My Blog

October 22, 2008

After several rallies in the past month I said it was just a question of time before the Chinese stock markets tested their recent lows, and today the SSE Composite closed at 1896.  It’s become so easy to be skeptical after every surge that I don’t want to fall into the trap of just assuming that each is bound to fail.  Still, I have had trouble finding a good reason for any of the recent rallies – all driven primarily, it seems to me, by government attempts to bully the market up – and, sure enough, they have always reversed themselves fairly quickly.  

This week in spite of a good Monday (up 2.2%), the market lost ground on Tuesday (down 0.8%) and Wednesday (down 3.2%) with the SSE Composite finishing below its October 16 close of 1910.  This is flat from its September 18 close.  Remember that Thursday September 18 was the day the government announced a bunch of market-supporting measures, including that Central Huijin was going to buy bank shares.  Coming on the back of a global market surge the SSE Composite rallied 9.5% that Friday and ran up another 7.8% the following Monday, adding a further 2.7% over the next three days.  Less than four weeks later it has given everything back.

Aside from the continued insanity in the markets, a lot of things have happened during the three days I was at a conference in Shanghai, which means I have not been able to cover events on this blog in the timely way I would have liked.  As everyone knows by now CPI and PPI numbers for September were announced on Monday and came in lower than last month’s numbers.  I don’t have a lot to say about this beyond what I said in my last entry.  On Monday 4th quarter GDP growth was also announced, and at 9% it came in well below everyone’s expectations.  We seem to be fully caught up in the game of constant downward revisions in everyone’s estimates for this year’s and next year’s GDP growth numbers.

During the conference (a very interesting one organized by Chatham House) I was asked by one participant about what I thought next year’s GDP growth numbers would be.  I had to beg off by saying I am not an economist and the only thing I would want to predict about next year’s numbers is that they are going to be lower than expected. 

I say this because it seems to me that we have yet seen the full impact of the global crisis.  As I see it, much of the dynamics of the past few years can largely be described as the relationship between Chinese excess savings and American excess consumption, and I think these are going to alter considerably, and not in a benign way.  It is the latter that absolutely must change in response to the global crisis.  The US is unlikely to continue to have such a low rate of savings as crashing house prices and stock markets reduce so much of the stock of accumulated savings – American savings, in other words, will almost certainly rise as a share of GDP (as probably will, by the way, Europe’s).

This has an inescapable corollary.  The rest of the world must inevitably see a rise in consumption that is as great as the US (and European) decline in consumption (the flip side of the rise in savings, made worse if US income stalls or declines), if global demand is to remain unchanged.  When you add to this the fact that in large parts of the world we are unlikely to see much of a rise in consumption, and may even see a fall (in Latin America, for example, and among commodity exporters), this in principle means that Chinese (and other Asian) consumption is going to have to grow sharply to absorb most of the US and European decline.  If it doesn’t, world growth will slow sharply.

Given that the economies whose savings rate must grow account for anywhere from one-half to two-thirds of world GDP, that puts a huge amount of pressure on a sickly Japan and South Korea and an increasingly unsteady China to generate rising domestic demand.  I think it is unlikely that such an increase in domestic demand will happen without a much more massive fiscal expansion in China than most of us are counting on, so my guess is that we are going to continue to revise our growth future estimates for China (and the world) downwards.  

One of the impressions I got at the Chatham Conference (ok, not a new impression, but a reinforcement of an old one) is that there is a very sharp split in the views on the Chinese financial system between analysts who have extensive experience in a wide variety of markets and analysts who focus almost exclusively on China.  The former seem generally to share my pessimism about the Chinese financial system, whereas the latter are amazingly (to me) sanguine. 

Because their main experience of crisis is the recent US crisis, I think these scholars are confusing risky balance sheets in general with the specific risks that brought down foreign banks reently.  There is real difficulty here in understanding that even though Chinese banks probably have little exposure to the sub-prime mess or to complex derivatives, it is not those instruments per se that created the crisis, but rather excess risk–taking encouraged by excessively loose money (although to be fair I think most foreign commentators don’t get it either).  These instruments were only the way in which banks took on excessive risk, they were not the cause of the excessive risk.  Japanese banks in 1990 weren’t brought down by US sub-prime mortgages or toxic derivatives, but rather by old-fashioned loans, and it is useless to think that these former are the only risk to a banking system.

In that light it is worth noting the recent CITIC scandal.  Over the weekend some of my students began telling me about rumors of a $2 billion loss at CITIC.  This was confirmed on Monday, when it was announced that a badly conceived and unauthorized hedging strategy had gone seriously wrong and, as a consequence, CITIC was facing a huge unexpected loss. 

It is still not clear exactly what happened, but from what I can tell this “hedge” was a pretty bizarre hedge – it seemed far more like a misconceived speculative bet to me.  According to an article in today’s South China Morning Post it was also not exactly a recent problem:

Questions have also been raised about the timing of Citic's profit warning, given on Monday. It knew about its currency exposure six weeks ago. Stock exchange rules require listed companies to disclose price-sensitive information promptly.

The article goes on to say “More worryingly, other local companies are exposed to similar currency contracts.”  Almost right on cue another problem was announced:

Shenzhen Nanshan Power warned that company officials had signed oil derivatives contracts without the firm’s approval, intensifying fears about internal risk management at mainland companies.  Shenzhen-listed Nanshan Power said on Wednesday its officials had signed two option-related contracts with a subsidiary of Goldman Sachs to bet on crude oil prices, although analysts said the contracts were still in the money.  Trading in the stock was suspended last week.

What does all this mean?  It has been very difficult to get a firm grasp on exactly what is going on in Chinese companies and banks as far as risk management goes.  My working assumption is that they have very little risk management experience, very weak rules on disclosure, and a perverse set of incentives.  That suggests to me that when faced with the same set of pressures faced by the leading Western corporations and financial institutions – i.e. ferocious liquidity growth and a previous environment of high rewards for excess risk taking – they are even more likely to have made some very risky bets.

Their lack of transparency has kept us from knowing exactly what is happening, but lack of transparency protected US and European banks for only so long before that very lack of transparency became the problem itself.  The few glimpses we can get into risk management among Chinese institutions do not give me much comfort.  If there is an economic slowdown, prepare to be surprised by all the garbage that comes out.

Comments (18) for "CITIC and risk management pr...

Hi Michael, You wrote that since US and European consumption is declining, and Japan and Korea and other resource dependent emerging won't be able to contribute either, then China must increase its consumption to keep the world economy from shrinking. However, from China's perspective, they do not need to be concerned about world output declining, but only need to make sure Chinese growth continue apace. The extent of the increase in Chinese consumpion or government fiscal spending only has to make up for the decline in export, which is a fraction of total US and European consumption, for China to achieve continued growth. I don't disagree that growth in China will likely disappoint, but just don't think China bears the burden of preventing global output from shrinking. By Sergei - 10/22/2008 12:12 AM

Chinese companies and banks have awful risk management. The consequence of this Chinese banks and companies need to be kept away from derivatives and leverage because they will make a total mess of things, and you need to have large reserves to take care of the situations in which people find a way around the rules. People will find ways around the rules. Based on previous experience, I'm unlikely to be surprised at the stupid bets that people end up making, and the large amount of garbage that you will end up having. The thing to do is not to look only at the unknowns, but also at the knowns. How much cash reserve do they have available? Since you don't know how bad the garbage is going to be, what you want to do is to maximize the amount of wealth you have in known quantities like US Treasuries or agency bonds. The reason I'm optimistic that there won't be a major systemic crisis is that we've known that Chinese banks and companies have horrible risk management and so that policy decisions are being made with the assumption that Chinese banks and companies have horrible risk management. So you have large foreign exchange reserves, and the restrictions that limit leverage. Sure people will go around the restrictions, but having them limits the insanity. What gets you trouble isn't bad risk management. It's thinking that you have good risk management when you don't. By Twofish - 10/22/2008 4:52 AM

It was a sunny day in New York. And the Dow started out OK. But, then it began a low slide just after opening, then took a Bing Bam Boom for the next hour, but finally settled down. For a few seconds. Then there were some more Bing Bam Boom, before taking a rest for lunch time. Then, after lunch, the Dow seemed to have eaten something too raw, maybe bad clams. This might explain His taking a nose dive, before picking up, just before the expected rally. Then, all of a sudden, it seems that the Dow was hit by investor sentiment. And then the Dow took a tumble. Not before picking up a bit. And then He was down again. And then he seemed to rally before he was hit with a final blow to the midriff, which was a technical sucker punch, and the Dow finally just got very tired of fighting, and just basically sank down in defeat at about 5.69% below the original close, a tired fighter, but He did his best. And who could doubt his willingness to keep on fighting, if only the bell and the death knell had not been sounded. By SunnyListon - 10/22/2008 5:05 AM

Pettis: Rather excess risk–taking encouraged by excessively loose money (although to be fair I think most foreign commentators don’t get it either). But you can control risk-taking through administrative directives and regulation. Pettis: It is still not clear exactly what happened, but from what I can tell this “hedge” was a pretty bizarre hedge – it seemed far more like a misconceived speculative bet to me. It was. Citic Pacific had to call it a hedge because if they called it what it was (a leveraged speculative bet) the authorities would have never given them authorization to trade derivatives. This tends to happen in that every time the authorities give someone permission to trade derivatives for "hedging purposes", someone will take that authority, bet wildly on it, and have it blow up. So I'm sure that we are going to see some very high profile cases of general stupidity. I don't think it is possible to outlaw greed and stupidity. It's just necessary to make sure that when things blow up, it doesn't destroy everything. The one thing that makes China's bubble different from most other bubbles is that authorities believed that China was in a bubble. I don't remember anyone talking about "new economic paradigms." By Twofish - 10/22/2008 5:10 AM

"The Chinese stock market continued to bounce around today, driven down largely by the poor performance of bank stocks. There were fears among investors that we may see more tightening measures in the form of hikes in interest rates or minimum reserve requirements, or both, and these fears have hurt bank stocks in particular. Shanghai opened the day down about 1% and quickly dropped another 1% or so in the first few minutes, before trading up in the late morning and bouncing in and out of positive territory all day, until by late afternoon it was up 0.6%. In the last 30 minutes, however, it gave up all its gains and then some to close down 0.73%. That doesn’t bode well for tomorrow, but either way I don’t think there was a lot of conviction." Only difference? Just a matter of hyperbole. By SunnyListon - 10/22/2008 6:10 AM

Pettis Just one question; do you really think the Chinese finance system is really in the position in which to increase consumption to the levels of the US or Europeans? Hmm, looking at the various kinks in the system, it may not be advisable to see that growth in the next 5 years, not to mention the next year or so. Just think, are they really ready for the consequences of widespread credit and reckless consumption, could the government truly face the consequences of a credit crisis just half the size of the present crisis that would almost certainly follow a complete liberalisation of the financial system? The learning curve exists, as does the price of each stage. By Judy Yeo - 10/22/2008 1:32 PM

Sergei, I agree that China is responsible for its own growth, not world growth, but if US net savings rises, the net savings of the rest of the world must fall by an equivalent amount, either by an increase in global consumption or a reduction in global growth (and so total savings). Since China’s net exports are the obverse of its net savings, and assuming that much of the change in net savings must be borne by China, this implies a huge adjustment on the part of China. My point is that with the US economy four times the size of the Chinese economy, any substantial change in the US part of the balance of payments equation implies a much larger Chinese adjustment in relative terms, and I am skeptical about China’s fiscal ability to adjust by that amount. The result is likely to be a downward adjustment in world growth and an even sharper downward adjustment in Chinese growth. Twofish, I disagree. What gets you into trouble is forcing a financial system to accommodate excessive money growth. In every case that leads to increasing instability in the financial system. I am not sure why you say “policy decisions are being made with the assumption that Chinese banks and companies have horrible risk management.” I don’t think that has been the case at all and wonder what policy decisions you refer to. The caps on loan growth simply pushed the consequences of horrible risk management into areas where risk management is even worse, and was, in my opinion, a mistaken policy response. I think you are making the same mistake as most policy makers in insisting that risk comes from derivatives. They do not. Risky derivatives exposure is a manifestation of the underlying problem, not the cause. I think it would be hard to argue that the Japanese 1990 banking crisis, or China’s banking crisis in the mid-1990s, was caused by derivatives (and by the way, everyone also knew back then that Chinese risk management was very poor, to little avail). It was caused by good old-fashioned bank loans. And, yes, there is an awful lot of talk about new paradigms – China, as many here insists, is different. Judy, I agree that the necessary rise in consumption is difficult and problematic. My point is not to argue that they must do it, only to point out that if they don’t do it growth is likely to be much lower than anyone predicts. That is the source of my pessimism. By Michael Pettis - 10/22/2008 6:29 PM

Pettis: Twofish, I disagree. What gets you into trouble is forcing a financial system to accommodate excessive money growth. In every case that leads to increasing instability in the financial system. We'll see what happens. I assert that excessive money growth doesn't directly cause financial system instability. It's a necessary cause, but not a sufficient one. My argument is that from the end of World War II until 1980, the West went through several boom/bust business cycles without financial system instability. Excessive money growth followed by contraction is an inherent part of market economies, and it's the financial system structure that determines whether or not these cycles cause instability in the financial system. In particular, lack of government regulation is what turns the credit cycle into a financial system problem. Developing countries tend to have weak government oversight, but it's not a coincidence that you started to see financial system problems in response to the credit cycle in the 1980's when you had deregulation in both Japan and the United States. Anyway this is a working hypothesis, and with all hypotheses it can be very wrong. Looking at China over the next few months will tell us to what extent this hypothesis is correct. Pettis: The caps on loan growth simply pushed the consequences of horrible risk management into areas where risk management is even worse, and was, in my opinion, a mistaken policy response. 1) If you have administrative limits, this makes things harder. and 2) it doesn't matter how bad the risk management is if you push them into areas that aren't connected with the core systems. The Chinese financial system is far less integrated than the US system which means that the consequence from an off-balance sheet blowup may be much less. Pettis: I think it would be hard to argue that the Japanese 1990 banking crisis, or China’s banking crisis in the mid-1990s, was caused by derivatives (and by the way, everyone also knew back then that Chinese risk management was very poor, to little avail). It's not nothing to do with derivatives. It has to do with removal of regulation and oversight over lending. Japan deregulated its banks in the 1990's. China had mandated loans to loss making factories, although I would argue that China's policy response was the "least bad" of several options. Also one should note that in neither case, did you have a "heart attack" situation that you had on Wall Street. Japan had a decade of low/no growth. China was able to restructure the banks without a crisis developing because the banks while insolvent were very, very liquid. Having lots of liquidity and low leverage is important, because without liquidity and with high leverage, a problem can become huge very, very quickly. If you have high liquidity and low leverage (like the Chinese banks in the mid-1990's) then when a problem develops then you have time (months to years) to come up with a policy response, and in Japan's case, the problem may be that they had too much time and too little pressure to come up with an effective policy response. I don't doubt that there will be problems, even huge problems in the Chinese financial system. However, my belief is that we won't end up in the situation that the Federal Reserve and Treasury ended up in in mid-September in which you have hours to make decisions in order to avoid disaster. Again, I'm very empirical, and all this can be wrong. The most you can do is clearly state a hypothesis, state the consequences, and the compare with reality, and my hypothesis is that banking crisis do *not* result directly from excessive money growth but rather weak governmental oversight in a period of excessive money growth. Probably by the end of next year, we'll have more data as to whether or not this hypothesis makes sense, and that will influence what sort of structural changes (if any) need to be made with the US financial system. By Twofish - 10/22/2008 8:48 PM

Excellent commentary.. jegan By Unknown - 10/22/2008 11:26 PM

Michael, you say "The rest of the world must inevitably see a rise in consumption that is as great as the US (and European) decline in consumption (the flip side of the rise in savings, made worse if US income stalls or declines), if global demand is to remain unchanged." I disagree. The world as a whole can save more if it invests more - indeed the world arguably should save more as its population is ageing - and the US is in need of infrastructure investment. I would even question whether China needs to adjust at all. One way of achieving global adjustment might be by shifting uncompetitive American production of consumption goods (eg cars) into investment goods. There would be a slowdown in global output during the shift in US activity, but that would also occur if China shifted production from export goods to goods and services for home consumption. By RebelEconomist - 10/23/2008 7:03 AM

Pettis I see your point, was just taking it a step further. Rebel erm, I think Pettis was talking about demand levels as they stand now, a change in types of goods produced would not only involve production capability, technical knowhow but also demand levels. Should the demand not be met by one country, it'll be met by another. Other low cost export oriented producers will emerge but temporarily there will be induced elevated levels of inflation as supply is reduced but not the demand. The shift by necessity has to be gradual, not sudden. By Judy Yeo - 10/23/2008 1:13 PM

About a month ago, I predicted that the American Dow would finally level off around....6549.18....don't ask, I never question my instinct, because it's never based on any real statistical input, just Gypsy intuition. It will fluctuate around those numbers for about two months, so set the Controls for the Art of the Sun..... By Victor Poison-Tete - 10/24/2008 4:18 AM

I thought this article from the FT was an excellent explanation in plain words for what happened: http://www.ft.com/cms/s/0/fba32c1e-9565-11dd-aedd-000077b07658.html?nclick_check=1 The correlary to that is that China's currency policy (along with a number of others), and the American response to this, is the ultimate driver behind this crisis. All these currency policies created the incentives that molted global investment and consumption decisions for a long, long time. This created a lot of wealth and assets that were predicated on this world continuing. However, the whole arrangement has been unsustainable and the extent of the global misallocation of capital so large that it makes sense that we've gone through the largest period of wealth destruction in the history of civilization (on a real dollar basis). On another note, over the last five years there's been a lot of talk about "global imbalances". Trichet has always said a risk was the disorderly unwind of these imbalances. It was always thought that the way it would unwind was due to the creditor side of the equation- the China's and UAE's of the world would no longer be willing to hold the dollar and dollar assets. However, I think what is happening now is exactly the disorderly unwind of global imbalances that everyone feared, but no one realized that the other way this arrangement could unwind is from the debtor side- refusing, or no longer being able to, take on more debt. That's what exactly is happening right now, and the logical conclusion as that this will be very painful for the rest of the world. I think we will probably see a long period of consumer price deflation given all the excess capacity in the world that has been geared towards demand which is no longer there. This also will help US consumers rebuild their balance sheets. I'm pretty worried about how this will all play out though between different countries- I hope it's peacefully. By sharpe_mind - 10/24/2008 8:12 AM

Its worth noting that CITIC's Sum-Of-The-Parts valuation almost certainly leaves nothing for shareholders. Just going by business segment: - Specialty Steel (Autos): Not great. - Property: Has been ugly for at least 3 quarters now. - Listed holdings: All are way off highs - Debt: At least 50bn HKD including derivative losses. Even if the Chinese government bails them out you've got to wonder why if the underlying assets are in that much trouble. It would be like throwing Lehman a lifeline, without all the systematic risk concerns. By Nemo Incognito - 10/24/2008 1:20 PM

Thanks, Sharpe. It is a good summary. I would add that it is not so much that the game ended because net lenders (high surplus countries) were no longer willing to lend -- instead they are more eager than ever to lend in order to maintain their surpluses. It is rather than they were lending to the US Treasury, hereby freeing up capital that was subsequently intermediated by the banking system into credit for riskier borrowers, who used credit cards and home loans to finance spending, and the banking system seems no longer willing or able to play this intermediation role. Victor, your gypsy intuition is amazingly precise. BTW I saw John Myers and Elliot Sharpe last night. By Michael Pettis - 10/24/2008 6:15 PM

Also one reason I'm somewhat optimistic about the informal finance sector in China is looking at how well the informal finance sector in the United States (i.e. hedge funds) are doing. Yes hedge funds are falling out of the sky left and right, but it's not causing a financial crisis, now the way that they did ten years ago. There are two reasons.... The reason for this is that hedge funds can do something that banks can't, which is to shut their doors to redemptions. When you go to a bank and demand your money, they have to give it back, but if you put your money in a hedge fund, there is a contract clause that limits the amount that people can redeem hedge funds. Typically, what happens is that the clause says that only some percentage of people can redeem hedge funds on one quarter, and that if that quota is filled then you have to wait to the next quarter to get your cash. So instead of having a fast train wreck, you have a slow motion train wreck, which is a good thing because it allows the markets to adjust. The second reason is that hedge funds are not leveraged as much as they were a decade ago. When LTCM fell, it was leveraged at 100:1. Today no prime brokerage will extend that much credit, and the Federal Reserve will not let a prime broker extend that much credit. The maximum leverage that a prime broker will allow a hedge fund is something like 10:1, and that was reduced to something like 3:1 in the current crisis. This is important because if a hedge fund starts having problems, the first reaction is to "double up the bets" which means that when things finally collapse, it could take the entire financial system with it. If you leverage is limited, then if you start having problems, then the bank calls you put and demands that you put up more capital. This could lead to a "death spiral" in which the hedge fund has to fold, but in that situation it folds quietly without destroying the financial system. Now if you look at the informal sectors in China and look at these two factors (ability to limit redemptions and leverage), they look more like hedge funds in 2008 than hedge funds in 1998. In particular, because the informal sectors are quasi-legal or illegal, you can't use them as checking accounts because if your a check written against a informal account bounces, you have no legal recourse. This means that if you want your money, an informal money lender can do what banks can't do. Tell you to come back tomorrow. Also, because the informal sectors are quasi-legal or illegal, this means that there are limits to the amount of leverage that they can have. Now I'm sure that there are all sorts of complex and tricky methods that people us to get money out of the formal system into the informal. But the important question is whether or not you can get the huge amounts of leverage that create a crisis that is big and fast, and my sense is that in a crisis, the mechanisms that people use to tunnel money from formal to informal sectors will fall apart, which causes things to fall apart before you have huge amounts of damage. This also gets at two things that I *don't* think are issues: 1) Transparency - Hedge funds make a good test case for financial theories because they are unregulated and non-transparent. Transparency is usually a good thing, but in the case of a bank run, it can be quite a bad thing, because people see people losing money, and this generates a panic. 2) Monetary policy - My thinking is highly influenced by Hyman Minsky, but I think one point of Minsky is lost and that is that boom-bust cycles are *inherently* part of market economics, and that it results from the dynamics of how these systems operate. Booms naturally create risk seeking activities that will fall apart when the boom turns into a bust. I'm also more interested in looking at what is political possible. Yes, the problem may be solved by having people be less greedy or by tightening credit, but it is hard to take away the punch bowl when the party is going, and solutions require that people behave in ways that they don't want to are not solutions. Academics often come up with solutions that are politically not workable, and when you come up with a policy that people just don't want to do (restricting credit in boom times is one), the reaction tends to be to curse the politicians and then figure that people deserve what they get. I don't think this is a useful reaction, and if people want accept plan A, I think the thing to do is to think of Plan B, which they might accept. If they don't accept Plan C, then you go with Plan's D, E, and F. Plan F might not create a perfect utopia, but I don't think that perfect utopias are possible with imperfect people, and trying to make people perfect causes more problems than it solves. So my thinking involves less trying to tell people to be less greedy in the boom times, but rather thinking ahead to the time in which everything falls apart, and trying to structure things so that you reduce the amount of damage when you have a bust. If Minsky is right, then things *will* fall apart every few years, and the goal is to make sure that when things fail, they fail gracefully. This makes it much easier to reduce the craziness when times are good, because setting things so that things fail gracefully reduces the desire to keep the bubble pumped out, and to engage in increasingly desperate "doubling strategies". By Twofish - 10/25/2008 1:12 AM

Twofish, I would argue that restricting credit in boom times (which I define in liquidity terms) isextremely difficult because credit will be created one way or the other. All you can do is restrict it within certain regulated areas, which may in some cases make things worse. We also seem to disagree on whther Minsky is right about the inevitability of booms and busts (I think he is right) but I agree with much of the rest of what you say. Minsky's "solution" is not to eliminate the cycles but to "stabilze" instability by removing or limiting automatic destabilizers (which nowadays we would call positive feedback loops or self-reinforcing behavior) and introducing autmatic fiscal and monetary stabilizers, especially the former. I think too that we should also focus on automatic balance sheet stabilizing mechanisms, which I think of as part of liability management, and in fact have argued several times that within governments and perhaps at the supranational level (I proposed this for the IMF) there should be a focus on just such balance sheet developments. Generally speaking, as you will see from today's entry, I am pretty pessimisitc about much of what passes for new-financial-order crisis management. By Michael Pettis - 10/25/2008 1:42 PM

Michael, I believe I read enough in SCMP (and perhaps elsewhere) to come to the conclusion that CATIC's "hedge" gone-awry was a foreign currency fixed deposit, linked to the Australian dollar. I believe CATIC's strategic explanation is that CATIC needed Australian dollars for a project in Australia, but more likely CATIC was seduced by the 10%+ pa returns promised by such fixed deposits. But when the Australian dollar subsequently falls by 45% over 2 months, that turns into disaster. (Of course, that means the value of everything and anything "Australian" has also fallen by 45%... so, let's not be so harsh about the Chinese SOES.) As far as Chinese experts being more sanguine than you... well, I think many such experts have seen this economy pull many rabbits out of many hats. When you've lived through hyperinflation followed by hyper-currency-deflation throughout east Asia... it's not unreasonable to think China, by virtue of its low base and unique fundamentals, can defy gravity again. I personally am still betting on Chinese equities, in the long (5+ year) run. By CCT - 10/27/2008 3:02 PM