The Olympic opening ceremony Friday was truly a spectacular event and left a lot of people here, at least among my students, with a sense of nearly euphoric pride. I watched the ceremony on television at D22, my music club near Peking University, and during the ceremony I received dozens of phone messages from current and former students – most of whom were at home in various locations around the country – expressing their excitement and happiness about the magnificent display their country was putting on, and I suspect several of them were near tears. I know a lot of people around the world were disturbed by what they thought was an ugly nationalism associated with the event, but I have to say that among my students and friends, the feeling was a very inclusive joy and pride, and it was infectious. All of us, Chinese and foreign, were in a great mood that night.
We are still marveling at the technological and theatrical prowess displayed, and in D22 – and in many other bar and restaurants, no doubt – the first hour of the ceremony was regularly interrupted by cheering and whooping, although the nearly interminable subsequent march of 204 national teams dampened the mood somewhat (and is, in my opinion, one of the strongest arguments against the granting of independence to too many small countries). The weather is not very good (in fact as I write this it is pouring rain outside) but Beijing is nonetheless in a festive mood.
The stock market, however, has decided to buck the festive trend. On Friday, in spite of the tremendous anticipation is the air, the market had a sloppy day until, mostly in the last hour, sloppiness turned into what seemed like panic selling that saw the SSE Composite drop 121 points, to close at 2606, or down 4.5% for the day.
Some analysts blame renewed worries about security and terrorist attacks (and I see in the press that over the weekend there were more terrorist attacks in Xinjiang province, with at least five dead), while others claim that investors were anticipating the announcement of additional government measures to shore up the market during the Olympics, and when no announcement was made, they panicked.
It will be interesting to see what happens on Monday and during the rest of next week. We may see some government-inspired buying, or even patriotic Olympic-related buying, or more measures from the authorities aimed at propping up the markets, but if none of those, I think the very bad mood could be extended. As I’ve said before in this blog, I think expectations about the transformational consequences of the Olympics are unrealistically high, and I think there is bound to be some disappointment.
In that context I have previously mentioned on this blog the parallels with the 1873 crisis that began in Vienna. Here is how I describe it in my book The Volatility Machine (Oxford University Press, 2001):
By the beginning of 1873 there was a general sense that the Viennese market was overvalued and unsustainable, but investors were looking forward to the World Exhibition to be opened in Vienna on May 1. They were irrationally hoping that the Exhibition would change the underlying situation and somehow justify the high asset prices. During April of that year, in response to a period of weak and declining stock prices, the local banking authorities became concerned about the position of banks and made a series of attempts to support the market. As a precaution, however, nervous banks were contracting credit and attempting to raise liquidity by calling in loans. When the Exhibition opened on May 1 and, not surprisingly, nothing really changed, investors lost heart and began selling.
The selling pressure in the market built steadily. On May 5 and 6, the market began falling and on May 8 it suddenly crashed. With the crash a full-blown panic began in Vienna that was almost immediately felt throughout the country as banks and investors rushed to dump assets.
I am not implying, of course, that events in China are going to resemble those of Austria in 1873, but 1873’s World Exhibition in Vienna drew some of the same fevered expectations as the 2008 Beijing Olympics have, and it is worth noting the impact of excessively high non-economic-related expectations on the markets. So much hope has been invested in the success of what is, after all, just a sporting event, that it will be hard for any result, no matter how positive for China, to live up to expectations. After the Olympics little will have changed.
Still, even during the Olympics work must go on. We should soon be getting a new set of economic numbers for the month of July. I hear that year-on-year CPI is expected to decline from 7.1% in June to around 6.5% or even lower in July, well below its April high of 8.5%. Partly this reflects a high base effect, partly price controls, and partly continued food price declines from the very high levels of February and March. What will be most closely watched is the non-food component of CPI.
In contrast year-on-year PPI, which hit a high of 8.8% in June (from 8.2% in May), is expected to stay high. I think this may be the worst combination of numbers. Declining CPI will convince many policy-makers, particularly those in the pro-growth camp, that inflation is no longer a problem and excessive monetary growth nothing to worry about. High and rising PPI, however, indicates that inflation has already spread out of the food sector and will increase inflationary pressures by the end of the year.