Chinese arithmetic

I have a naive faith in the transparency of numbers, trusting that they have no significance in themselves but allow us to see directly through to the importance of the amount they have measured. Numbers are truly floating signifiers, with no meaning until they are given a context, something to count. I naively believe that everyone else fundamentally feels the same way, in the abstract. This seems a cornerstone principle of what it means to be rational, and it draws the boundaries that mark off the territory of superstition. The incantations of economic data or earnings reports, with their endless litany of percentage gains and year-over-year comparisons and moving averages, seem in part an elaborate ritual to testify to the neutrality and clarity of numbers, so solemnly are they invoked to give meaning not to themselves but to large intractable phenomena in the economy. Few reading these stories about economic indicators or market performance reports care about the specific numbers, only the justification and the argument that the numbers allows to be built around them. They anchor the ongoing narrative of capitalist practice without usurping it. The efficient transparency of numbers facilitates the smooth series of exchanges and calibrations capitalism requires—the price system works because no one presumably fetishizes the price itself but rather allows it to shift freely according to conditions.

That’s why a story like this one from the Wall Street Journal a few days ago is so disturbing: it relates how numerology contributes to driving the Chinese stock markets.

Part superstition and part self-fulfilling prophecy, numerology is a basic trading strategy in China. The philosophy reflects the widespread belief in Chinese society that numbers contain clues to good fortune.
It is a little noticed force adding fuel to a roaring market in the world’s fourth-biggest economy. The benchmark Shanghai Composite Index is up 56% this year and quadruple its level at mid-2005, a spike that is raising concerns about an investment bubble.
Investors’ zeal to base decisions in numerology also helps explain why Beijing has been unable to temper enthusiasm in the stock market through conventional measures, like credit tightening last week.
To professional observers, the Chinese investing public’s trust in the predictive power of numbers—rather than fundamentals like business prospects or profit—is one of many reminders of how buying on the Shanghai and Shenzhen stock exchanges looks like gambling.
Brokerages are set up like casinos. Investors drink tea, smoke and chat as they make trades on computers lined up like slot machines. Instead of dropping in coins, they swipe bank cards to pay for shares.

What makes this so flabbergasting, I think, is the enormous effort made in business discourse to make stock markets not seem like gambling. a great deal of emphasis is placed on providing information that justifies stock prices, connecting them to earnings in elaborate ways. But if the stock prices have more to do with the numbers themselves, then it’s just roulette. Then it’s predictable only in the sense of self-fulfilling prophecy mentioned above, which scuttles the idea that economic growth and the stock market are connected, that stock market bubbles are producing real progress or change in the society at large.

And then an article like this one, from last week’s Economist seems scarier.

For the government the situation poses quite a challenge, particularly as anecdotal reports indicate that the stock buying craze is rampant both among the urban middle class and less well off sections of society like taxi drivers, pensioners and students. Should the market suffer a downturn these people could vent their fury, as investors did in the late 1990s when stock price crashes occurred, threatening political stability. The government will want to avoid such scenes in 2007 and 2008, as the Chinese Communist Party holds its five-yearly congress and the Olympics kick off in Beijing.

Inducing novice investors with possibly numerologically based investing strategies into an overheated market seems like a recipe for catastrophe.

Hence, from this week‘s Economist:

The Chinese consider four to be a very unlucky number (because in Mandarin it sounds like the word death). The number 4444 is thus presumably as bad as it gets. So suppose the Shanghai A-share index closes during the next week at 4,444 (it stood at 4,375 on May 23rd), which is quite possible given its 258% gain since the beginning of 2006; might that frighten investors enough to cause the share-price bubble to burst?

It just seems terrifying to me that stock markets can aggregate people’s superstition and give it agency in the nonbelieving world at large.

—Rob Horning