China's share-buying binge could get ugly
Email Print Normal font Large font Hamish McDonald Asia-Pacific Editor
May 26, 2007

MAOTAI, a clear liquor distilled from sorghum and wheat grain, is a well-known hazard of doing business in China.

To many foreigners, it tastes and smells like shoe polish, and can be a toxic fast track to unwise enthusiasm. To its makers, it is a health tonic "elegant in smell, of mellow flavour, pleasant aftertaste and lasting fragrant flavour in the emptied glass".

Now it is helping threaten a different kind of hangover, one that could cause some sore heads in Australia. The best-known maker of the spirit, the Kweichow Moutai Company, is the favourite stock of a leading bull investor in China's rampaging stockmarket.

Lin Yuan is one of China's heroes, claiming to have turned 8000 yuan ($125) into a portfolio worth more than 1 billion yuan over the past 18 years.

The maverick China economist Andy Xie, who was sacked by Morgan Stanley last year for disrespectful remarks about Singapore, holds up maotai as an example of the irrational share-investing mania sweeping China.

In the Chinese magazine Caijing, he notes investors are piling into Kweichow Moutai because of "urban myths" about fortunes being made. This is backed by a suspect "analysis" that as maotai is the "Chinese brand" served up at official banquets, demand will keep growing as more and more prosperous Chinese buy it.

Xie points out that China's fondness for maotai is a holdout from a worldwide trend away from hard liquor. "When doctors tell government officials to stop drinking maotai, just watch its price then," he says.

But is China's rush into maotai and other stocks a threat to global or regional health, or at least its own? Could it start another Asian financial meltdown, almost 10 years after the last one?

Certainly the May 18 triple-whammy move by the People's Bank of China, the central bank, reflected very deep nervousness in Beijing. The restraints on the yuan were loosened, interest rates lifted, and bank reserve requirements raised.

The stockmarket bubble has now pulled in so many of the emerging middle class - the number of trading accounts has risen to nearly 100 million - that a crash will be a political problem.

Riots by villagers in the rural hinterland or the coastal factory zones can be isolated and suppressed. Widespread discontent in the big cities by investors losing their life savings could be much harder to handle.

It could unravel the tacit bargain between the Communist Party and the urban populations, trading off political freedom for rising prosperity.

The political risk is so big that it is actually helping pump up the sharemarket bubble. With the party's next five-yearly congress coming up in October and the Beijing Olympics in August next year, many speculators calculate the leadership will not allow a bust.

So the actions by the central bank governor, Zhou Xiaochu, did not turn off the drinks for very long. It was only after the former US Federal Reserve chairman Alan Greenspan expressed concern this Wednesday that the market has paused.

If, or rather when, the market enters a big correction, worse than the one-day 8.8 per cent fall on February 27 that caused contagion here and elsewhere, the effect on Chinese domestic demand could be extensive.

China might have $US1.2 trillion ($1.45 trillion) in foreign reserves, but these are in US treasury bonds and other external assets. Any propping up of domestic bank balance sheets or the stockmarket itself - such as by direct buying of shares as Hong Kong's government did after the 1997 crash - will require domestic financing. Weaker commodity prices could be one result, which would of course have an impact on economies such as Australia's.

The stockmarket in Hong Kong, where many of the best Chinese companies have dual listing, and the casinos of Macau, where many speculators no doubt splurge their wealth, are two obvious places for regional impact.

Asia is much more insulated than it was in 1997, with countries enjoying sizeable foreign reserves and currencies more soundly valued. But a short-term stampede out of all emerging markets would not be surprising.

The most intriguing question is how the Communist Party will withstand this coming crisis of the capitalism it has embraced.