How much longer can all this go on? That’s the question on everyone’s lips and lobes. Today, we have a precise, mathematically sound, conceptually irrefutable answer, more or less.
449 days. That is how much time you have left to make your fortune in the great global M&A boom, where every asset is for sale, and every company a buyer. How do we come to that number?
On August 8, 2008, the summer Olympics will begin in Beijing. Anxious to show itself off to the world, China’s government will do anything it can to avert a destabilising financial panic before then. We’re not saying it will succeed. Like everyone else participating in the worldwide equity land grab, China’s officials are out of their reckoning. Still, an important step has been taken this week to keep the boom going for at least another 449 days.
“China will let its banks buy shares overseas for the first time, diverting some of the country’s 35 trillion yuan (USD$5.49 trillion) in savings from the local sharemarket, where trading has surged sevenfold,” report Zhao Yidi at Bloomberg. You may call this whatever you like. Here at the Old Hat Factory, it reminds us of brain surgery.
Specifically, we are reminded of the brain surgery on Bob Woodruff, the correspondent for U.S. network ABC News who was injured in an IED attack while riding with a U.S. military patrol in Iraq. We saw several stories on how Woodruff’s life was saved. To prevent his brain from swelling up against the confines of his skull-and causing irreversible or even fatal damage- military doctors removed a pizza slice-shaped chunk of his skull.
The brain swelled up to the size of a rugby ball on the outside of his head, according to Woodruff’s wife. But it saved his life. Later, after the swelling went down, cosmetic surgeons were able to reconstruct the missing piece of skull to reshape Woodruff’s head. If you saw him today, you would hardly notice the man had a large piece of his skull removed. What does this have to do with China?
China sits on tremendous foreign currency reserves and banking assets (the result of savings rates in the 20 percent range). Every time China sells a new pair of extra large sweat pants to America, the dollars come back to China. China has to do something with those dollars. The process of “sterilising” the inflationary effect of those dollars is a little Byzantine. We won’t explain the whole thing here. Only what it means.
Extra foreign currency reserves have become a kind of swelling on the brain of the Chinese financial system. They are causing massive inflation in local share markets. The central bank has tried and failed to relieve this swelling by raising short-term interest rates and reserve requirement at banks. But it hasn’t worked. The animal spirits are unleashed in China. And if they do not find new pastures to roam and assets to consume, they will soon turn on each other, devouring local gains in a massive sell off.
In liquidity terms, China’s forex and banking reserves are now free to find a home on other equity markets. First stop will be Hong Kong. But where next? America? Australia? More details on this later this week.
Markets and Money