It was supposed to be a doubly auspicious start to the Chinese trading year,
for it was the first week of the Year of the Golden Pig, when the precious
metal and the prosperous beast combine to favour lucky investors.
In the bright new dealing rooms in Shanghai’s skyscrapers, on the high-tech
floor of its proud stock exchange and in the smoke-filled, shabby brokerages
across that stock-mad city, the punters all came back from family reunions
to deal.
As usual, nobody wanted to listen to the warnings. At least two senior
Communist party officials had publicly cautioned that a bubble was building
up in China’s stock markets. Commentators and analysts repeatedly sounded a
note of caution over the Shanghai market, which had soared more than 140%
since the end of 2005, after half a decade in the doldrums.
Its companion index in Shenzhen, a southern boom town next door to Hong Kong,
put in a similarly spectacular performance.
The government told the banks to curb credit, talked of a capital-gains tax
and did what it could to restrain an exuberance that, to many Chinese, seems
entirely rational.
The Chinese middle class, hungry for returns, fearful of reliance on a broken
welfare state, keen to sharpen their wits against the market, and
relentlessly optimistic, kept buying.
On Tuesday morning, thousands joined long queues in front of brokerages
offering shares in CCB Principal Asset Management, a mutual fund. It
collected more than £650m in the space of an hour.
“Some investors don’t have any idea what mutual funds are,” said Shang Fulin,
chairman of the Securities Regulatory Commission.
Maybe not, but the Chinese financial media had breathlessly reported that 90%
of the open-ended funds traded in Shanghai had made good profits last year
and some had doubled their money.
Then, just as the happy investors in CCB were collecting their certificates,
the market caught a chill that might have come from Shanghai’s notoriously
flu-ridden February air.
A slip turned into a slide that turned into a cartwheel downhill as selling
orders swamped the market, screens turned red and the main index closed 8.8%
down, its worst day in a decade.
The tremors went around the world, reflecting the fact that even though
China’s economy and stock exchanges are by no means integrated with global
capital markets, millions of investors have assumed that they will be. This
was the first big shock China had inflicted on the world’s financial
markets. There will be many more. FOR years, one man held sway over the
world’s markets. Every word uttered by Alan Greenspan was scrutinised for
its nuances. On the evidence of the past few days, not much has changed.
Early last week, in a private talk to an investor group in Hong Kong, a plane
hop from Shanghai, Greenspan, former chairman of the Federal Reserve, warned
that the American economy might slip into recession by the end of the year.
He also said that the US budget deficit remained a “significant concern”.
Greenspan has given a series of these mini-lectures since he retired. They are
marketed as “intimate conversations” and the hosts pay about $150,000
(£77,000) to be in his presence.
For many, Greenspan remains the ultimate authority on economic issues. When
word of his fears hit the market, investors were rattled.
The sell-off almost collapsed the market. Tuesday’s meltdown combined with
technical glitches to produce conditions of extreme turbulence. At one stage
the Dow Jones plunged 244 points in three minutes.
Amid the panic, the New York Stock Exchange’s new automated trading system
malfunctioned. The NYSE has invested hundreds of millions of dollars
developing and marketing its “hybrid system” — a combination of human and
electronic trading.
On its first big test, the exchange’s servers became overwhelmed by the huge
volume of activity as the system struggled to cope with a record 2.41
billion shares changing hands. NYSE’s floor traders, whose jobs have been
threatened by the new system, saved the exchange from disaster by resorting
to pen and paper to execute trades. The eventual 416-point slide still cost
investors $600 billion.
Greenspan’s successor, Ben Bernanke, tried to soothe the markets on Wednesday,
saying the economy still seemed poised for “moderate” growth and perhaps
even a slight acceleration later this year.
But Greenspan was at it again on Thursday. In another one of his intimate
conversations he set out to clarify his position, saying there was a
“possibility but not a probability” that America would go into recession by
the end of the year.
The clarification fazed the markets again and seemed to upstage Bernanke.
Critics accused Greenspan of being provocative in order to build excitement
for his memoirs. The book, for which he is to be paid about $8m, is due out
in September.
“Alan held the world stage for 18 years,” said Ken Goldstein, economist at the
Conference Board in New York. “Perhaps he misses the limelight.”
Greenspan spooked the markets not just because of what he said but because it
chimed with many investors’ fears that a sharp downturn in the US housing
market and problems with so-called sub-prime mortgage lending could hit the
economy hard. Figures last week showed that new home sales dropped by nearly
17% between December and January, the biggest fall since 1994.
But Goldstein said it was wrong to blame Greenspan for the market shakedown.
Nor was he impressed by the argument that trouble in the mortgage market was
hurting the overall economy.
The sub-prime market lends to would-be home owners with poor credit. In recent
months default rates have soared, leaving banks, including HSBC, facing
potentially huge losses and hurting hedge funds and other investors who have
bought their mortgage-backed securities.
“It’s much more about those folks who immediately panicked and started to
sell,” Goldstein said. “Clearly the markets had got ahead of the actual
economies in China and in the US.”
Goldstein said the sub-prime market, while large, was isolated and that low
interest rates and low unemployment should protect the majority of American
homeowners. “I don’t think there’s a domino effect here. This is much more
about the levels of fear and speculation in the market. Some of these hedge
funds are overexposed. We haven’t seen the last of the fireworks.”
MARKET strategists do not mind fireworks, but they like to be able to explain
them. While last week’s turbulence could be put down to China, Greenspan,
and even sabre-rattling over Iran, many investors and strategists had been
expecting a hiccup for weeks. They felt it was inevitable after an
eight-month rally that had propelled stock markets to levels not seen since
the days of the dotcom bubble.
But when it came it was an odd kind of crash. China’s stock market is
insignificant in global terms, with shares valued at $1,400 billion against
$44,000 billion for global equities as a whole. The market is also
relatively insulated from global markets, with trading dominated by local
institutions. Some equity strategists have been scratching their heads. “It
feels odd, peculiar. This is a financial-markets event which has happened
when in our view there is very little change in the economic picture,” said
Nick Nelson, a European equity strategist at UBS. “The US data have been
mixed, but it does not merit a 5% sell-off in a few days.”
In contrast, the previous correction in May and June last year came after a
shock increase in US inflation, prompting fears of higher interest rates.
Goldman Sachs continues to argue that the macroeconomic backdrop is
favour-able, predicting that the global economy will grow by 4.3% this year,
close to last year’s very strong 4.9%. But in the markets the tone has
become more pessimistic; the glass no longer appears half full.
“The attitude has swung from looking on the bright side to seeing the gloomy
side,” said Tony Dolphin of Henderson Global Investors. A few weeks ago,
investors were comfortable if economic data were not worse than forecast,
now they are looking everywhere for negatives.”
Albert Edwards, global strategist at Dresdner Kleinwort, dubbed the turmoil
the “Great Unwind”. “In the last six months, risk-appetite from investors
has been high,” he said. “We believe that appetite has been at 20-year highs
and when it gets to such extreme levels the danger is that something comes
along which causes it to switch back the other way,” he said.
Others feel something fundamental has changed. Ian Scott of Lehman Brothers
believes the markets are in transition.
“Investors will focus on valuations and fundamentals,” he said. “There will be
a period of reflection. It is unreasonable to expect the market to come
straight back.”
Back in China, meanwhile, the squall appears to have passed. The government
machine went into hasty but shrewd action. The state media talked up the
market, wrote that a capital-gains tax was not, in fact, on the cards, and
suggested that foreigners might soon be allowed to own more stocks; a shaky
confidence crept back. The consensus appears to be that a healthy correction
was inevitable and seasoned brokers say there will be many more to punctuate
a gradual, but inexorable, upward trend. Few institutional investors intend
to walk away from the Chinese growth story.
And for the editorialists at the state-run China Daily, there was even a
silver lining to the fallout. It was, declared one, “a psychological
revelation of China’s growing importance”.
That may not be quite how shell-shocked traders see it. They will sleep
uneasily tonight fearing that the sell-off, which continued on Wall Street
on Friday night, will resume tomorrow. They will also be awaiting further
instalments of Greenspan’s “intimate conversations”.
