This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here: sign up for
Money Morning
It must be an odd experience for the Chinese ruling elite.
They’re used to ruling by dictat. They speak, and the people obey – or at least, make a reasonable show of it.
But when it comes to China’s stock market boom, the communists at the top of the ladder are just like King Cnut, vainly trying to ward off the encroaching tide. Cnut of course, knew his efforts were futile – he was demonstrating to his populace that there were limits on even a king’s power.
Somehow, we doubt that China’s leaders are trying to make the same point…
China’s main stock market index, the Shanghai composite, rose by 130% in 2006, and it’s risen another 50% since the start of this year. New stock trading accounts are being opened at a rate of one million a week, says the FT. Overall, the market trades on a multiple of 43 times trailing earnings.
So when the governor of China’s central bank says that he’s worried about a bubble forming in the stock market, it’s fair to say he’s not exaggerating – it’s an open and shut case. Of course it’s a bubble.
But if governor Zhou Xiaochuan expected his words – broadcast throughout the state-run media – to have any impact on the market, he was sorely disappointed. The index gained about another 3% yesterday.
A big problem is that Mr Xiaochuan’s words don’t correspond to his actions. Interest rates on bank accounts in China come in at about 2%. With official inflation running at more than 3%, savers are losing money by putting it in the bank. Compare that to the double-digit monthly returns you can get by putting your money in the stock market (which, as with any bubble, has attracted hordes of unsophisticated investors who believe it can never go down and that it’s no riskier than a bank account) and it’s no surprise that investors are ignoring him.
As Fraser Howie, a writer on Chinese stocks, tells the FT: “If Mr Xiaochuan really wanted to affect the market, he could double the bank deposit rate, but that would wipe out the state-owned banks.” Hence the dilemma. The last thing China wants is a crash before the Beijing Olympics next year. Afterwards, a bit of pain might seem more acceptable – but for now, the softly, softly approach is likely to continue.
Perhaps the Chinese central bank governor just needs to resign himself to the fact that having your warnings ignored by investors is just part of capitalism‘s rich tapestry. Our own Mervyn King could tell him that. The Bank of England governor has tried on several occasions to talk down our own white-hot housing market, using increasingly alarmist language in the hope of appealing to common sense rather than wielding the big stick of interest rates. He may well have realised by now, with inflation climbing and consumers still spending like there’s no tomorrow, that the only way to get through to people is via their wallets – let’s hope he can persuade his peers on the Monetary Policy Committee of the same thing.
Meanwhile, no one’s trying to talk down our booming stock market. But amid the merger and acquisitions frenzy, MoneyWeek regular Tim Price reminds us that “it is worth recalling the simple fact that the majority of corporate acquisitions fail.” Surveys regularly point to between half and three quarters of all deals ultimately ending in failure.
Tim points to research by Arie de Geus, author of “The Living Company” who notes that the bigger the deal, the harder it is to get employees on both sides to co-operate with one another, as two corporate cultures clash.
And of course, with financial services being very much a “people” business, the obstacles facing the likes of ABN Amro’s suitors, or even the Thomson / Reuters deal are even higher. The M&A party will continue for now – and perhaps even drive the FTSE 100 to a new all-time high – but the hangover from deals struck in this “dangerously frothy market”, as Tim calls it, may be a long time in wearing off.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
In London, the FTSE 100 fell 53 points to close at 6,550 as weak mining and property stocks weighed. Tate & Lyle made the day’s biggest gains whilst Royal Bank of Scotland led the fallers. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 lost 37 points to close at 6,034 and the Frankfurt DAX-30 fell 83 points, ending the day at 7,442.
Across the Atlantic, there was little change on Wall Street yesterday. The Dow Jones fell slightly, ending the day 3 points lower at 13,309, having matched an 80-year record winning streak on Monday. The tech-heavy NAsdaq was a fraction of a point higher, at 2,571, whilst the S&P 500 was one points lower, at 1,507.
In Asia, positive earnings prompted investors to buy, helping the Nikkei to a close of 17,748 – a 91-point gain – today.
Crude oil was unchanged at $62.26 this morning and Brent spot was higher at $64.53 in London this morning.
Spot gold had climbed to $685.60 this morning and silver had fallen to $13.46.
In the foreign exchange market, the pound was at 1.9883 against the dollar and 1.4687 against the euro. Meanwhile, the dollar was at 0.7386 against the euro and 119.93 against the Japanese yen.
And in London this morning, miner Rio Tinto denied that it had received a takeover approach from peer BHP Billiton. The rumour saw Rio Tinto shares record their biggest rise in over seven years on the Australian stock exchange and climb by as much as 5.5% in early London trading. Were the takeover to go ahead, it would the third-largest in history.
And our two recommended articles for today…
What is the real solution to America’s trade deficit?
– Tough trade sanctions on Chinese imports look set for a veto-free route through the US Congress. But not only does the legislation risk provoking Chinese retaliation, it also distracts from the true cause of the gigantic US trade deficit, says economist Stephen Roach. To read more of his insights into Sino-US relations, click here: What is the real solution to America’s trade deficit?
How Tesco became Britain’s top supermarket
– Rather than low prices, it is cutting-edge customer intelligence which has given Tesco its competitive advantage. But as the likes of Sainsbury’s and Asda fight back with more sophisticated schemes of their own, could the days of Tesco’s dominance be over? For more on what the information wars mean for the major retailers – and where lucrative contracts may be heading – see: How Tesco became Britain’s top supermarket