So many out-of-the-way things had happened lately that Alice began to think that very few things indeed were really impossible.
Alice's Adventures in Wonderland
Popular legend has long incorrectly credited the phrase 'May you live in interesting times' to that ocean of ancient Chinese civilisational wisdom. From a Chinese perspective, conditioned by a history of war, famine and the monstrosity that was Mao, those words would be considered a curse. But, like a movie that starts after the intermission, 2016 is already proving riveting in Beijing and beyond. On Wednesday, the Chinese authorities extended a ban on sales of shares by large shareholders, put in place last August as the market went into freefall. The move is intended to reassure investors after a seven per cent plunge on Monday morning, apparently triggered by the worry that the ban would be lifted this week, prompted a suspension of trading. Instead, the renewal of the ban underlines that the propping up of markets in August through concerted buying by what is being called "a national team" of state-owned financial institutions and the diktat disallowing sales by large shareholders were not one-offs.
Even as an attempt to shore up the market, this move is destined to be counter-productive as it sends all the wrong signals to foreign institutional investors, who are already nervous though typically more reliable long-term holders of securities than Chinese retail investors, who regard the market as an extension of the casinos of Macau. Significantly, all seven strategists and fund managers Bloomberg spoke to in December expected the ban to be lifted. As recently as Tuesday, a spokesman for the Chinese securities regulator was arguing that lifting the ban would have a limited effect on the market "because not all major shareholders need to reduce their stakes… (and sales) have been done by block trades or transfer agreements that have less impact on the market." The extension of the ban is also unnecessary as the Chinese market is among the most expensive in the world; only the most recent investors would suffer in the event of a fall. Even after the drop on Monday, the median Chinese share was trading at about 65 times earnings.
In the go-go days of overseas listings in Hong Kong and New York of a conga dance of state-owned enterprises - ranging from China's oil giants to its banking behemoths - that started around the beginning of this century, many foreign investment banks and fund managers assured themselves and the rest of the world that China was becoming as market-oriented as the West - but was blessed with an omniscient leadership capable of predicting the future. "It was never necessary…to reconcile the government's deep mistrust of markets," as the analyst Anne Stevenson-Yang observed.
In the past few months, however, the contradictions have poured forth like the Yangtze in flood. China really is one of a kind - and not at all in a good way. If this week's nudges and diktats on the stock market were not unsettling enough, there is news that the Chinese authorities have, in essence, kidnapped a UK citizen of Chinese origin in Hong Kong because he ran a book store in the city's busiest shopping district that sold books critical of the Communist leadership. According to the terms of the joint declaration signed by Britain and China, when Hong Kong was returned to China in 1997, the city is administered by a separate and independent government and judiciary. Such is the confidence of the Chinese government that its foreign minister went ahead with a joint press conference this week with the UK foreign secretary, who happens to be visiting Beijing, and brazenly declared that the bookseller was "first and foremost a Chinese citizen." Such is the propensity of the David Cameron government to kowtow to China that Philip Hammond, the UK's foreign secretary, merely said that he had raised the matter with Beijing.
Hong Kong's wealthy businessmen, who along with the Taiwanese, were part of the first wave of foreign investors in China and are an underappreciated part of the nation's success, must be unnerved. In addition, the Hong Kong stock market has been a launching pad for most successful privatisations of Chinese state-owned enterprises. Historically, Hong Kongers have managed to mostly shrug off news of routine human rights abuses from Communist China. But, this comes in a week when Beijing looks almost as clumsy in trying to control the market as it did last August. And, it follows several detentions and arrests of mainland Chinese businessmen and securities traders in China in autumn last year for "crimes" such as publishing negative market reports or shorting the market.
When attempting to manage currency and stock markets, governments play a kind of confidence trick; Beijing only more so. What I believe was a genuine attempt by China to introduce a wider trading band for the renminbi last August, rather than indulge in competitive devaluation, now risks getting out of control because the investing world is baffled by Beijing's moves. Given the backdrop of the dollar's appreciation, the currency is already under pressure. The Financial Times reported on Wednesday that the People's Bank of China's designated midpoint for the renminbi to dollar trading range was Rmb 6.5314, a fair bit below its previous day's close. Is the central bank pushing it down - or accepting that market forces, especially the offshore renminbi market, no longer believe the renminbi is a one-way bet? Who knows? Meanwhile, hot money flows are seeping out of China's nominally closed capital account - up from $60 billion in October to $90 bn in November. Beijing needs to prevent things from getting more interesting - and quickly.
Twitter: @RahulJJacob
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
