Brad DeLong's Semi-Daily Journal (2004)

Dear BdL: I do not follow completely your point. True, if the financing mix has a higher share of equity, investors know their risk is higher. Nevetheless, the point of investors not being able to assess the risk of investments by a large margin is still valid no matter if it is a fixed or variable income investment... at least in terms of market repercussions. Let me put it in other way: repercussions of stock crashes are not less damaging than repercussions of bond crashes (hard to think of them separately, by the way).

Yeah but FDI growth and the surges in the stock markets of China and Hong Kong (and Taiwan to boot) show that equity finance has bee very large.The picture that's the hardest to get is both the portion of equity that comes from offshore stock markets (Taiwan and HK companies raising money intheir own home markets for investment in China); Chinese companies raising equity funds in those markets, and Chinese ventures borrowing money in those markets. Lots of money is lent in HK to CHina entities as offshore borrowing; the same is happening in Singapore.

Anyway, risky country risky projects. Is there actually any way a country like China trying to catch up by opening up could avoid a boom-bust cycle. What's coming will be their second real estate/construction collapse. Anyway, at least the BOC has been putting foreign reserves to good use, building up bank capital.

China has unsustainably low exchange rates fueling this.

When they go up (i.e. the Dollar drops), that money will flow out of China like a popped balloon.

We are in a house of cards.

"China has unsustainably low exchange rates fueling this. When they go up (i.e. the Dollar drops)"
No. Last time I checked China ran a trade deficit. A sectoral bust in China will, in fact, turn out to be a boom rotating into the tech sectors. Fx reserves will be used to repair the damage done to the banking system by overinvestment in real estate.

Brad´s point eludes me. Surely there was a massive NASDAQ crash a few years ago? How about pointing out that China´s bond market is underdeveloped - a fact that needs to change before we are going to see equity financing in China taking off?

Is China a net saver? I don't know for a fact, but I assume based on the current account that the answer must be "yes." I would think that, whatever the risks represented by individual firms and projects, there is less country risk if the country as a whole has not trouble generating savings and has massive fx cover.

The Chinese trade balance just turned negative.

But there is a very large inflow of short term hot money betting on a currency revaluation.

If China actually floats this hot money trying to get out might actually cause the currency to plunge.

The Chinese stock market is not a significant source of capital -- this is not a developed country like you are use to thinking about.

Spencer,

I'm actually not all that accustomed to thinking about developed countries (you wouldn't believe some of the holes I've lived in). Savings be savings, don't matter much what conduit you choose. Banks are a less common source of capital for US firms than was once the case (still pretty common for smaller fry, though), a more common source of capital in places like China. Savings go to banks, rather than to the stock market, but are still available for domestic investment. I realize that banks in China offer their own set of problems - problems investors ought not take lightly. China's trade account has turned negative, true enough, but the current account very likely won't for some time to come. And again, big fx reserves should diminish certain forms of payment risk, and I would think, offer a buffer against the outflow of hot money.

The major source of company financing in most countries is bank loans.

In the case of China, the bank loans are not being made on economic criteria. In essence, the 'equity' being provided is by the owners of China's banks ie the government.

A public equity or debt solution would only be more efficient if in turn the shareholders had transparency of what was going on in their investments: there isn't much of that in China either.

Every mercantilist economy pulls the same trick - borrows money against growth when they don't actually have assets to back that growth.

It works so long as they keep putting up big growth numbers, and can then refinance old loans with the assets those loans created.

Then comes the day when the target economy can't import any more.

See "Mercentilist Meltdown".

For China to have a more equities heavy approach to financing, first it has to have the infrastructure - legal and otherwise - to do so. It does not.

Savings are savings until the crunch comes.

That is when the importance of equity finance comes into play because a firm can just quit paying investors and use the cash to survive.
But if the financing is loans they have to pay investors or go under.

When I first left govt to become a business economists the exec vice president I worked for had been a young man in the 1930s when he learned his approach to business. He told me the role of banks was to determine which firms would fail and which ones would survive.

Online Casino Directory

Facilius per partes in cognitionem totius adducimur - We are more easily led part by part to an understanding of the whole. (Seneca)

Fere libenter homines id quod volunt credunt - Men readily believe what they want to believe. (Caesar)

Quod erat faciendum - Which was to be done

Quid nunc - What now?! (a nosy busybody)