TRANSCRIPT: Will sovereign wealth
funds be a political hot potatoe this year? Markets
update and Four predictions for the Shanghai Composite
Sinomania! Volume II Webisode 45, January 20,
Shanghai Composite at 10,000?!
Four predictions for Chinese stocks;
And With Recession Looming What Will Be the Big
Factors of 2008?
WELCOME TO 2008
In oceanography a recession is a
sudden decline of sea level - a warning bell -
before a tsunami hits. It is now almost universally
accepted that the United States economy and possibly
Japan's and parts of Europe are in recession.
We'll be certain by March. Nearly all the world's
big investment houses predict no recovery until
the fourth quarter of the year at just the time
China may overheat. Welcome to 2008. If you're
like me you've already seen your share of negative
signs in your investments. Volatility will be
the rule this year and I expect Chinese stocks
will be even less predictable than they were in
But first, let's look at where we
are now: The Shanghai Composite plunged all week
but closed January 18 with a modest up tick to
5,180.51. As I predicted sometime ago 5,000 appears
to be a new baseline going back several months.
The CSI 300 has remained above 5,000
and performed fairly well since the year began.
The index closed at 5,414.47 on January 18.
Shanghai B shares are still relatively
flat with lackluster transaction volumes. The
new baseline for Shanghai Bs seems to be 350.
ShenZhen B shares have lost all
their gain since 2008 began - will they manage
to stay above 600 in the short term?
For the first time in modern history
Chinese macro economic policies and the behavior
of China's economy overall will impact most of
the world. The decisions of Chinese policy makers
as they deal with money supply, mobility, and
exchange will be as important if not more than
the policy directions of the US Federal Reserve
or the European Central Bank.
The International Monetary Fund
expects so-called emerging markets to account
for 80% of global growth this year with much of
it coming from China. Expect continued high growth
in China to lead to inflation and Chinese demand
for oil, coal, metals, and nearly all other commodities
to give no relief in rising prices for energy
and industrial goods. Indeed some analysts believe
the disinflationary benefit of globalization to
be ending as Chinese, Indian, and other major
economies outside the G-7 continue to pressure
prices for energy and commodities offsetting the
lower costs of their merchandise exports.
The competition for energy resources
will continue in 2008 and I expect will become
an issue in the American race for the Presidency.
In fact, as I predicted last year, I see full-scale
China blaming and China bashing to emerge as a
theme in both the Democratic and Republican parties.
In particular we will see a lot of talk about
Sovereign Wealth Funds and the China Investment
Corporation in particular.
The effect of political angst against
Sovereign Wealth Funds and China's investment
company can only be damaging. Sovereign Wealth
Funds are hot potatoes because they make great
incendiary headlines and help politicians direct
blame outside their bad direction. But Sovereign
Wealth Funds behave much as giant pension and
hedge funds behave and could play an important
part this year in holding up stock values as they
buy into markets and make direct investments into
growing industries. Nevertheless I expect these
funds and the China Investment Corp. to be discussed
a lot this year and it will be important to watch
what they do.
CHINESE STOCK MARKETS FORECAST
Here is my take on where Chinese
stocks will be a year from now. I see four possible
scenarios within a very wide range of possible
outcomes. In all four scenarios, which I will
describe next, I see the potential for great volatility
Each scenario is based on certain
conditions existing within China and in the global
economy and uses three or four data points of
historical performance of the Shanghai Composite
My first prediction is the "hot"
scenario that shows the Shanghai Composite
Index reaching 10,000 around New Year's 2009.
This outcome is predicated on Chinese stocks repeating
the tremendous performance of 2007 and China's
economy growing at over 10% or higher. This scenario
also anticipates that China's government will
be unable to contain inflation. The hot prediction
carries with it the risk of possibly strong contractions
and even the long anticipated stock market crash
if the Chinese government is forced to bring on
a hard landing in the first half of 2009. This
scenario is consistent with the classic boom-and-bust
cycles of China's recent past and requires that
the government's policy direction either backfire
or that the government lose effective macro controls.
It carries with it a lot of risk but could mean
great short term, that is one to two year, gains.
My second possible outcome is the
"flat" scenario with the Shanghai Composite
Index closing between five and six thousand
at the end of 2008. The flat scenario assumes
a hard recession in the United States and Europe
and much slower demand from nearly all segments
of the global economy. For this scenario to occur
Chinese stock prices might be subject to a strong
downward adjustment perhaps even a modest crash
and Chinese consumption would be moribund in the
face of slower growth in China. These conditions
could be most pronounced in the last quarter of
2008. Under this scenario you may not lose money
at the end of the year but your gains would have
been hard won and come with some possibly serious
Prediction three is the "moderate"
scenario with the Shanghai Composite ending
between six and seven thousand. For this outcome
China's government would stall with poor policy
direction and there be risk of retaliation by
one or more of China's major trading partners,
a possibility particularly given the political
environment in the presidential elections in the
United States. The moderate scenario does envision
growth overall but nothing like the experience
of last year.
Lastly, my "fast" prediction
sees the market end the year at a sustainable
and healthy level reaching up to 8,000.
This scenario assumes nearly all conditions be
favorable - that external demand slow just enough
to lessen trade friction with major customers
such as the United States, Renminbi appreciation
accelerate, and new government changes without
a hitch and policy measures are smart and well
received. The fast forecast expects a smooth year
marked by a successful Summer Olympics and for
good measure the election of an American president
with favorable overall policies toward Beijing.
Remember the key areas to pay attention
to at all times with Chinese stocks are: inflation,
real estate prices, capital outflows, Renminbi
appreciation, exports, investment, consumption,
decentralization and growth of the private sector,
domestic political situations, and foreign relations.