What to do, what to do?

“…with almost 100 million stock accounts now open -- including 310,000 opened just this past Friday -- any panic selling might test the limits of the system.”

"China's Bubble is Defying Beijing"
Wall Street Journal
May 22, 2007

To the Chinese leaders meeting with their US counterparts I say: Welcome to world of capitalism.

The Chinese economic model threatens to spin out of control, a nightmare scenario if there ever was one for a communist country trying to transition to a free market-based economy and not experience the chaos of the pre-Putin Russian model nor the near global financial debacle of the Asian contagion of the late 1990’s. Yet, the baby steps taken thus far by the Chinese government toward cooling an overheated and increasingly speculative economy and stock market are clearly not working. What to do, what to do?

Obviously, stronger action needs to be taken by the Chinese central authorities. The problem lies, however, in the fact that the Chinese economic and banking system is not like the US and other developed countries. As noted in yesterday’s Financial Times, “It might be more accurate to liken the Chinese economy to a flotilla of large and small boats, all steaming ahead at full bore, with little regard to the direction of the fleet or the diktats of its commanding officers in Beijing.*” No central control is evident here. What to do, what to do?

Well, if the central authorities can’t get the job done, then the market will do the dirty work for them – and let the consequences fall where they may. Ironically, should such a development happen, it may occur during the tenure of Mr. Market Discipline himself, Henry Paulson – the host of the current round of meetings here in the US.

Investment Strategy Implications

The nightmare scenario for stock market bulls and advocates of laissez-faire/cowboy/American-style capitalism is to have both ends of the global growth train – the US and China – go off the rails simultaneously. While this is a low probability, either event occurring is not. Nevertheless, given the interconnected nature of our globalized world, the odds of a negative feedback loop are not zero either. What to do, what to do?

Wait. I know. More liquidity!!!

*China’s Unbalanced Economy
Richard McGregor