Asymmetrical Information

From the desk of Jane Galt:

The shout heard round the world

99% of my readers probably didn't even notice yesterday when a story hit the wires that China had definitely decided to revalue the yuan. Needless to say, those of us who write about these sorts of things were following this more attentively than an obsessive-compulsive bloodhound on the trail of a meat truck. Would they? Could they?

Sigh. Turns out it was just a translation error, says the Wall Street Journal (subscription required):

Guan Xiangdong, a reporter for the China News Service, is more at home writing about tourism than about finance. But she was on duty in Hong Kong last Saturday while more financially savvy colleagues took the day off. And in a bit of enterprise, she put together a story on the impact of a possible appreciation of the Chinese currency. Her sources: bits and pieces of news and analysis gleaned from local newspapers.

Yesterday, her efforts roiled the world's trillion-dollar-a-day foreign exchange market and sparked panicky emails and phone calls among currency traders and fund managers from Singapore to Stockholm as the U.S. dollar tumbled. The dollar later recovered against major currencies.

. . .

Ms. Guan, who says she has been a reporter for 20 years, was flabbergasted by the fuss. "I can't work out why it's got blown up like this," she said. She says that all she did was trawl through Hong Kong newspapers for views on how an appreciation of the Chinese currency would play in the city -- views that she attributed to "observers," not to the newspapers she was drawing from.

The online People's Daily got hold of her story and farmed it out to a translator who put it into English. The translation took her speculative musings and made them much more concrete. It stated that China had decided to revalue, by 1.26% within a month and 6.03% in 12 months. It gave no source for the story and neglected to mention China News Service. China News Service was set up in Beijing in the early years after the 1949 Communist revolution to channel news to Chinese living outside the country. It maintains close links to the Chinese State Council.

In London, yesterday morning, Bloomberg staff who monitor global currency markets were alerted to the People's Daily article. It was unearthed by software that Bloomberg uses to automatically search the Internet for new postings that contain key words.

The People's Daily article was written in clunky English, but the first sentence contained what could be construed as a major development: a revaluation of the yuan or an expansion of the band in which it trades "will be announced" after a meeting between Chinese and U.S. economic officials -- a meeting that actually did take place this week.

Based on the article, Bloomberg shot a headline around the world. An editorial staffer familiar with what happened said that before the Bloomberg story was published, a Bloomberg reporter contacted the People's Bank of China, and it declined to comment. (Later in the day, the bank denied the report.) Weighing that nonresponse along with the assumption that the People's Daily speaks for the Chinese leadership, Bloomberg decided to go with the story. "The key is that it's state-owned -- the People's Daily -- there it was on the Web site," said one Bloomberg staffer.

The Bloomberg story flashed across trading screens just as Asian currency traders were ending their day and European markets were opening.

In Stockholm, Frederic Cho, who manages Chinese equities for brokerage firm Hagstromer & Qviberg, used the office loudspeaker system to announce the news to startled colleagues and then started frantically searching for the People's Daily story on the Internet and dialing journalists and finance-industry contacts in Asia. "It didn't make sense to me," he says. What central bank would telegraph a revaluation, with the exact numbers, a week in advance?

In Shanghai, Stephen Green, chief China economist for Standard Chartered Bank, was similarly puzzled. "My initial thought was, 'This is very strange,' " he said. He got on the phone and started calling Chinese regulators. Eventually, his research team dug up the English translation and the original story in Chinese and figured out what was going on. Immediately, he sent an electronic note around the bank explaining that there had been a mistranslation.

European stocks jumped on the People's Daily story, but quickly reversed themselves when it became clear the story was erroneous.

But there is still a school of thought that says this was no accident. The Chinese government doesn't have accidents like this; it was clearly a trial balloon to see how markets would take the news.

The WSJ quenches this hope:

It once was true that a story in the People's Daily really did have the imprimatur of the Chinese government. Foreign journalists would study every phrase in search of nuances that could signal a change of policy. But now the official Chinese media, under commercial pressure to compete, often in real time, sometimes struggle with basic accuracy.

. . .

After yanking the story, editors at the People's Daily online edition expressed regret, albeit defensively. "We are very sorry that the translation was not accurate -- it is our mistake," said one editor, who declined to be identified. But the editor also took a swipe at the China News Service: "Their reporter should be criticized. She put too many vague sentences in the story, which eventually caused our mistranslation."

I find it all too easy to believe that Chinese reporters are as fallible as their Western counterparts. Still . . . it might not be a bad time to buy yuan . . .

Posted by Jane Galt at May 12, 2005 07:24 AM | TrackBack | Technorati inbound links