[Email Reply]

International Financial Markets

Introduction to the Chinese Edition

The chairman of a finance department of a major university once told me he had learned "so much" from reading my textbook. I cynically thought: He has been a professor of finance for fifteen years. Why should he have anything to learn from an introductory textbook? Then a few minutes later he said: "But there is nothing new in it."

Many people look at knowledge as a collection of objects, and the search for something "new" means discovery of a new thing, term, or product. But most of knowledge actually lies not in a mere cognizance of what things are, but rather in an understanding of the relationships or connections among them. That’s what economics is about. That’s what my book is about. I was not surprised that a finance chairman had learned so much from a book in which there was "nothing new." You may know what eurodollars are, or what options are, but understanding them is a different thing entirely. The first rule of teaching, the Tao Te Ching reminds us, is to create confusion in those who think they know. Out of this confusion can emerge understanding: a new way of seeing the relationships among familiar things.

I myself learned very little of the information presented here in the classroom. Most of it I had to learn on my own: from other sources or my own observations. So when I wrote the book, I was writing it mostly to myself, to summarize what I was learning. To the extent I thought of it as a textbook, I tried to write the type of textbook I wished I had had in graduate school, but hadn’t. Necessarily I wrote it simply to please myself, and while I hoped others would like it also, I had little assurance they would. For my writing a textbook aroused great hostility. Junior professors were not supposed to write textbooks. They were supposed to spend their time writing research papers on the trendy (and often absurd) theories of senior professors. Well, I chose not to follow that path. And I don’t regret it. A number of those who advised me I was "doing the wrong thing" immediately adopted my book once it appeared. My few successes in life have all come from "doing the wrong thing."

Does this book have any relevance for China? Perhaps. One might observe that the future development of China is heavily dependent on foreign investment. International business is increasingly important to the development of the local Chinese economy. An understanding of the financial markets and contracts prevalent in Europe, Japan, and the United States should be considered an essential prerequisite for any Chinese business manager. Of course the markets tolerate amateurs, but usually not in a way amateurs would like. That’s one reason to study this book.

A second reason is intellectual. If China is to emerge from its economic isolation, it must understand what is happening in the rest of the world. And that includes understanding the often-baffling financial markets of the world. These require specific study. Simply reading the newspaper for many years will not do the trick.

At the time of writing, Asia is very much in the world’s eye. Following on of the heels of the Asian financial crisis in the latter half of 1997, the burning question in Asia is whether there will be a devaluation of the renminbi. What should or will China do? Will the battered economies of South Korea, Indonesia, Thailand, and Hong Kong be allowed to sell their goods without significant competition from the Chinese mainland? Meanwhile, the Beijing government is debating the question whether it is time that banks be run like banks. The obvious answer, of course, is yes. But that doesn’t mean the damage done by not running banks like banks can be easily undone. And that doesn’t mean the speculation and build-up of debt in the coastal regions of China will casually disappear. This book gives a variety of tools for looking at these and similar issues.

It’s important not to let the veil of words--or the veil of business practice--get in the way. There was a famous finance professor of my acquaintance who hated derivative contracts. People who talked about, or studied, things like futures and options upset him so much that he would practically froth at the mouth. Meanwhile, his office neighbored another university department: the Insurance Department. This same professor thought insurance was a respectable subject, greatly worthy of academic study. What he did not understand--because he refused to look--was that most insurance contracts can be analyzed and understood in terms of option pricing theory. He died never knowing that "insurance" and "options" were essentially the same thing appearing in two different disguises, and thoroughly convinced that he loved one and hated the other. One must not be deceived by the Monkey King’s chosen outward appearance.

From an outsider’s perspective, there are two Chinas: the mainland, and the "bamboo network" of overseas Chinese. The latter, for most practical purposes, includes Hong Kong, Taiwan, and the Chinese communities of the Philippines, Malaysia, Indonesia, and Thailand. There are estimates (although one should never take these too seriously) that the 50 million "overseas" Chinese control an economy roughly comparable to that of the 1.2 billion mainlanders. Maybe so. Maybe not. But this community has extraordinary importance for China’s future. For those of us who view China as a civilization, rather than as a government, they are very much part of the Chinese system. And this community has their hands deep inside world financial markets. This book can help them grasp that market forces are a different type of guanxi.

Finally, there is the individual student. When I was teaching in the 1980s, two of my students were working on a project together. One was the foreign exchange manager for Daewoo Corporation, one of the large Korean chaebol, or conglomerates, and the other was a Chinese friend of his from Taiwan, whom I will call Billy. I thought it would be useful for them to visit the floor of the Philadelphia Stock Exchange, and made arrangements for a friend who worked for the now-defunct investment bank Drexel, Burnham, Lambert to give them a tour. Foreign currency options were new at the time, and there was not much business. Yet there were plenty of traders already in the market, anticipating future growth. On this particular day, a woman broker appeared in the crowd of floor traders with a limit order to sell, and about a half dozen traders simultaneously shouted their acceptance of the price and lunged for the ticket. The woman fell on the floor with several traders on top of her. Two of the traders emerged from the melee holding the ticket, both claiming possession, and proceeded to have a fist fight over who would be the counterparty to the trade. This was not, of course, exchange-approved behavior, but Billy, who had recently gotten out of the Taiwanese army, was quite impressed.

"Now I understand trading," he said. "This is war."

Yes, I suppose it is, in a way. Markets are certainly a more constructive form of battle than the nonsense implied by the current militaristic rhetoric emerging from Washington (and from Beijing also).

To students: Here is your guide. Go forth and do battle.

J. Orlin Grabbe