Connectivity requires code: to join global financial markets is to import their rules
■"Derivatives Trade Goes Sour in China," by Darren McDermott, Bruce Stanley and Cris Prystay, Wall Street Journal, 2 December 2004, p. A3.■"Global Stock Exchanges Vie for a Slice of China's IPO Pie," by Mary Kissel and Laura Santini, Wall Street Journal, 2 December 2004, p. C1.
The first story is an interesting one, starting with the first para:
A massive trading miscalculation in which the overseas arm of a Chinese state-controlled jet-fuel supplier lost at least $550 million on oil derivatives raises fresh questions about corporate governance at Chinese companies and, in particular, the risks that arise when state-owned enterprises begin operating as commercial entities.Just think of it! A Chinese state-owned company is dabbling in derivatives to the tune of a half-billion dollar loss!
If you told me back in college that I would ever read that headline, I just would have laughed. And then I would asked you what the hell a derivative was.
Why does the article interest me beyond that quaint historical glance backwards? Both China and Singapore came together to bail the company out, which tells me how much Singapore sees its economic fate tied to China—that it’s willing to bail out a state enterprise. Second, it’s the biggest loss in derivatives since Barings Bank collapsed a decade ago after that rogue trader in Shanghai lost over a billion, meaning back then it was the foreigners doing that sort of speculation on Chinese soil, whereas today the Chinese are doing it for themselves! Third, the guy riding this beast had turned the company from its original function (ship brokering) toward sexy derivatives and had used its winnings over the years to “rise to the top of Singapore’s corporate scene.” The CEO is now suspended from trading and his post. Mr. Chen Jiulin, 43, is a self-made man who came out of the rural countryside to be a serious mover and shaker in the financial world. Right up to his downfall he was touting the company, China Aviation Oil Singapore, as “an integrated oil-services company with international reach.”
So Mr. Chen overshot. That’s not the real story to me. The real story is that China now has the same type of dare-devil financial types that we’ve long had in the states—guys who push the envelope, make financial mountains out what were originally mole hills, and yes, who sometimes suffer godawful falls. You need a lot of Mr. Chens to build a great country, and eventually, almost all of them go down in flames. But each time they do, the rules get adjusted and improved, and that’s the fourth reason why I like this article. As scary as this activity can sometimes be, China needs a financial system where the Mr. Chens can do their thing, and the system as a whole can learn from both their successes and failures over time.
Connectivity requires code, and China’s financial system is connecting up to the outside world at a frightening pace. Scary yes, but it generates a flow of rules from the outside in like China has never seen before. Big markets all over the world are lining up to have China’s IPOs (initial public offerings) listed on their exchanges. Will they be spectacular opening gains to be had? You bet. Will we see plenty of busts and meltdowns? You bet. But no guts, no glory, and no connectivity, no code. You want China to play by our rules more and more? Then you have to deal them into the game. You have to list their IPOs. And you have to ask questions, and demand answers, when the inevitable scandals unfold.
Scandals of this sort, like they often say on Wall Street, are a sign of a healthy market. Show me a market with no scandals, and I’ll show you one with no innovation and risk-takers. Scandals are the Petri dishes of new rules for financial markets. Like a young child trying to build up his immune system, China’s financial markets need to be exposed to plenty of scandals.
As as Yoda might say, "They will be . . . they WIIIIILL!"