September 1, 2016 / 9:00 PM / 3 years ago

COLUMN-Swiss watches, corruption battles and the high price of Facebook shares: James Saft

(The opinions expressed here are those of the author, a columnist for Reuters)

By James Saft

Sept 1 (Reuters) - Despite Facebook being locked out of China since 2009, Mark Zuckerberg can, in part, thank the Party for the healthy valuation of Facebook shares.

That’s because the fewer Swiss watches corrupt officials in China buy, the more shares of Facebook the Swiss National Bank does.

Now follow along as we trace a particularly bizarre train of cause and effect in a world where China is a huge economic force and central banks are some of the world’s largest equity investors. Butterflies beating their wings in the rainforest of Brazil have caused hurricanes in the Gulf of Mexico easier to predict than this.

Facebook, locked out of China in the wake of rioting, has ceded the field to more compliant domestic social media platforms.

Between 2010 and 2011 exports of Swiss watches to China more than doubled while exports to Hong Kong surged by a similar amount. A fine watch is a very fine thing, no doubt, but in China they have long served as sort of currency and talisman among the nomenklatura, both a badge of power and wealth and a favored gift to those one wishes to impress or sway. They are also, especially at the high end, a portable store of value, worth more by far than their weight in gold, something officials, especially corrupt ones, value.

Immediately upon becoming General Secretary of the Communist Party in 2012, Xi Jinping launched a crackdown on corruption which is still being fought. The immediate motivations were different from those behind the ouster of Facebook, but both moves had certain themes in common, namely the desire to retain a high level of control, over the internet on the one hand and over an increasingly wealthy and powerful official class on the other.

As usual, China is not kidding: the party said it punished nearly 300,000 corrupt officials last year.

And as gift giving came in for special disfavor in the crackdown, watch sales, both in mainland China and Hong Kong, have been hit extremely hard. Exports of Swiss watches fell, and carried on falling, with 460,000 fewer watches exported last year, down 23 percent to Hong Kong and 4.7 percent to the mainland. Watch exports to Hong Kong have now been contracting for 18 consecutive months, those to the mainland for seven months.


That’s a problem for Switzerland, which earns half of its output via exports, of which 11 percent are watches. Until last month, Hong Kong alone was the single biggest export market for Swiss watches, though with volume down by a third in the year to July, the U.S. has now taken over top slot.

So how do Facebook and Mark Zuckerberg come in to this?

We'll get there, but first let this sink in: The Swiss National Bank now owns more of the publicly traded Facebook shares than Zuckerberg does. (here)

The SNB also owns more Facebook shares than all but about 20 U.S. mutual funds, having a stake worth $741 million, or a bit more than 0.28 percent.

The SNB has plenty of problems, and a sagging market for one of the country’s principal exports feeds into a number of them.

First off, there is deflation, with prices falling for the vast majority of the past five years. Then there is sub-par growth, with the economy expanding in the past year by just 0.8 percent in real terms, less than half last year’s clip. There is also the very strong Swiss franc, which makes exports that much more difficult.

One of the SNB’s principal tactics in fighting its various battles is foreign exchange intervention to contain the value of the Swiss franc, a currency which, viewed as a safe haven, has attracted very large flows. This leaves the SNB holding huge amounts of foreign currency, which they must stash somewhere.

One of the places the SNB puts the money is into stocks, and though it mostly buys shares in proportion to their weight in main indices, that leaves the central bank as a very large owner of companies like Facebook. As a new and large marginal buyer of shares the SNB bears some credit, or responsibility, for their valuations. Facebook shares are up 66 percent over the past two years, the period of most heavy investment by the SNB.

Without a corruption crackdown, the SNB’s job of hitting its various mandates would be easier, and while we can’t say for sure their currency or investment policy would be different, it just might. It is also possible, though not proven, that some of the safe-haven flows coming into Switzerland and driving up the value of the franc are from China and are owned by people in fear of the corruption crackdown.

It is a strange and interconnected world.

Mark Zuckerberg might want to thank China for the corruption crackdown, using a Facebook post, naturally. And don’t forget to tag the SNB. (Editing by James Dalgleish)

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