China's favourite (non currency) band

Wednesday, May 30, 2007

Who knew that the Sundays, an English indie band that broke up in 1997, were so popular in China? On the same day that Macro Man quoted one of their songs in reference to the end of the Chinese stock market bubble, darned if the authorities didn’t raise the stamp duty on transactions from 0.1% to 0.3%, prompting a 6.5% decline in Shanghai A shares and 9% drop in B shares.

Of course, this pullback took the year-to-date gains in A and B shares to 51% and 133%, respectively- still pretty heady stuff. And when you’re playing for those kind of serious returns, does it really matter if the cost of trading rises from a fraction of a percent to a slightly larger fraction of a percent?

Macro Man would not have thought so, but history suggests otherwise. Two previous stamp duty hikes have provoked bone-crunching declines in Chinese equities. In 1992, the imposition of a 0.3% stamp duty was followed by a 70% decline. In 1997, a rise in the duty from 0.3% to 0.5% was followed by a 75% decline (as well as the Asian currency crisis, coincidentally.)

Ultimately, with Chinese equity volatility this high, and participation so widespread, the rise in the duty should have little impact. Macro Man saw one estimate based on turnover data that the rise in the stamp duty would cost punters 2.8% per year: fairly small beer for indices that move as much as China’s. Yet it is often the last straw that breaks the camel’s back, especially when risk premia are as low as they are at present. Ironically, the US market could be a (relative) star performer if the China malaise were to last for more than a day, given the large short interest on the NYSE and the market’s reported affinity for long Europe/short US spread trades.

(UPDATE: As an aside, isn't this a lot like February? China meltdown on the penultimate day of the month...all we need now is ADP to print 200k and send bond yields screaming higher....)

Elsewhere, the ongoing squeeze in funding currencies (the yen excepted) certainly suggests that markets are cruising for a bruising. Fortunately for Macro Man, even the squeezes are getting squeezed, and the SGD 1 year payer position is now comfortably in profit.

As has been the case for much of the past few weeks, Macro Man is torn between tactical concerns on risky assets and more structural bullishness. News that Russia is formally drafting legislation to allow the state pension fund to purchase domestic equities, erstwhile rock stars that have fallen on hard times recently, is emblematic of the underlying demand for risky assets from sovereigns as well as private sector investors. And lest anyone doubt whether emerging markets are providers of liquidity and/or running overly loose monetary policies, have a look at Russia’s year-on-year M2 growth:

At 57% y/y, is it any wonder that Russians have so much money to play around in equities, commodities, and foreign exchange?

Posted by Macro Man at 10:47 AM  


MM "..At 57% y/y, is it any wonder that Russians have so much money to play around in equities, commodities, and foreign exchange?..."

...and of course the wholesale acquisition of Courchavel and an increasing share of Chelsea megahomes. Nostroviya!! Yet despite the gazillions, they are (according to my sources) lousy tippers.

"Cassandra" said...
12:28 PM  

I know a couple of (non-oligarch, but reasonably successful) Russians, and they are nice guys. But I catch your drift- it was quite jolting to see the first Cyrillic sign in the heart of the French alps.

As an aside, one wonders why the UK government doesn't slap a mega stamp duty on non-residents who buy up the palatial megamansions in London (call them 'Abramoviches'.) These guys don't pay income tax and price the lower end of the domestic toff class out of the mansion-scale house. Why not soak the foreigner?

Macro Man said...
1:02 PM  

Did you read Absurdistan yet?

My prediction (I am a "Cassandra", after all) is that if Gordo-Labour wins the next election in their own right, and his reveues fall short (as they will when the HF bubble subsides), he will (a) revert to a good old property tax from the terribly regressive "poll tax" or "community charge" or whatever the regressive garbage & police tax collection nonsense is now termed; and (b) place a surcharge (similar to your non-resident tax), for the luxury of residing in the UK and the benefit of the fine protection afforded by the British authorities (like that given to Litvinenko).

"Cassandra" said...
1:13 PM  

Well, to quote a Cockney friend of mine...Gordo has two chances of winning the next election: Bob Hpoe and no hope. Though with the speed at which David Cameron is alienating the classic Tory consituency, Gordo might be the most right-wing of the three candidates in the next general election! (An exaggeration, but not a hyperbole.)

Am 1/3 of the way through Absurdistan, as I'm juggling it with a couple of other reads. Does Misha ever become less obsessed with his manhood?

Macro Man said...
1:22 PM  

Yes...that is part of his [presumably the Russian people's] allegorical transformation.

But I think its cultural too. The only Russian phrase I know , "KLASNYA POPKA", was proudly taught to me while sipping a coffee in a high traffic urban locale by someone probably similar to your friends. It (alledgedly) translates into something like "nice ass!"

"Cassandra" said...
2:35 PM  

It was said that Litvinenko, when things began to get hot, called his wife and told her to get a plane out of Russia to "anywhere". Well, the missus got out her world map and dart set, blindfolded herself and came up with... Marbella

Charles Butler said...
5:42 PM  

Perhaps she went to Marbella because the rampant corruption of the ironically named Jesus Gil (is he still mayor?) reminded her of home...

Macro Man said...
6:46 PM  

Yeah well, the sidewalks of Puerto Banus are kind of cluttered with tart-laden Russian guys talking on cellphones.

Gil died of a stroke about three years ago. The name of his political party, though? Grupo Independiente Liberal.

Charles Butler said...
8:21 PM  

You can see a good picture of him here...

Separated at birth from Jabbah the Hutt...

Charles Butler said...
8:28 PM  

...and at death, Like Pinochet, he will return to Jabba and look thus

"Cassandra" said...
9:18 PM  

But with a jacuzzi for a casket..

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10:23 PM  

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6:30 AM  

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