In the recent book, Here Comes Everybody: The Power of Organizing Without Organizations, author Clay Shirky discusses how new technologies for collaboration and information-sharing impact society. It is a fascinating analysis and commentary on how groups of people are collaborating and networking online in new and more efficient ways because of blogs, instant messaging, Twitter, Flickr and other new services. The types of group-forming he describes are sometimes called crowdsourcing and flash mobs. For those of us in China, we might better know crowdsourcing as the Human Flesh Search Engine, the increasingly frequent phenomenon of online crowds gathering via China’s bulletin board systems, chat rooms, and instant messaging to collaborate on a common task. The Human Flesh Search Engine shares many of the same characteristics of Shirky’s networked social collaboration: Enabled and made cost-effective by technology, channeling an existing motivation that was not possible to act upon as a group before.

In our own book, Supertrends of Future China, we describe what we call the Inter-Networking Supertrend, the new web-enabled version of the classic Chinese guanxi (which means ‘relationships’). China’s Human Flesh Search Engine is a poor translation (yet a popular and visceral description) of the Chinese phrase ren’rou sou’suo （人肉搜索）and was, for a day, Google’s homepage for its Chinese edition Googrle.cn (the page can still be found online here). The fact that day was April 1st should tell readers it was meant as tongue-in-cheek (and may not entirely be a joke - a number of search engines have tried human-assisted search and relevance checking), but it put a name to a movement that has been happening online in China for some time: Online collaboration by Netizens to search via the power of China’s massive 225 million Internet users.

The human search engine has been operating in China, for good and for ill, for at least a year or two already. We profiled several such instances in our book, such as the Kitten Killer of Hangzhou and the infamous Chinabounder blog, both of which involved an intensive human-assisted search that sometimes bordered on a lynch-mob mentality. There are numerous other cases: The South-China Tiger photogate and, in 2008, the misidentification of an Olympic torch relay protester, the 1970’s-style ’struggling against’ a Chinese student studying in America, and the ‘I (Heart) China’ movement that spread like wildfire over MSN to millions of Chinese users in two days.

Shirky’s ideas on the extraordinary power and occasional madness of online crowds would be an apt explanation for both the apparent effectiveness and mob mentality of the Human Flesh Search Engine. Profiling a case in the US of a person who lost a mobile phone, had it found by somebody who refused to return it, and the subsequent online tracking and debate over the people involved, Shirky wrote:

…The whole episode demonstrates how dramatically connected we’ve become to one another. It demonstrates the ways in which the information we give off about ourselves, in photos and e-mails and MySpace pages and all the rest of it, has dramatically increased our social visibility and made it easier for us to find each other but also to be scrutinized in public. It demonstrates that the old limitations of media have been radically reduced, with much of the power accruing to the former audience. It demonstrates how a story can go from local to global in a heartbeat. And it demonstrates the ease and speed with which a group can be mobilized for the right kind of cause.
But who defines what kind of cause is right?

As the cases of the Human Flesh Search Engine mentioned above clearly show, right is determined by a kind of process of consensus-building where the strongest, earnest, motivated voices may dominate, but as to whether the end result is right or wrong, as somebody once said, the mob has many heads but few brains. Where will China’s human flesh search engine strike next? We’ll keep you posted.

————

We should add that Shirky’s book mostly deals with the postive aspects of group collaboration and the benefits it can bring to society and organization. We recommend any readers interested in this topic consider buying Here Comes Everybody: The Power of Organizing Without Organizations or going to the book’s blog.

Categories: China Supertrends, Inter-Networking
4 Comments »

Milton Friedman was thought to have said, “The stock market and economy are two different things.” Looking at the recent actions of the China Securities Regulatory Commision and Chinese leadership, the two appear increasingly intertwined. This is setting a dangerous precedent for Chinese government intervention in the stock markets: Last year by increasing the stamp duty to cool the market’s irrational exuberance, this year by goosing it to prevent market losses from spilling over into the general economy.

In the long-term this will inevitably create more instability in the system for several reasons. While some regulation is good - corporate reporting standards, for example - micro-management of the stock markets to cool the economy or appease the public should not be the role of a regulator. Friedman, who implictly blamed government mismanagement for causing the Great Depression, abhored government interference in the markets except for defending against a systemic collapse. If he saw what was going on in China’s stock exchanges, he would be rolling in his grave.

In late April the CSRC announced a pair of regulatory actions designed to stimulate the market after its free-fall in March, which saw Shanghai’s Composite Index decrease by 20 percent, its biggest one month loss ever. The first, a block trading system for sales of more than one percent of outstanding shares, was announced on April 20th. In the next trading days the reponse was lukewarm, the index went up only six percent. Clearly more investor relief was needed and, on April 24th, the Commission delivered a cut to the stamp duty, the tax on transfer of stocks, from 0.3 percent to 0.1 percent. The next day, Shanghai’s index increased by 9.29 percent and, for the week, up 14.96 percent, the biggest one week gain on the index, ever.

Whenever I want to know how the stock markets in China are performing, I can ask several of my Shanghainese friends whose sole occupation is chao gupiao - stir-frying stocks. If they say they’re in a bad mood that day, I know the market is down, if they’re in a good mood, the Shanghai Composite must be up.

Thinking back to March, my friends were in a very bad mood. The Shanghai index had its largest monthly drop in the last ten years, just over 20 percent, and this made for some bubble-popping pessimism. Then in late April, the emergency regulatory moves to stem the bleeding were like a one-two blow to the pessimists: A block-trading system was unveiled to stop quanties of shares from flooding the market, and, most importantly, the stamp duty was reduced from 0.3 RMB per share to 0.1 RMB per share. That day, my stir-frying friends cooked up an extra-large serving, so overjoyed were they. But in a nation with a 5000 year historical memory, didn’t they remember the last time the regulator lowered the stamp tax, then raised it again, then lowered it again, or raised it once again? The public have started to buy and sell based on the actions of the China Securities Regulatory Commission, not on the fundamentals of the stocks themselves.

From the best major-index performer globally in 2006 and 2007 to one of the world’s worst performers in 2008, is there anything wrong with the Shanghai stock market then? According to one local investor, “Too much government interference, that’s what’s wrong with these markets…Things won’t improve until the government leaves these companies alone to get on with their business.” That’s good advice, perhaps from last month when the market was in freefall? No, it quoted in an article from the May 29 1996 International Herald Tribune. Clearly, when it comes to government participation in the markets, old habits die hard.

It occurs to me then that these techniques, for questionable short-term benefit, only serve to further destabilize the fragile market equilibrium by increasing moral hazard. This term, when applied to investing, means taking too much risk in the belief that one will be bailed out if things go wrong. In early April trading volumes were way down: Clearly Chinese investors were expecting the government to do something, waiting for it in fact, to bail them out after the worst trading month on record. Now that the Commission delivered, the expectation will be increased the next time around. Any recovery will be short-term at best, and we are likely to see more Dead Cat Bounces.

As I disucssed in the innaugral post of this blog, the idea of a dead cat bounce is a temporary reprieve from a downward trend, due to some optimistic investors or positive news coming out, but lacking a fundamental change in the factors driving the bear market sentiment.

April 30’s Shanghai Daily reported that 1574 listed firms had combined 2007 profits of more than 136 billion US dollars. Meanwhile, a commonly reported statistic is that 15% of corproate profits, or about 20 billion US dollars, were from stock market speculation in 2007. You may want to reread that sentence if the implications aren’t clear: A major source of profit for Chinese firms, not including invesment banks or insurance companies which have to invest, is buying and selling stocks retail. Nor is this is not some kind of strategic, pre-merger or cross-shareholding action as Japanese companies are apt to do (and lost more than US$3.2 billion on in 2007, incidentally). It is plain speculation.

A year ago, the Commission had to prohibit Chinese firms from using thier IPO funds for speculation on the stock markets, so widespread was the practice of many companies to invest their working capital into stocks, bonds, and derivatives. You might be thinking it is all insurance companies and investment banks when you should be thinking Zhengzhou Yutong Bus Company, one of China’s top makers of buses, investing part of its IPO funds into other companies’ IPOs. It was not alone. The lure of easy money was too great.

In 2007 you may recall that Shanghai’s market was the best performing major index in the world, gaining 97 percent after a 127 percent increase in 2006. This year, with the index dropping sigifantly off its 2007 highs, one might wonder how many companies are sitting on losses right now. Bounce.

The new block-trading system recently announced, whereby amounts of shares over one percent of the total outstanding had to be sold in a block trade, seems like a good way to prevent shares from flooding the market. In the days following the announcement, numerous companies were found to be selling 0.99 percent of their holdings at a time. Bounce.

Of the last four times the stamp duty was modified, the three times it was decreased were in flat or declining markets with no appreciable long-term stimulus, and the one time it was increased, May 2007, the market continued its great bull run. Now tell me again the logic that decreasing the stamp tax will push the market back into bull territory? Bounce.

The big question on Chinese investors’ minds is, how low will it go? I’m reminded of some other stock market investment experience that I wish I could share with Chinese inv estors. This situation in China’s stock markets seems eerily similar to teh Dot-Com NASDAQ bubble around 2000 (the equavalent of 2007 in China) and 2001 (how China’s marketrs are right now). From the classic “Buy the Dips” investment stategy to “Sell the Peaks” all in the course of about a half year. The Shanghai Composite index is close to having lost 50 percet of its value from the 6000+ point high which occured … about six months ago. My bet then is that we have not seen the last of the declines in 2008, though we might see a few dead cat bounces before the end of the year. Meow.

Categories: Affluencing
3 Comments »

In the mid-19th century, people in China dreaming of wealth may have thought of Gold Mountain, or Gum Shan, the Cantonese name for California. Tens of thousands of Chinese flocked there, seeking their own claim to riches.

Now, in 2008, wealth-seekers don’t need to leave home, the Chinese are actually sitting on the new Gold Mountain - China’s 1.68 trillion dollars in foreign currency reserves held as of the end of March: $1300 for every man, woman, and child. In a country where GDP per capita is still less than $2500 (additional source), that’s no small change.

Yet, in much the same way as the miners of the 1800s were lucky to see a small gold nugget at best, so too does China’s populace sit upon a mountain of gold that is nonetheless maddeningly out of reach. China is not doing enough to control its foreign exchange reserves, and needs a new way to deal with them, and fast, or it is likely to continue to suffer the main ill of having too much money: Inflation.

The Story of Foreign Reserves

A country, especially a developing country such as China, needs foreign reserves. To simplify matters, in order to facilitate trade amongst diverse nations with their own currencies, the world needs a common representation of value. Historically that was gold. Today, gold has been supplanted by several reserve currencies such as the US dollar, Euro, and the Yen, and the value of those currencies is ultimately backed by confidence in the goods and services produced by those countries.

Developing countries, in order to trade, need that foreign currency, and typically have several months of reserves on hand to cover the average cost of imports. Every prudent country needs a few months’ reserves for a rainy day; eight to ten months worth could be considered extremely cautious. China had sixteen months of reserves available to cover its $91 billion in imports in January. The People’s Bank of China on April 11th announced the official size of the reserve at 1.68 trillion dollars as of the end of March 2008. And the country is getting richer faster than ever before, with reserves growing 40% more in March than the same period last year.

A second reason to have reserves is to be able to defend the home country currency from speculative attack in the foreign currency markets. For example, Thailand could have used a few more dollars back in the 1997 Asian Financial Crisis, but China does not allow convertibility of the RMB, which curtails the majority of currency speculation, thus making this point moot.

Finally, reserves are used to cover foreign debt. China’s estimated $363 billion plus of foreign debt at the end of 2007 is nothing to scoff at, but SAFE will not be bouncing any cheques. In fact, China has the largest foreign reserves in the world, nearly double those of number two Japan. So, what gives, China? Why the massive foreign reserves?

China’s Big Piggy Bank

China does not actually hold wads and wads of cash, like a high-roller hitting Macau’s new casinos. Most of its funds, especially those denominated in US dollars, are in the form of US Treasury bills and other long term securities. T-bills have a notoriously low interest rate because they are seen as the safest investment available. With China holding an estimated $466 billion in T-bills alone (full data, 2), earning interest in the low single digits (even hitting a 50-year low at recent auctions), parking so much money in low-yielding securities means China is literally leaving billions in potential investment income on the table.

Couple this opportunity cost with the depreciation of the US dollar against major world currencies and China’s US dollar holdings are looking even less attractive. Given the consensus estimates that China’s total foreign reserves are comprised of about 70% dollar-denominated securities and cash, and that the depreciation in the US dollar over the last year has been about 14% against both the Euro and Yen, those Chinese reserves in US dollars have lost about 100 billion in spending power. Of course, China’s Euro and Yen holdings have increased buying power, but not in proportion as only about 30% are in non-US dollar assets. With such low interest rates and the passive depreciation of its US dollar holdings, China is anxious to look for other ways to spend its growing fortune.

Enter the CIC

The China Investment Corporation, a 200 billion dollar sovereign wealth fund, was created in late 2007 to funnel some of China’s foreign reserves into more profitable investments. Its size is not exceptional among other global funds from Norway, Abu Dhabi, or even Singapore’s, but the speed with which it was formed makes it the new kid on the block and is seen as a carpetbagger by many countries, but chiefly the US, which fear the CIC is merely an extension of Chinese government policy abroad.

In early April, the genial president of CIC, Gao Xiqing, appeared on the US news program 60 Minutes. In a not-so-hard-hitting interview, Gao pinned down the fear foreign governments seem to have of CIC, saying “Immediately after we announced our existence, then the U.S. Government, some European governments, all came out and said, ‘okay, we think of this as — this is a dangerous — we need to do something about it. They probably want to control us. They probably want to do something bad about us,’”

These fears have stymied CIC’s investment plans. To date they’ve made only two major investments. First, a three billion stake in US private equity firm Blackstone Group, and a five billion dollar investment in Morgan Stanley at the peak of the sub-prime mortgage crisis. Not bad for six months, and only 192 billion to go.

Perhaps answering calls to speed up the pace of investment, other Chinese government entities are buying foreign assets, such as SAFE itself, which last week announced that it had accumulated about 1.6 percent of French oil firm Total S.A.’s shares, worth about 3 billion dollars. Let’s see, that only leaves, oh…. 1.67 trillion.

(Update: 4/16/08 This story showing how CIC has quietly accumulated a one percent stake in British oil producer BP. Note to China: If you’re trying to reassure the world that your SWFs are not just an extension of national energy security policy, you might want to diversify a little more. What’s next? A one percent investment in Exxon?)

With all that gold not being spent somewhere productive, the Chinese government needs to consider a new policy that will impact foreign reserves more quickly. One may hope that the new Gold Mountain won’t turn out to be the illusion it was for so many Chinese more than a century ago.

Categories: Affluencing
2 Comments »

WESTERN MARKET FENG SHUI

Recently as I watch the volatile stock markets in China, more out of curiosity than as an actual investor, I am reminded of some of the stock market wisdom my father taught me, garnered from his two decades of experience as a stock broker in Canada.

As China’s Premier, the PBOC governor, and other officials rush to the press to reassure investors every time there is a fluctuation in domestic markets, I believe that what China’s markets really need is more Western-style investor education, and where better to start than with understanding the animals of the Western stock market zodiac, or what I will localize as Chinese investor feng shui.

Let’s test your investing feng shui IQ: Do South China Tigers bounce?

Near the end of March, when the markets in China were on a roller coaster, punctuated by a five percent plus drop in the Shanghai index on one Thursday and a near mirror-image rally the day after, I was reminded of the somewhat morbid concept of a bouncing cat. With all the recent purported sightings of South China Tigers, one may ask, can a big cat bounce? The answer, amazingly, is yes, if it is dropped from sufficient height. However, and this is the salient point investors need to pay attention to, the cat will then be dead. The bounce, in other words, is not expected to be of much use, least of all to the poor feline.

Traders have long used the term dead cat bounce to describe a rally or jump in a stock or market that is short-lived at best. As the Chinese stock markets have dropped dramatically from their 2007 peak, when Shanghai’s index was the world’s best performing market at 97 percent on the year, it looks possible that in 2008 their performance may be among the worst. Yet, on the way down, from so high up, we may expect there to be bounces, technical rallies, as happened that mirror-image Friday when the index gained nearly five percent after a sharp drop the day before.

If investors choose to follow this wisdom, they will not be fooled into thinking those rallies can be sustained, because the underlying fundamentals of the market decline - interest rates and inflationary pressure, reduced exports, falling corporate profits, and overall market sentiment - remain in play. With China’s political leadership collectively saying, “It’s going to be ok”, smart investors should next be asking, can you put lipstick on a pig?

Again, in stock market lore, the answer is a resounding yes! This expression means to make a bad stock appear better by using cosmetic enhancements. Such metaphorical lipstick has been put on stock market pigs for decades. Premier Wen Jiabao said to the press during his recent trip to Laos that one of the primary purposes of the government is to

“establish, through legal means, an open, fair and transparent market environment so as to protect the interests of investors and small shareholders.”

Those investors should wonder if this was merely meant to help stabilize the rapidly falling markets, and was there any real substance to the announcement?

With the Shanghai Composite Index dropping about 20 percent in the month of March alone, market talk from leaders may result in a temporary halt to the decline, but the pig is still ugly and long-term attractiveness will take much more than just cosmetics. But the political leaders’ comments beg the question, why was there so much volatility in March, anyway? Could somebody be shaking the monkeys off the tree?

Does the March sell-off indicate a healthy correction to the 2007 run-up, or is it driven by panic selling from the small investors? My father might ask, are there some big gorillas shaking the tree to make the monkeys fall out? This is one of my favorite expressions, referring to the ability and propensity of large fund and institutional investors to use their holdings to push down the values of individual stocks, even markets, by using large sell orders to panic the small investors. Later the funds come in to clean up at lower prices.

Market psychology in China’s volatile investment environment, compounded by the habit of older shareholders congregating in the brokerage lobbies and sharing stock rumors and trading tips, is especially fragile and easily distracted by short-term changes in stock price.

The small investors here should learn from their US investing brethren, who have left behind the heady days of the Dot-Com bubble and its day-trading millionaires for a return to the long-term value-investing approach. When the gorillas shake the tree, if the stock’s fundamentals and news are still strong, this can be seen as a buying opportunity to cost-average stock holdings at a lower overall valuation. So Chinese investors should save the short-term sell order and instead buy and hold for the long-term, because there are two more animals to learn from in market feng shui, the bull and the bear.

Long-time market players know there is no way to predict when to ride the market upswings - the bulls - without hitting some of the corrections - the bears. However, one thing is true over time in healthy stock markets, bulls reign over bears. Bears may lumber and growl, but they eventually go back to hibernation. Bulls, on the other hand, will always be ready to charge again. Running with the bulls, and waiting out the bears, has been the best strategy in the US stock market for the last one hundred years.

Chinese investors can learn two things from market feng shui: Old stock market wisdom can have merits, and don’t be scared of the animals.

(c) 2008 Jason Inch (Originally printed in the Shanghai Star, April 7 2008)

Categories: Affluencing, China Supertrends
1 Comment »