2014-02-21

Tertiary Evidence China's Financial System Is On Edge

Why take these steps if nothing is going on? Given the general trend of reform towards opening the economy, the long-term trend would be for a more open discussion of the economy. If they are tightening now it is because they are worried about the short-term; I do not see this as a long-term reversal.
Beijing giving foreign economists the cold shoulder
Chinese government officials have quietly become more sceptical about foreign banks' research reports and are avoiding senior economists at global banks, partly because of growing mutual distrust over the scale and seriousness of the country's debt problems.

Economic researchers and people working for state-owned media told the South China Morning Post that the central government's propaganda department had instructed senior editors at major official media outlets to be cautious about whom they invite to talk about China's economy and what they might say about the problems and challenges it faces after its long run of supercharged growth.

"There's no black list or white list, but it's clear we are now being encouraged to invite economists and analysts with domestic securities firms and banks to talk about China's economy, especially on live broadcasts," said one mainland media source who declined to be named given the sensitive nature of the matter.
If you read through the article, you will see that this includes Chinese economists who work for foreign banks.

The Life of a Chinese Economist
Within the past year my office has been broken into, I strongly believe my home has been broken into, there is every indication my phone calls are all listened to, and my computer has been hacked or at the very least targeted.

It began when I wrote a blog post, which has since been taken down due to threats against my personal safety, in which I mentioned some of the activities of a large, powerful, and very influential Chinese company. The information I linked to and wrote about this company was nothing more than public domain information that had already been published by global news organizations. Though embarrassing, I wrote nothing new about this company that was not already in the public domain.

Shortly thereafter, I received word from a senior person at my school that three lawyers and a secretary from this company in Beijing had flown to Shenzhen and made numerous civil and criminal legal threats against me also urging that I be fired immediately.
One thing that many foreigners outside of China do not realize is the extent to which local actors are responsible for government actions. In the United States there is a very clear line between local, state and federal officials (and even then you will often see people confuse a locally decided issue with federal policy), but in media coverage of China these lines are often blurred. Most of the time when one reads about an abuse of power, it is a local official abusing their authority. For the person on the receiving end it doesn't matter much whether it is official policy or a personal vendetta, but it matters a great deal to everyone else. If individual companies abuse their power and silence critics in the media, that is one thing. If it is official policy to silence critics, that is different because of what it implies is behind it—in the former case, an isolated incident; in the latter case, a possible systematic crisis.

Investors act on two levels, one rational and one emotional/psychological. The more information one has, the less emotional one will be and vice versa. When mood peaks and troughs, that is when investors as a group have become nearly 100% emotional, it doesn't matter how much bad or good information one has, the market will still surge to a peak or crater to a bottom. Other times, information can play a role in dampening or exacerbating the mood. I have been doing fewer socionomics related posts lately, but there are quite a few based on how the media changes its tune based on the direction of the stock market. Quite literally, a story such as IBM missing earnings can go from a very negative story when the stock market drops, to a very positive story if the market rallies and even IBM rises. The reality of the story doesn't change, the impact on the earnings doesn't change, but the perception can completely shift how the news is interpreted by the media and individual investors.

Take China for example. One thing you notice if you pay attention to media coverage is a shift from generally positive stories on China to generally negative ones in the wake of 2008. This isn't surprising considering that social mood in the West plunged at this time. It wouldn't matter what China did these past few years. A booming economy with no credit bubble would have sparked more anti-China trade rhetoric and calls for the renminbi to further appreciate because Americans were in bad mood.

To some extent, the media coverage from the West, the rising tension between China and Japan, and China and Southeast Asian nations, is a part of social mood. Controlling the message can have an impact on emotionally charged topics because the trends are mood driven, but when investors lack information, their emotions take over. The lack of information is not a problem in bull markets. Things are going well and they overlook information gaps, the missing information is ignored. On the way down, investors focus on the gaps because people fear the unknown. Those information gaps loom larger and larger in the minds of investors until they become irrationally large.

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