Several newspapers reported yesterday that two Chinese officials have received jail sentences of six and five years for leaking confidential economic data to traders prior to their official release. In one of my favourite films, Trading Places, the anti-heroes Randolph and Mortimer Duke try to obtain the crop report in advance of its release so they can corner the market in frozen orange juice. Like their Chinese counterparts nearly 30 years later no good became of them either. Insider dealing laws prevent those who have information in advance of the market, or public, from acting upon it. And quite rightly so.
The news from China though can be understood at a number of levels. First it confirms that economic news on the Chinese economy is sufficient to move to asset prices in a substantive and predictable manner. Thus the market having formed expectations, news that does not completely verify those expectations leads to asset prices adjusting. By the by, rational expectations does not mean that we know the news, it means that we have worked out the probability of different events and the payoff from those events. When the uncertainty is resolved by the actual publication of the news, the event that actually happened goes from being a mere probability to a certainty and that is why asset prices move. That Chinese data is valuable enough to change asset prices is significant enough and a positive development, per se. We, or the financial intermediaries we employ on our behalf, are therefore forming views about the Chinese economy and then re-evaluating those views as news emerges. The scrutiny, rather than the tyranny, of the market is a good thing.
Secondly, the successful prosecution means that authorities understand that market sensitive data must be released to all market participants simultaneously. This does not mean that no information should be released or that only certain bits of information should be released. All data on the state of the economy, revisions, warts and all, should be released on a well understood timescale and produced by a well-documented statistical process. Such a process will facilitate the development of views on the likelihood of different state of nature and also – this is the important bit – facilitate the transfer of information from the private information set to the public domain. The trader or analyst with a bearish view will 'sell' his or her analysis to market participants and be amply rewarded if they turn out to be right as prices will move to reflect the accuracy of the originator’s private information set. The key is that the traders are rewarded for their private information and so have an incentive to work out what it might be through analysis.
What is less clear is whether any of the clear sanctions against the release of public information will have any impact on what we have come to call 'guidance'. It should not. Guidance involves statements by policymakers on the implication of a given stream of data for likely future policy or backward-looking explanations of why what was carried out when. Guidance, if given to all and is free to access, is helpful as it clarifies public thinking and so pools information. The guidance is not private information nor is it data per se. It helps markets interpret the large flow of information and understand better the conditions under which policy is currently being set and the parameters that might cause it to change. To the extent that guidance accelerates learning and forces policy makers to spell out their reaction functions, guidance is less something to be proscribed but more an obligation. The debate about the effectiveness of transparent as opposed to opaque policy relies on such guidance. So at the same time that sanctions are developed again insider information, governments should work harder to explain, warn and advise.