Western investors accustomed to certain ground rules and behavioural norms in their native markets should consider the influence of political culture on risky markets in Asia that are increasingly attracting their money.
Some observers in this region, known for its economic dragons, are blaming the dramatic market moves this week on “Dragonomics,” in which officials use common local ploys to drag markets up or down to suit their agendas. The region has seen many recent examples of this. China’s one-party government has tried for weeks to cool off an overheated stock market by curbing bank lending and warning novices not to bet their life savings on what locals call “the slot machine.” When that didn’t work, they threatened this week to arrest market players bending the rules and spread rumours that they would slap capital gains taxes on profit-takers.
That worked, perhaps too well, and the market dropped nearly 10 per cent on Tuesday, starting a domino effect around the world. Perhaps fearing a deeper crash, the government coaxed the markets to rebound yesterday by declaring that it might allow more foreigners into the markets.
The above measures may or may not ever become reality. In China, that doesn’t mean much, because the Communist party can often dictate reality. Local investors, who are used to reading between the lines in manipulated media and deciphering the meaning of behind-the-scenes plays, are watching closely to see what happens at an upcoming Communist party congress. So much for market forces.
Thailand’s military dictatorship, meanwhile, has been managing markets by crying wolf. First, it spooked foreign investors by imposing capital controls (later revoked) to prop up exports and slow down their surging currency. Then it hired the finance minister of the government it overthrew as an adviser to the current finance minister who, not surprisingly, got fed up and quit. Now the government is cutting interest rates to try and offset the fallout from bombings in Bangkok and an intensifying conflict in the south. It is also waging a media campaign to manipulate prices in order to retake Shin Corp., which includes Thai satellites and telecoms, from the clutches of Singapore’s government investment arm.
The world’s second-largest economy, Japan, isn’t immune from official hijinks. Cabinet ministers and senior party members have pressured central bankers to keep interest rates near zero, in effect sanctioning the yen “carry trade” that has allowed many wealthy Japanese to profit from real estate in Mumbai and New Zealand to the markets of Shanghai, Vietnam and beyond. When the Bank of Japan finally decided to raise rates by 25 basis points, it leaked its decision to state broadcaster NHK, and perhaps to others as well, which, in effect, manipulated stock and currency markets.
Japanese print media are no better. They routinely run false stories, quoting unnamed sources, that jolt the markets and propel the shares of giants such as Sanyo or Nikko Cordial up or down 20 per cent.
The good news, for foreign investors, is that once you figure out the domestic political puppet show, there’s money to be made.