A Blog by Jonathan Low

 

Jan 13, 2016

Infochina: The Causal Relationship Between Chinese Data Suppression and Market Turmoil

Capital markets are in turmoil to the extent that one substantial Scottish bank is advising clients to sell everything and prepare for a financial cataclysm.

The proximate cause of this collapse is the decline in Chinese demand for virtually everything the world produces. That appetite comprises products from baby diapers to iron ore. The upshot is that every business in every nation predicating its strategy on the fact that China would buy whatever it produced now has to imagine a Plan B.

But there is a disconnect: markets abhor uncertainty and the Chinese abhor transparency. The result is that the absence of information causes fear of the unknown to take precedence over optimism. This is compounded by the evidence suggesting that the decisions being made by China's leaders are not necessarily based on the same data-based economic rationale the rest of the world employs. The information age is proving its power - and that its absence can be as impactful as its presence. JL

Gordon Crovitz comments in the Wall Street Journal:

Global finance depends on a free flow of information. The world’s second-largest economy is censoring within and beyond its borders. The lesson from China is that markets can’t function smoothly when accurate information is disappeared.
Analysts trying to understand the volatile Chinese stock market should pay a visit to a gritty building on Lockhart Road in Hong Kong. They’ll find a reminder of the risks of operating in an authoritarian country where providing information is a crime.
On the second floor is Causeway Bay Books, long a popular destination for mainland visitors looking for information banned at home. It’s closed, at least temporarily, after five owners and employees were “disappeared”—apparently snatched and detained by mainland security forces—for selling books that offend Beijing.
The case shows Beijing is willing to create international incidents to control information. Just before the store closed, its two best sellers were “2016: Collapse of the Communist Party of China” and “Shen Bing’s Account: My Story With Zhou Yongkang,” in which the author, a state-TV anchorwoman, describes her affair with Mr. Zhou, a former Politburo member now imprisoned for corruption. There’s speculation that the disappearances are meant to stop a planned book about the love life of President Xi Jinping.
Four bookstore employees disappeared in October, three while visiting the mainland and one in Thailand. Last month co-owner Lee Bo vanished. “I am not worried,” he had told the South China Morning Post. “I have avoided going to the mainland for years.” It turned out he wasn’t safe in Hong Kong. British Foreign Secretary Philip Hammond last week complained in Beijing about the snatching of Mr. Lee, a British citizen, calling it an “egregious breach” of China’s commitment to respect Hong Kong’s rule of law and freedom of speech.
There’s a connection between Beijing’s repression and last week’s collapse of its stock market. International investors have long trusted Hong Kong as a haven for information about China. The Communist Party has always censored political speech in China, but until recently the Politburo understood that being part of global markets requires an open flow of information. Beijing’s censorship now suppresses economics as well as politics.
Chinese share prices have fallen 40% since summer. Beijing is eager to stop the decline, with the government buying shares directly as well as through pensions and pressuring patriotic brokers. It bans large owners of a stock from selling more than 1% of total shares at once and requires them to inform exchanges three weeks in advance to sell shares at all. The official mouthpiece Xinhua warned that “malicious” short sellers must be dealt with in a “firm-handed manner.”
The bellwether was the arrest of Wang Xiaolu, a financial journalist at Caijing, an independent Beijing-based magazine, who reported in July that the government planned to pull back on propping up the stock market. Mr. Wang was detained, then forced on national television to confess that he had published “private information” and brought “great losses to the nation and investors.”
Publishing private information about markets is central to financial journalism. Mr. Wang’s reporting about government plans was accurate, which was no defense. Instead, Beijing used his case to instruct other journalists it is now a crime to report accurate information about markets. The Chinese propaganda ministry issued a directive: “Do not use emotionally charged words such as ‘slump,’ ‘spike’ or ‘collapse,’ ” it instructed. “Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market.”
The result is that global investors are in the dark, and China’s 90 million individual shareholders even more so. When mainland censors blocked Web searches for “stock market crash,” Chinese investors who incurred losses resorted to black humor on social media. “Last month, my dog ate what I ate,” one wrote. “Last week, I ate what my dog ate. This week, I ate my dog.”
In addition to booksellers and journalists, Beijing has arrested numerous senior financial executives. Among them are senior bankers at the Citic brokerage as well as the president of the country’s first private bank, China Minsheng. Some arrests relate to corruption, but others are for no reason but to control markets.
In all, executives from 34 companies have disappeared, with only some reappearing. Among those was Guo Guangchang, chairman of the Fosun Group, who is known as China’s Warren Buffett. His interests include Cirque du Soleil, Club Med and the former Chase Manhattan Plaza in downtown Manhattan. Brokers and hedge-fund managers are also among the mysteriously missing.Global finance depends on a free flow of information. World markets are in uncharted territory now that the world’s second-largest economy is censoring within and beyond its borders. The lesson from China is that markets can’t function smoothly when accurate information is disappeared.

0 comments:

Post a Comment