Saving Face at All Costs

China's stock market, which, until a couple weeks ago, had nearly doubled from early January, has run into some trouble.

From Bloomberg:

Chart from Bloomberg

China’s benchmark stock index, the world’s worst performer this month, may fall another 10 percent as bank lending slows, said Andy Xie, a former Morgan Stanley chief Asian economist.

“The current correction is reflecting the tightening in lending,” said Xie, who correctly predicted in April 2007 that China’s equities would tumble. “We’ve seen the peak of this market cycle, though there’s likely to be a bounce as the government seeks to stabilize the market.”

The benchmark Shanghai Composite Index plunged 5.8 percent yesterday, the most since Nov. 18, extending its decline from this year’s high on Aug. 4 to 17 percent. The gauge, the worst performer among 89 benchmark indexes tracked by Bloomberg worldwide, sank as foreign direct investment plunged and Yunnan Copper Industry Co. posted a loss, saying there are “no clear signs” of a recovery. The Bank of New York Mellon China ADR Index, which tracks American depositary receipts, slumped 5 percent, the most since March 2.

Prime Minister Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package, coupled with record bank lending in the first six months, helped the Shanghai index more than double this year from the low on Nov. 4. An estimated 1.16 trillion yuan of loans were invested in the stock market in the first five months, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s Cabinet.

The equities rally faltered as new loans in July fell to less than a quarter of June’s level and the securities regulator allowed initial public offerings after a nine-month moratorium.

The government may order the national social security fund to support the market before Oct. 1, when the Communist Party celebrates the 60th anniversary of taking power, according to Xie. Other measures that may be taken include halting the approval of IPOs and share placements, he said.

“This is not the bursting of the bubble,” Xie, who is now an independent economist, said by telephone. “The government will be under pressure to take action because a lot of people have lost money.”

Read On

I'm not simply posting this because of the huge loss that was posted yesterday. For all I know, stock prices may be up today or by the end of the week. Reacting to every rise or fall of the Chinese stock market will probably not tell too descriptive of a story and will instead surely paint a very bi-polar picture.

The thing about this article that struck me were the comments from the analyst, Mr. Xie, about the upcoming anniversary in China and the need to have things "going well" when that day occurs.

Is the "government action" that Mr. Xie says is imminent the most prudent thing to do at this time? I suppose it depends upon what that action is. If it were regulations aimed at promoting stability in the markets and economy, then those could be a good thing. But if it is simply more cash aimed at propping up otherwise stalling and over-inflated markets, then I would think that that would be pretty harmful.

A few days ago, there was a discussion in the comments of one of my posts about the notion of "saving face" and how important and central to Chinese culture the concept is. Hopfrog, a frequent commenter, encapsulated the absurdity of doing things for the sake of saving face very well, I think:

I personally think if it weren't for this whole ingrained "save face" concept that the government would do the right thing and regulate their markets to prevent the crash, which I will guarantee, is imminent.

Saving face is without a doubt the most moronic ancient concept among any culture on the planet. Yeah, let's not be open and honest and try to improve... why would we do that when we can lie to ourselves and each and continue to make mistakes while maintaining a false pride based on lies?? BRILLLIANT!!!

I'm not a savvy investor and this stuff that drives how markets work is all new to me in the past year. But the idea that saving face would be the driving force behind government economic policy and particularly the intentional creation of a bubble is crazy to me.

If money is pumped into the Chinese markets so that October 1st is a grand day, I really hope that China has a glorious day that they remember forever. Because it'll certainly be an expensive one.