned financial assets, it also means that the “state” has remarkable influence over China’s largest banks.

CIC holds 35.4% of the country's largest bank, the Industrial & Commercial Bank of China, 67.5% of Bank of China and 48.2% of China Construction Bank. It also has stakes in 13 domestic securities firms.

And there’s the rub. The CIC cannot possibly manage its stake in domestic financial firms as a purely commercial investor when these very banks are being used by Beijing as “fiscal agents” to finance the State’s infrastructure led stimulus package. Indeed, the extraordinary return the CIC received from domestic assets sits very oddly with the performance of the A-Share market.
Ooops, capitalists beware the St. Communists!

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