Global Agenda: Shanghai Express

The first time something remarkable happens, everyone is deeply affected.

By PINCHAS LANDAU
global agenda 88 (photo credit: )
global agenda 88
(photo credit: )
The first time something remarkable happens, everyone is deeply affected. If the same thing happens again, people are briefly distracted. The third time, no one pays more than fleeting attention. It doesn't matter how mind-boggling this "something" is, the pattern is always the same. Older readers (those born before 1960) will recall the moon-shots of the late 1960s. The Apollo 11 mission, the first to land astronauts on the moon, riveted the entire world; everyone with access to a TV, or at least a radio, watched or listened with rapt attention, stopping every other normal activity. A few months later, Apollo 12 followed and people kept track of what was going on, but the magic was no longer there. When Apollo 13 took off, it was no longer a big deal and if that mission had not developed into a drama of a very different sort, it would have been relegated to the secondary news items. Thus, when the Chinese stock market slumped for the first time (in recent history, at least), in late February this year, the entire global financial system took fright. Markets collapsed and currencies plunged; pundits spoke of a global meltdown - and there really was one for a day or two. Then the shock eased and things gradually returned to normal, meaning prices resumed their strong uptrend. Until this week, when the Shanghai stock exchange took another tumble on Wednesday. Once again, there was a brief bout of global selling, but by noon New York time, the American markets decided the Chinese were not worth getting upset about. After following the lead of Asian and European markets and opening lower, US markets turned around and went back up. The S&P 500 index closed the day at a new all-time record, breaking the one established back in March 2000, before the tech crash. On Thursday, all global markets were back on the up escalator and the mini-crisis had passed. The next time the Chinese have a bad day, the ripples may not even reach the Atlantic Ocean, let alone the Hudson and East rivers. On the other hand, there cannot be much doubt that sooner or later the Chinese share market will undergo a severe correction, not a one- or two-day bout of indigestion. There are three mutually reinforcing reasons to believe this: a) smart and/or influential people in, around and outside of China - such as Alan Greenspan and Li Ka-shing (not a central banker, merely the richest man in Asia) - are now saying publicly that the Chinese market is a bubble that will burst soon; b) all the phenomena, especially the cultural and behavioral aspects, associated with bubbles are clearly evident in China; c) the Chinese government is determined to burst the bubble asap, before it gets even bigger and eventually results in severe damage to the economy. The government's efforts were what caused both the sell-offs to date; in February, it decided to raise interest rates sharply and this time round it hiked the stamp tax on share transactions from 0.1% to 0.3%. The results have been negative - so far. The speculative mania now gripping the nouveau-riche Chinese middle class is such that seemingly trivial factors, like raising the cost of money and tripling the cost of buying and selling shares, are brushed aside. However, as the text-books demonstrate and economic history in many countries proves, these measures will take their toll. If they don't work soon, the government will come back with more, and at some point their cumulative weight will cause the market to snap. There will then be heavy falls, not for one or two days, but in bouts of several days, extending over several weeks and months. In between, there will be sharp rebounds, which will entice the gamblers back in by suggesting to them that the underlying trend has not changed and what happened in February and May will happen again. But that will be a trap, because this time it will be for real. We know that all this will happen, because that's how these things always play out. Whether in London in 1720, or in New York in 1929, or in Tel Aviv in 1983, the denouement is the same. Your name can be Smith or Cohen or Feng, but if you're part of the human race, the psychology doesn't change, nor do the market dynamics. We don't yet know when it will happen, but more importantly we don't know what impact a market collapse in China will have on the global markets. There are many views on how strong or otherwise the links are between Shanghai, Tokyo, London and New York. We should find out the answers before long. landaup@netvision.net.il