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This is perhaps not entirely on topic, but it's certainly a variation on the theme of predatory financial craziness:

China Inc. Is Out on a Limb

China's stocks are sky-high. And Chinese companies are huge investors. That means a serious market backslide will send balance sheets into free fall

By now every investor on the planet is trying to handicap what happens when China's scorching-hot stock markets finally start to cool off. The conventional wisdom is that China's greenhorn individual investors will take the hit, while corporate China--the companies that make shirts, build ships, and run utilities--won't feel much at all. The real economy these companies operate in is far too strong to be affected by stock wobbles, goes the argument. The price of corporate shares may fall, but underlying earnings will power on.  

That line of argument, though, is looking suspect for the simple reason that companies big and small are now playing the markets with abandon, using corporate funds to invest in each other's initial public offerings and bolster their bottom lines. Although figures are hard to pin down, Morgan Stanley figures a third of reported corporate earnings in China stem from investments outside companies' core businesses--which in almost all cases means plowing money into stocks. "It's quite dangerous for these Chinese companies because these gains have no cash basis," says Ding Yuan, a professor of accounting at China Europe International Business School in Shanghai. "It's really frightening."

Scarier still is what could happen if the stock markets head south. Shanghai is more than 700 points off its all-time high of 6,124, reached on Oct. 16, though as of Nov. 14 it was still up 102% for the year. If and when stock prices start to fall in earnest, companies will have to report these portfolio losses on their income statements, depressing their earnings. That, in turn, could hurt their own stock prices, pushing the market down both further and faster. "It's a replay of what happened in Japan during their bubble," says David Webb, a Hong Kong-based corporate governance expert and non-executive director of Hong Kong Exchanges & Clearing. Japan Inc. gorged on stock and real estate, only to tumble into the red when those markets collapsed.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Thu Nov 22nd, 2007 at 10:22:47 AM EST
The problem isn't the United States or United Kingdom.

The problem is unregulated capitalism, it consumes all that it touches and turns it into a commodity regardless of whether that makes any human sense or not.  The lesson of King Midas would seem to have been lost on the people who promote this aspect of the market as something positive.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Nov 22nd, 2007 at 10:35:49 AM EST
[ Parent ]
It seems like history repeats itself an awful lot in this area, and that people collectively never learn much from the lessons.

Kevin Phillips, in Wealth and Democracy, has traced variants of this pattern as far back as 14th century Italy. It's like a bad software program in it's 10th iteration, chock full of all sorts of interesting "features."

Billy Ray Valentine caught the essence of the game in Trading Places:

"Oh, see, I made Louis a bet here. See, Louis bet me that we couldn't both get rich and put y'all in the poor house at the same time. He didn't think we could do it. I won."

"When the abyss stares at me, it wets its pants." Brian Hopkins

by EricC on Fri Nov 23rd, 2007 at 10:50:48 AM EST
[ Parent ]
China's stocks are sky-high. And Chinese companies are huge investors. That means a serious market backslide will send balance sheets into free fall.

Let's rewrite that, shall we?

"Commercial paper valuations are sky-high. And investment banks are huge investors. That means a serious credit crunch will send balance sheets into free fall."

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Thu Nov 22nd, 2007 at 10:36:30 AM EST
[ Parent ]


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