Where do we stand?
During the second half of 2008, economic growth slowed noticeably. In Q3 2008, the GDP grew at 1.7% down from 4.2% in Q2. The GDP growth for 2008 is now estimated at 3.0 to 3.5% (officially announced on 14 November 2008) and it is unlikely that the original forecast of 2009 GDP growth of 4.5% made at the time of the Budget Speech for 2008/09 will be achievable.
No systemic damage but not immune
HK has been through many financial crises in the past. In recent times, HK survived the 1967 riots, the 1987 Black Monday, and the 1997 Asian Financial Crises. Since 1997, we have also faced down the SARS epidemic in 2005. Each crisis had its own origin but the end result is a “crisis of confidence”. After each crisis, new measures were put in place to ensure the integrity of our financial system. Thus, HK is better prepared than most to weather the current storm.
The current Financial Tsunami is both deeper and wider in its impact on the local economy. With the exception of Black Monday in 1987, the crises we faced in the past were localized in scope. Even the 1997 Asian Financial Crisis was restricted to the Asian region and the Asian economies were still able to export their way out of recession because the US and European economies continued to remain strong and their consumers provided the demand for Asian goods.
This time it is different. The most optimistic forecasts for the US and European economy for 2009 is for no more than 1.5% growth and many are forecasting negative growth. With the US and European consumers expecting to cut back on their spending due to unemployment and tighter credit, the Asian economies need to look beyond the traditional export led recovery scenario.
During the Asian Financial Crisis and the SARS Outbreak, both the stock and property markets suffered major setbacks. However, manufacturers and exporters were not affected as the orders continued flowing from the US and Europe. During the current crisis, manufacturers and exporters are as severely affected as those in financial services with their order books being down by 50% or more. It is now obvious that a purely monetarist approach of loosening credit and lowering interest rates will not have the same effect as in previous other financial crises.
What are we doing about it?
The current meltdown calls for a Keynesian (i.e. fiscal) approach to stimulate the economy.
On 15 October 2008, the Chief Executive of the HK Government, Mr. Donald Tsang, announced a number of measures in his Policy Address aimed at maintaining and expanding HK’s position as an international financial centre. The cornerstone of the measures to combat the slowdown in the economy ranges from minor tweaks which can be implemented almost immediately to major public works programs.
Longer term, the HK government will start implementing 10 major infrastructure projects which will require total investments of HK$250 billion (US$32 billion). Some of these projects are aimed at integrating Hong Kong with nearby provinces on the Chinese mainland e.g. HK/Macau/Zhuhai Bridge (HK$37 billion) and Guangzhou/Shenzhen/HK Express Rail Link (HK$40 billion). While others are aimed at further development of the transport links within HK itself e.g. Shatin/Central Rail Link (HK$38 billion), Tuen Mun Western Bypass and Tuen Mun/Chep Lap Kok Link (HK$20 billion). Urban development has not been forgotten as the West Kowloon Cultural District project (HK$22 billion) will finally be started. All of these projects are in the final planning stages and implementation works will begin in two years time.
Altogether, 180 minor capital works programs will be started within the next 2 years involving some HK$60 billion (US$7.7 billion). These interim programs are meant to help the local economy absorb the return flow of construction works from neighboring Macau where the construction boom in hotels and casinos is grinding to a halt.
The Chinese have a saying, “Water from far away cannot put out the fire next door”. Clearly, something needs to be done within the next two years. The Chief Executive will chair a Task Force to monitor and assess the impact of the financial crisis and to recommend actions which can be taken to help alleviate the effects. HK government departments have been asked to assess their needs and come up with a list of projects which may be outsourced to the private sectors in an effort to sustain employment in the non construction area.
Most important of all, these are not “make work” projects. In other words, they are projects which are economically justified and are needed to allow the economy to continue to grow and integrate with the Chinese mainland. “Make work” projects which are not economically justifiable are a waste of taxpayers’ money, and are no more than “handouts”.
Crisis? What crisis?
The Chinese word for “crisis” (危機) is made up of two characters, danger (危) and opportunity (機). Since 1967, we have seen no fewer than 4 major and countless minor financial crises. Yet, we have weathered the turbulence and came out stronger with better regulatory regime and more vibrant business environment. And the current storm will also pass.
Thursday, November 27, 2008
Monday, November 24, 2008
Kazakhstan: Development of the Financial Sector
The following article was written by the author and published in the November 2008 edition of "Exclusive" a Kazakhstan magazine.
The Government of the Republic of Kazakhstan has already taken a number of steps in creating the infrastructure needed for Kazakhstan to position itself as the financial hub for the Central Asian Region. These steps included creating a state holding company “Samruk” to hold the shares in the large State Owned Enterprises (SOE’s) and a development fund “Kazyna” to encourage sustainable development, and establishing the Regional Financial Centre in Almaty “RFCA”.
In a review of the progress of the SOE’s, it became apparent that State’s assets in key sectors such as oil and gas, metallurgy, petro-chemistry, infrastructure should be combined to create a state corporation of the global rank, which is capable of implementing large scale projects.
Thus, in a package of measures announced on 13 October 2008, President Nursultan Nazarbayev signed a Decree on the merger of the two major state holdings “Kazyna” and “Samruk” into the National Well-being Fund “SamrukKazyna”. SamrukKazyna will manage the state owned shares of “Kazatomptom”, “Eurasian Corporation of Natural Resources”, “Kazakhmis”, “Kazakh Mortgage Company”, “Kazakhstan Fund of Guarantees of Mortgage Loans”, “Housing Construction Bank”, as well as of seven Social-Entrepreneurial Corporations.
SamrukKazyna will operate along the lines of successful national holding companies such as “Temasek” in Singapore, and “Khazanakh” in Malaysia, and be engine driving regional industrial breakthrough.
Where Are We In The Development Of The Financial Sector?
One of the key initiatives in developing Almaty as the main financial centre in Central Asian Region is focused on creating favourable conditions for domestic and foreign financial institutions to act as the main providers of credit, insurance and financial services, and to facilitate the implementation of big regional projects.
The Kazakhstan Stock Exchange (KASE) was originally established as a currency exchange on 15 November 1993, 2 days after the launch of the national currency, the Kazakhstan Tenge. In December 2006, the KASE was designated as the Special Trading Floor of the RFCA, and began trading as such on 27 February 2007. Today, currency transactions account for approximately 25% of the trading turnover. The KASE is also the primary trading platform for debt securities including short-term repos, and government and corporate bonds. Besides currency and debt trading, corporate equities are also traded on the KASE. However, equities account for less than 2% of the trading turnover.
Despite numerous concessions and incentives, Kazakhstan has only achieved limited success as a financial centre. The credit crisis which hit Kazakhstan in 2006 was a re-play of the financial crisis which hit Thailand ten years earlier in 1996, and which subsequently became the Asian Financial Crisis. To recap, local banks expanded rapidly in financing local development, and because they did not have the domestic deposit base to support this expansion, borrowed heavily from foreign financial institutions. When the global financial crisis hit and foreign banks began calling in lines, the local banks were left high and dry.
Much of the plans to attract foreign financial institutions fell by the wayside as the economy adjusted to the contraction in credit. With the entire world now embroiled in the Financial Tsunami, it is an appropriate time to re-examine the approach so that Kazakhstan is positioned to take advantage of the turnaround when it comes.
What Does It Take To Become A Financial Centre?
To be sure, a number of incentives have been provided to attract more corporate equity listings and foreign participation in order to boost the development of the securities market. These include:
1. The RFCA is a tax free zone for brokers and investors. Income from executing client trades, market marking, underwriting, nominee services, etc. are free of tax for broker dealers. Dividends, and capital gains and interest income on securities bought on the KASE are also exempted from tax.
2. Where companies seeking a listing on the KASE have to undergo an audit (where none were previously required) the initial audit fees are reimbursed by the Agency of RFCA.
3. To facilitate communications with international partners, the RFCA will operate in three languages – Kazakh, Russian and English.
4. An International Advisory Board, with well known financial experts, has been set up to ensure that RFCA adopts the best practices from the international community in developing the financial infrastructure. An example of this is the establishment of special financial courts to arbitrate financial disputes.
5. Participants such as broker dealers are required to be registered with the Agency of the RFCA and licensed by the Financial Supervisory Agency (FSA). All dealings must be on the special trading floor (i.e. KASE), and foreign participants must have a permanent office in Almaty.
6. Debt securities can be listed as long as they have credit ratings at or above the level recognized by the FSA as investment grade.
7. Companies seeking a listing must either comply with the requirements of the Listing Rules as defined by the FSA, or be already listed on one of the recognized exchanges. Exchanges which are accredited by the Agency includes NYSE, NASDAQ, and Toronto in the North America; London Stock Exchange, Euronext, Deutsche Borse, BME Spanish Exchanges, Borsa Italiana, Swiss Exchange, and MICEX in Europe; and Tokyo, HK, Shanghai, Singapore, and Taiwan in Asia.
But is it enough to provide easy access and incentives? According to TIME magazine, the world will revolve around 3 international financial centres – NY covering the Americas, London covering Europe, Middle East and Africa, and Hong Kong the Asia Pacific Region. What distinguish these 3 from the many which aspire to be financial centres?
Lesson Number One: Location, Location, Location
Historically, financial centres grew out of the need to service the local economy. In the case of London in the 1600’s, the trade in commodities with the far flung colonies and later commonwealth countries created the beginnings of joint stock companies to fund larger enterprises, and insurance to distribute the risks. The well renowned merchant banks came out of the integration of trade and finance. NY became powerful providing financial services the vast American hinterlands.
The financial services sector in Hong Kong grew out of the need to finance the trading activities of the Hongs (British trading companies). As its’ share of world trade grew, many foreign banks established offices in HK which engaged in foreign exchange and money market transactions to fund the trade finance needs of their customers back home, making HK an international banking centre.
With the accumulation of financial expertise in Hong Kong, currently there are 285 banks operating in HK of which 200 are foreign registered, it was a short step to help their client companies seeking longer term capital to raise funds through IPO’s. Finally, with the return of sovereignty to the China, HK re-invented itself as the preferred listing destination of Chinese enterprises.
In the 1980’s Singapore had for a time challenged the supremacy of HK as a financial centre by offering many incentives to financial institutions re-locating their headquarters to that city including tax holidays, seed capital for fund management companies, etc. However, at the end of the day HK’s position on the doorstep to China, and its’ location and ease of transportation, won out and HK became the choice of fund management companies investing in the Asia Pacific region.
A financial centre is a bridge between investors and issuers. HK has been playing the role of financial intermediary to China over the past decade. Since the first Chinese company was listed on the HK Exchange in 1993, Chinese enterprises have raised over US$250 billion from the equity market in HK. China recently announced that it has foreign currency reserves of US$1.9 trillion which means that the equity market in HK provided more than 12% of China’s foreign currency holdings.
Kazakhstan has vast energy and mineral resources available and is situated at the cross roads between the East and the West. Natural resource companies need to raise capital and loans to develop the resources, to refine the raw materials, and to distribute the end products. Meanwhile, banks, telecommunications, media and transportation companies will also need to raise funds in order to provide the infrastructure necessary for the economy to grow in tandem.
Lesson Number Two: The Foundations
Before international investors will flock to invest in equities in Kazak enterprises, they must feel comfortable with the clarity of the regulatory regime, the efficiency of the dealing and settlement platform, and application of the rule of law in dispute resolution.
The opportunities are boundless. However, with a population of only 16 million, Kazakhstan will need to bring in additional expertise to develop its resources and infrastructure. Financial services professionals will come from around the world and not just CIS countries (Russia has only just started on its’ own road to financial development). Therefore, the use of a common language in international finance will be essential in order to allow participants to easily communicate with each other across the globe. More than likely, this will be English.
Tokyo was an international banking centre the 1980’s when HK was just starting out. With its’ huge financial institutions funded by strong deposit base, Japan was a financial juggernaut. However, many financial institutions decided to locate their regional head offices in HK because of easy access to financial services professionals, and ease of communications in English.
Using HK and Singapore as models, the Dubai International Financial Centre went so far as to re-write the laws using English common law as base and to invite British judges to sit on cases that come to court. Equities are traded and settled in US dollars on the Dubai International Financial Exchange, and there are no restrictions on the free flow of capital. As far as familiarity with the system is concerned, Dubai’s approach is hard to beat.
However, both Dubai and Singapore lacks the natural advantage that both HK and NY have i.e. a vast hinterland in China and America respectively. Additionally, Dubai has competitors as a regional financial centre in Egypt, Bahrain, and Qatar, while Singapore is competing with Jakarta and Kuala Lumpur. HK has a formidable competitor in Shanghai as a domestic financial centre. But for the time being, Shanghai is hampered by China’s rules and regulations and the lack of convertibility of the Chinese currency.
And let us not forget about logistics and transportation. As a regional financial centre, Kazakhstan has to be a hub in the physical sense with frequent direct connections with major cities and financial centres, and ease of travel for financial services professionals.
Kazakhstan has the benefit of starting from scratch in building a financial services infrastructure, and has the benefit of access to the best practices available because of its enormous wealth potential. The structures that have been put in place, such as “Samruk”, “Kazyna”, and RFCA shows the willingness to streamline existing institutions, and to put the weight of the government behind the push for modernization in financial practices. More importantly, it has the wealth to put its plans into practice, and the strength of will to overcome whatever obstacles may be in the way.
Lesson Number Three: Play To Your Strength
In 2006, trading turnover on the KASE amounted to US$169 billion, a huge increase over the volume of US$10 billion in 2001. During this period, GDP rose from US$18 billion to US$57 billion, international currency reserves increased from US$2 billion to US$ 26 billion, and Foreign Direct Investments doubled from US$2.7 billion to US$5.4 billion.
The KASE Index rose from 216 on the 1 January 2005 to over 2,048 by the end of 2006
. Market capitalization increased 14 times to US$64 billion.
So far notable IPO’s include KazMunayGas Exploration and Production, and the secondary listing of KAZAKHHMYS which was listed in London. Kazakhstan has enormous resource potential with many in the early stages of exploration and production. Within a few short years, we will see major local resource companies being listed on the KASE.
In addition to resource companies, a number of SOE’s under the control of “SamrukKazyna” will be privatized and spun off in accordance with the charter of the development agency which is to facilitate development but to return control to the private sector when the enterprises are self-sustaining.
In the near term, Kazakh enterprises will need to look to an offshore exchange for primary listing for reasons of funding and liquidity, and to give international investors comfort in the quality of the listing. For example, early listings of Chinese enterprises were wholly listed on the HK Exchange which has rules and regulations that international investors are familiar with. As domestic liquidity builds up, China began to maintain dual listings with the domestic portion on the home exchange for domestic investors. The ultimate aim is to repatriate the listing to the domestic exchange as the liquidity and confidence builds up, and the domestic currency is freely convertible.
Lesson Four: Build strategic Alliances
Due to the previous Soviet influence, Kazakhstan has looked to Russia and London (because foreign financial institutions in Russia are run out of London). Many Kazakh enterprises have listed on the AIM, the junior market in London. However, they have found that the subsequent trading is subdue, and opportunities for secondary fund raising virtually nonexistent.
China has 140 million domestic investors and foreign currency reserves of over US$1.9 billion. Chinese investors will be a powerful force in international finance. Although Chinese investors are currently barred from investing abroad, China allows Qualified Domestic Institutional Investors (QDII funds) to invest abroad on their behalf. The HK market as part of China will be the first beneficiary of funds going overseas.
Kazakhstan shares a common 1400 km long border with China’s Xinjiang Region, and is only 250 kilometres from Urumchi. There are daily flights to Almaty from Beijing and Urumchi, or one can choose to transit in Bangkok or Seoul. From Hong Kong, there is the additional choice of travelling to Shenzhen and taking an internal flight to Urumchi. Almaty, and the capital Astana, are only 2 time zones away from HK and Beijing, but 6 time zones away from London and Europe.
A pipeline is being built from the Caspian to Xinjiang in China which will be a major end buyer of Kazakh energy and mineral exports. Kazakhstan and Xinjiang is separated only by the Tian Shan mountain range. Therefore, it makes sense for Kazakhstan, in positioning itself as the Central Asian Financial Centre, to more closely align with Hong Kong and China than with Europe. Kazakhs are Central Asian in outlook and attitudes which are more Asian than European. We look very much alike and think alike.
The Government of the Republic of Kazakhstan has already taken a number of steps in creating the infrastructure needed for Kazakhstan to position itself as the financial hub for the Central Asian Region. These steps included creating a state holding company “Samruk” to hold the shares in the large State Owned Enterprises (SOE’s) and a development fund “Kazyna” to encourage sustainable development, and establishing the Regional Financial Centre in Almaty “RFCA”.
In a review of the progress of the SOE’s, it became apparent that State’s assets in key sectors such as oil and gas, metallurgy, petro-chemistry, infrastructure should be combined to create a state corporation of the global rank, which is capable of implementing large scale projects.
Thus, in a package of measures announced on 13 October 2008, President Nursultan Nazarbayev signed a Decree on the merger of the two major state holdings “Kazyna” and “Samruk” into the National Well-being Fund “SamrukKazyna”. SamrukKazyna will manage the state owned shares of “Kazatomptom”, “Eurasian Corporation of Natural Resources”, “Kazakhmis”, “Kazakh Mortgage Company”, “Kazakhstan Fund of Guarantees of Mortgage Loans”, “Housing Construction Bank”, as well as of seven Social-Entrepreneurial Corporations.
SamrukKazyna will operate along the lines of successful national holding companies such as “Temasek” in Singapore, and “Khazanakh” in Malaysia, and be engine driving regional industrial breakthrough.
Where Are We In The Development Of The Financial Sector?
One of the key initiatives in developing Almaty as the main financial centre in Central Asian Region is focused on creating favourable conditions for domestic and foreign financial institutions to act as the main providers of credit, insurance and financial services, and to facilitate the implementation of big regional projects.
The Kazakhstan Stock Exchange (KASE) was originally established as a currency exchange on 15 November 1993, 2 days after the launch of the national currency, the Kazakhstan Tenge. In December 2006, the KASE was designated as the Special Trading Floor of the RFCA, and began trading as such on 27 February 2007. Today, currency transactions account for approximately 25% of the trading turnover. The KASE is also the primary trading platform for debt securities including short-term repos, and government and corporate bonds. Besides currency and debt trading, corporate equities are also traded on the KASE. However, equities account for less than 2% of the trading turnover.
Despite numerous concessions and incentives, Kazakhstan has only achieved limited success as a financial centre. The credit crisis which hit Kazakhstan in 2006 was a re-play of the financial crisis which hit Thailand ten years earlier in 1996, and which subsequently became the Asian Financial Crisis. To recap, local banks expanded rapidly in financing local development, and because they did not have the domestic deposit base to support this expansion, borrowed heavily from foreign financial institutions. When the global financial crisis hit and foreign banks began calling in lines, the local banks were left high and dry.
Much of the plans to attract foreign financial institutions fell by the wayside as the economy adjusted to the contraction in credit. With the entire world now embroiled in the Financial Tsunami, it is an appropriate time to re-examine the approach so that Kazakhstan is positioned to take advantage of the turnaround when it comes.
What Does It Take To Become A Financial Centre?
To be sure, a number of incentives have been provided to attract more corporate equity listings and foreign participation in order to boost the development of the securities market. These include:
1. The RFCA is a tax free zone for brokers and investors. Income from executing client trades, market marking, underwriting, nominee services, etc. are free of tax for broker dealers. Dividends, and capital gains and interest income on securities bought on the KASE are also exempted from tax.
2. Where companies seeking a listing on the KASE have to undergo an audit (where none were previously required) the initial audit fees are reimbursed by the Agency of RFCA.
3. To facilitate communications with international partners, the RFCA will operate in three languages – Kazakh, Russian and English.
4. An International Advisory Board, with well known financial experts, has been set up to ensure that RFCA adopts the best practices from the international community in developing the financial infrastructure. An example of this is the establishment of special financial courts to arbitrate financial disputes.
5. Participants such as broker dealers are required to be registered with the Agency of the RFCA and licensed by the Financial Supervisory Agency (FSA). All dealings must be on the special trading floor (i.e. KASE), and foreign participants must have a permanent office in Almaty.
6. Debt securities can be listed as long as they have credit ratings at or above the level recognized by the FSA as investment grade.
7. Companies seeking a listing must either comply with the requirements of the Listing Rules as defined by the FSA, or be already listed on one of the recognized exchanges. Exchanges which are accredited by the Agency includes NYSE, NASDAQ, and Toronto in the North America; London Stock Exchange, Euronext, Deutsche Borse, BME Spanish Exchanges, Borsa Italiana, Swiss Exchange, and MICEX in Europe; and Tokyo, HK, Shanghai, Singapore, and Taiwan in Asia.
But is it enough to provide easy access and incentives? According to TIME magazine, the world will revolve around 3 international financial centres – NY covering the Americas, London covering Europe, Middle East and Africa, and Hong Kong the Asia Pacific Region. What distinguish these 3 from the many which aspire to be financial centres?
Lesson Number One: Location, Location, Location
Historically, financial centres grew out of the need to service the local economy. In the case of London in the 1600’s, the trade in commodities with the far flung colonies and later commonwealth countries created the beginnings of joint stock companies to fund larger enterprises, and insurance to distribute the risks. The well renowned merchant banks came out of the integration of trade and finance. NY became powerful providing financial services the vast American hinterlands.
The financial services sector in Hong Kong grew out of the need to finance the trading activities of the Hongs (British trading companies). As its’ share of world trade grew, many foreign banks established offices in HK which engaged in foreign exchange and money market transactions to fund the trade finance needs of their customers back home, making HK an international banking centre.
With the accumulation of financial expertise in Hong Kong, currently there are 285 banks operating in HK of which 200 are foreign registered, it was a short step to help their client companies seeking longer term capital to raise funds through IPO’s. Finally, with the return of sovereignty to the China, HK re-invented itself as the preferred listing destination of Chinese enterprises.
In the 1980’s Singapore had for a time challenged the supremacy of HK as a financial centre by offering many incentives to financial institutions re-locating their headquarters to that city including tax holidays, seed capital for fund management companies, etc. However, at the end of the day HK’s position on the doorstep to China, and its’ location and ease of transportation, won out and HK became the choice of fund management companies investing in the Asia Pacific region.
A financial centre is a bridge between investors and issuers. HK has been playing the role of financial intermediary to China over the past decade. Since the first Chinese company was listed on the HK Exchange in 1993, Chinese enterprises have raised over US$250 billion from the equity market in HK. China recently announced that it has foreign currency reserves of US$1.9 trillion which means that the equity market in HK provided more than 12% of China’s foreign currency holdings.
Kazakhstan has vast energy and mineral resources available and is situated at the cross roads between the East and the West. Natural resource companies need to raise capital and loans to develop the resources, to refine the raw materials, and to distribute the end products. Meanwhile, banks, telecommunications, media and transportation companies will also need to raise funds in order to provide the infrastructure necessary for the economy to grow in tandem.
Lesson Number Two: The Foundations
Before international investors will flock to invest in equities in Kazak enterprises, they must feel comfortable with the clarity of the regulatory regime, the efficiency of the dealing and settlement platform, and application of the rule of law in dispute resolution.
The opportunities are boundless. However, with a population of only 16 million, Kazakhstan will need to bring in additional expertise to develop its resources and infrastructure. Financial services professionals will come from around the world and not just CIS countries (Russia has only just started on its’ own road to financial development). Therefore, the use of a common language in international finance will be essential in order to allow participants to easily communicate with each other across the globe. More than likely, this will be English.
Tokyo was an international banking centre the 1980’s when HK was just starting out. With its’ huge financial institutions funded by strong deposit base, Japan was a financial juggernaut. However, many financial institutions decided to locate their regional head offices in HK because of easy access to financial services professionals, and ease of communications in English.
Using HK and Singapore as models, the Dubai International Financial Centre went so far as to re-write the laws using English common law as base and to invite British judges to sit on cases that come to court. Equities are traded and settled in US dollars on the Dubai International Financial Exchange, and there are no restrictions on the free flow of capital. As far as familiarity with the system is concerned, Dubai’s approach is hard to beat.
However, both Dubai and Singapore lacks the natural advantage that both HK and NY have i.e. a vast hinterland in China and America respectively. Additionally, Dubai has competitors as a regional financial centre in Egypt, Bahrain, and Qatar, while Singapore is competing with Jakarta and Kuala Lumpur. HK has a formidable competitor in Shanghai as a domestic financial centre. But for the time being, Shanghai is hampered by China’s rules and regulations and the lack of convertibility of the Chinese currency.
And let us not forget about logistics and transportation. As a regional financial centre, Kazakhstan has to be a hub in the physical sense with frequent direct connections with major cities and financial centres, and ease of travel for financial services professionals.
Kazakhstan has the benefit of starting from scratch in building a financial services infrastructure, and has the benefit of access to the best practices available because of its enormous wealth potential. The structures that have been put in place, such as “Samruk”, “Kazyna”, and RFCA shows the willingness to streamline existing institutions, and to put the weight of the government behind the push for modernization in financial practices. More importantly, it has the wealth to put its plans into practice, and the strength of will to overcome whatever obstacles may be in the way.
Lesson Number Three: Play To Your Strength
In 2006, trading turnover on the KASE amounted to US$169 billion, a huge increase over the volume of US$10 billion in 2001. During this period, GDP rose from US$18 billion to US$57 billion, international currency reserves increased from US$2 billion to US$ 26 billion, and Foreign Direct Investments doubled from US$2.7 billion to US$5.4 billion.
The KASE Index rose from 216 on the 1 January 2005 to over 2,048 by the end of 2006
. Market capitalization increased 14 times to US$64 billion.
So far notable IPO’s include KazMunayGas Exploration and Production, and the secondary listing of KAZAKHHMYS which was listed in London. Kazakhstan has enormous resource potential with many in the early stages of exploration and production. Within a few short years, we will see major local resource companies being listed on the KASE.
In addition to resource companies, a number of SOE’s under the control of “SamrukKazyna” will be privatized and spun off in accordance with the charter of the development agency which is to facilitate development but to return control to the private sector when the enterprises are self-sustaining.
In the near term, Kazakh enterprises will need to look to an offshore exchange for primary listing for reasons of funding and liquidity, and to give international investors comfort in the quality of the listing. For example, early listings of Chinese enterprises were wholly listed on the HK Exchange which has rules and regulations that international investors are familiar with. As domestic liquidity builds up, China began to maintain dual listings with the domestic portion on the home exchange for domestic investors. The ultimate aim is to repatriate the listing to the domestic exchange as the liquidity and confidence builds up, and the domestic currency is freely convertible.
Lesson Four: Build strategic Alliances
Due to the previous Soviet influence, Kazakhstan has looked to Russia and London (because foreign financial institutions in Russia are run out of London). Many Kazakh enterprises have listed on the AIM, the junior market in London. However, they have found that the subsequent trading is subdue, and opportunities for secondary fund raising virtually nonexistent.
China has 140 million domestic investors and foreign currency reserves of over US$1.9 billion. Chinese investors will be a powerful force in international finance. Although Chinese investors are currently barred from investing abroad, China allows Qualified Domestic Institutional Investors (QDII funds) to invest abroad on their behalf. The HK market as part of China will be the first beneficiary of funds going overseas.
Kazakhstan shares a common 1400 km long border with China’s Xinjiang Region, and is only 250 kilometres from Urumchi. There are daily flights to Almaty from Beijing and Urumchi, or one can choose to transit in Bangkok or Seoul. From Hong Kong, there is the additional choice of travelling to Shenzhen and taking an internal flight to Urumchi. Almaty, and the capital Astana, are only 2 time zones away from HK and Beijing, but 6 time zones away from London and Europe.
A pipeline is being built from the Caspian to Xinjiang in China which will be a major end buyer of Kazakh energy and mineral exports. Kazakhstan and Xinjiang is separated only by the Tian Shan mountain range. Therefore, it makes sense for Kazakhstan, in positioning itself as the Central Asian Financial Centre, to more closely align with Hong Kong and China than with Europe. Kazakhs are Central Asian in outlook and attitudes which are more Asian than European. We look very much alike and think alike.
Tuesday, November 11, 2008
Have We Seen The Bottom? Redux
Investors are very pessimistic. Globally, stocks are trading at 10x earnings (i.e. 2007 earnings). Chinese shares are trading at 9x, Indian shares are 10x. The prize goes to Russian shares which are now trading at 4.4x earnings. This tells us that investors are expecxting earnings next year to fall 50% at least.
Bears now outnumber bulls. Which in itself is a good sign. Fund managers are sitting on over 60% cash waiting for investors to redeem, not necessarily because they are pessimistic.
The Chinese market looks to be the only game in town with the Chinese government announcing a USD586 billion stimulus package for the next 2 years. Also, the Chinese banking sector has only minimal exposure to Lehman, and the toxic CDO's which have dragged down their Western counterparts. look for value in Chinese banks which have been sold off on concerns about their level of exposure to toxic assets, infrastructure, natural resources, and consumer shares. Stay away from export based companies as the markets in the US and Europe will contract. Ditto trtansportation shares.
Happy hunting!
Bears now outnumber bulls. Which in itself is a good sign. Fund managers are sitting on over 60% cash waiting for investors to redeem, not necessarily because they are pessimistic.
The Chinese market looks to be the only game in town with the Chinese government announcing a USD586 billion stimulus package for the next 2 years. Also, the Chinese banking sector has only minimal exposure to Lehman, and the toxic CDO's which have dragged down their Western counterparts. look for value in Chinese banks which have been sold off on concerns about their level of exposure to toxic assets, infrastructure, natural resources, and consumer shares. Stay away from export based companies as the markets in the US and Europe will contract. Ditto trtansportation shares.
Happy hunting!
The October Effect
With the exception of October 2007, october can right lay claim to being the worst month for stock markets.
October 2007 proved to be different for HK at least because China had announced the "thru train" allowing Chinese retail investors to buy stocks in HK. With over 150 million registered investors in China each being able to exchange USD50,000 per year this announcement gave further life to a flagging market.
However, the arrangements were made by the China Banking Regulatory Commission (CBRC) to allow banks to conduct this business, and the scheme ran into bureaucratic infighting with the China Securities Regulatory Commission (CSRC) warning of dire consequences for the Chinese stock market (which was over valued) if Chinese investors were allowed to invest their money elsewhere ie HK. Finally, the scheme was suspended awaiting 'further clarification".
Back to October. This past October 2008, recorded the worst performance inall markets with HK down 22%, Japan down 24%, Korea down 23% and US down 17%. Market capitalisation fared even worst down 50% for the year as some companies disappeared completely.
October 2007 proved to be different for HK at least because China had announced the "thru train" allowing Chinese retail investors to buy stocks in HK. With over 150 million registered investors in China each being able to exchange USD50,000 per year this announcement gave further life to a flagging market.
However, the arrangements were made by the China Banking Regulatory Commission (CBRC) to allow banks to conduct this business, and the scheme ran into bureaucratic infighting with the China Securities Regulatory Commission (CSRC) warning of dire consequences for the Chinese stock market (which was over valued) if Chinese investors were allowed to invest their money elsewhere ie HK. Finally, the scheme was suspended awaiting 'further clarification".
Back to October. This past October 2008, recorded the worst performance inall markets with HK down 22%, Japan down 24%, Korea down 23% and US down 17%. Market capitalisation fared even worst down 50% for the year as some companies disappeared completely.
Monday, November 10, 2008
USD586 Billion Stimulus Package
China approved a RMB4 trillin (USD586 billion) stimulus package for the next 2 years, 2009 and 2010 to boost the Chinese internal growth rate.
This will be invested in 10 areas: budget housing, rural and key infrastructure, medical system improvements, environmental protection, industrial innovation, and raising people's income.
In addition, the value-added tax reforms will reduce RMB120 billion in tax payments by companies. The central bank will also lossen loan quotas.
It's good to have some spare cash lying around. China's foreign currency reserves amounted to USD1.9 trillion and this represents only about 25% of the reserves.
This will be invested in 10 areas: budget housing, rural and key infrastructure, medical system improvements, environmental protection, industrial innovation, and raising people's income.
In addition, the value-added tax reforms will reduce RMB120 billion in tax payments by companies. The central bank will also lossen loan quotas.
It's good to have some spare cash lying around. China's foreign currency reserves amounted to USD1.9 trillion and this represents only about 25% of the reserves.
Tuesday, November 04, 2008
Investing Paradox
It is paradoxical! Just when the market is right for buying in, most investors are scared out of their wits and are selling indiscriminately. And it is usually the better stocks that are being sold because nobody wants to buy the "rubbish" anyway. Thus, just when the market may have bottomed, you will find investors selling all their solid stocks (because there is still some value left) and holding onto the rubbish.
The question really is, "Have we bottomed?". From the peak of 32,000 to the low last Monday, the market had fallen over 60%. It has recovered somewhat in the last few days but there are no shortage of people telling us that there is a long way to go before the we can see light at the end of the tunnel.
I do not disagree with them, especially if we are talking about the US or Europe. In China, the government still has sufficient surpluses to stimulate the economy without going into debt, and have been making moves recently to encourage more investments and lending by the banks.
On the short 3.5 year cycle, the last peak was in October 2007. Usually, we look for the market to fall for 1.5 years before finally turning around. Then we will have a 2 year run up to the next peak. So far, we are 1 year into the 1.5 year downturn. During the next 6 months, there will be opportunities to buy into the market.
Do we buy now? It depends on the stock. Now is the time to stock pick. Look fro stocks which have a great franchise but are sold down because of market sentiments. A good example is #2319 Mengniu Dairy (accounts which I manage own some). It was sold down because of the milk scare in China. I can remember the Tylenol tampering in the US. Eventually, they introduced tamper proof packs and consumers went back to buying them.
I also like #941 China Mobile. People are not going to stop using their mobile phones.
Happy hunting!
The question really is, "Have we bottomed?". From the peak of 32,000 to the low last Monday, the market had fallen over 60%. It has recovered somewhat in the last few days but there are no shortage of people telling us that there is a long way to go before the we can see light at the end of the tunnel.
I do not disagree with them, especially if we are talking about the US or Europe. In China, the government still has sufficient surpluses to stimulate the economy without going into debt, and have been making moves recently to encourage more investments and lending by the banks.
On the short 3.5 year cycle, the last peak was in October 2007. Usually, we look for the market to fall for 1.5 years before finally turning around. Then we will have a 2 year run up to the next peak. So far, we are 1 year into the 1.5 year downturn. During the next 6 months, there will be opportunities to buy into the market.
Do we buy now? It depends on the stock. Now is the time to stock pick. Look fro stocks which have a great franchise but are sold down because of market sentiments. A good example is #2319 Mengniu Dairy (accounts which I manage own some). It was sold down because of the milk scare in China. I can remember the Tylenol tampering in the US. Eventually, they introduced tamper proof packs and consumers went back to buying them.
I also like #941 China Mobile. People are not going to stop using their mobile phones.
Happy hunting!
Tuesday, October 21, 2008
CITIC Pacific May Lose Up To HK$15.5 Billion
CITIC (#267) announced last night that a currency hedge transaction went wrong and the company may lose up to HK$15.5 billion.
This is a trading opportunity for those with "intestinal fortitude" i.e. guts. Based on the 2007 financials net equity was HK$59.8 billion. According to the most recent financials NAV is HK$66.73 billion (including net income in 1st 6 months of HK$4.38 billion). The no. of shares in issue is 2.193 billion; therefore NAV per share is HK$30.42 before any write-offs related to the "hedge".
Assuming the company loses all HK$15.5 billion, net NAV is HK$51.23 billion based on most recent figures, or HK$23.36 per share. If we assume that the company will earn another HK$4.38 billion in the 2nd half, the NAV would be HK$55.61 or HK$25.35 per share
At current market price of HK$8 per share, market value is HK$17.54 billion. The shares are trading at between 31% and 34% of projected and current NAV assuming total write-off.
The share price was down 41% from 7 Sept 2008 (when the problem was discovered) through 16 October 2008 (last Friday's price because trading was suspended on Monday 20 October 2008). During that time, the HSI was down only 23%.
This is a trading opportunity for those with "intestinal fortitude" i.e. guts. Based on the 2007 financials net equity was HK$59.8 billion. According to the most recent financials NAV is HK$66.73 billion (including net income in 1st 6 months of HK$4.38 billion). The no. of shares in issue is 2.193 billion; therefore NAV per share is HK$30.42 before any write-offs related to the "hedge".
Assuming the company loses all HK$15.5 billion, net NAV is HK$51.23 billion based on most recent figures, or HK$23.36 per share. If we assume that the company will earn another HK$4.38 billion in the 2nd half, the NAV would be HK$55.61 or HK$25.35 per share
At current market price of HK$8 per share, market value is HK$17.54 billion. The shares are trading at between 31% and 34% of projected and current NAV assuming total write-off.
The share price was down 41% from 7 Sept 2008 (when the problem was discovered) through 16 October 2008 (last Friday's price because trading was suspended on Monday 20 October 2008). During that time, the HSI was down only 23%.
Friday, October 17, 2008
China Update
In the first half of 2008, GDP growth slowed from 11.9% (2007) to 10.4% mainly due to slowing exports. During the first 6 months, exports grew at the rate of 21.9% (down 5.7% from last year) to US$666.6 billion.
During the same period, reatil sales more than made for the slowing export growth raising 21.4% to RMB5.1 trillion. Fixed assest investments increased 26.3% to RMB6.84 trillion.
After 5 years of double digit growth, it is expected that GDP will only grow 9% this year (the smallest growth rate since 2002).
The Chinese government will be aggressively cutting lending interest rates (by at least 0.81% to up to 1.35%), deposit rates (by 0.27% up to 0.81%), and reserve requirements (by 3.5% up to 5.5%) over the next 12 months. See previous article.
The cut in interest rates is important but there is no lack of borrowers even at the present rates. More important, the cut in resewrve requirments will mean that banks are at last being allowed to re-start their lending which had been put on hold since 2006.
China is the one bright spot in the global economy where is growth albeit slower than before.
NOTE: I have been asked if I got my numbers wrong. Why 0.27% and not 0.25% (which is a quarter point) for those more familiar with the Western system. The answer is that China use numbers divisible by 9 in calculating interest rates (360 days basis). It actually makes sense when you start working the numbers.
During the same period, reatil sales more than made for the slowing export growth raising 21.4% to RMB5.1 trillion. Fixed assest investments increased 26.3% to RMB6.84 trillion.
After 5 years of double digit growth, it is expected that GDP will only grow 9% this year (the smallest growth rate since 2002).
The Chinese government will be aggressively cutting lending interest rates (by at least 0.81% to up to 1.35%), deposit rates (by 0.27% up to 0.81%), and reserve requirements (by 3.5% up to 5.5%) over the next 12 months. See previous article.
The cut in interest rates is important but there is no lack of borrowers even at the present rates. More important, the cut in resewrve requirments will mean that banks are at last being allowed to re-start their lending which had been put on hold since 2006.
China is the one bright spot in the global economy where is growth albeit slower than before.
NOTE: I have been asked if I got my numbers wrong. Why 0.27% and not 0.25% (which is a quarter point) for those more familiar with the Western system. The answer is that China use numbers divisible by 9 in calculating interest rates (360 days basis). It actually makes sense when you start working the numbers.
Thursday, October 16, 2008
Perspective on China
Many economists predict that China will not be able to escape the contagion. It is significant that they all come from the US or Europe and are projecting their own despondency into their forecasts. It is difficult to be optimistic when the world as you know it is collapsing around you and your own job may not be there tomorrow.
China is the fastest growing of the so-called BRIC (Brazil, Russia, India and China) countries. All four countries have massive land masses and that is where the similarities end. Brazil, Russia and China have natural resources, and India and China are the two most populous countries in the world. But only China has it all - land mass, large population, natural resources, and most important of infrastructure.
The interior of China still lacks investment and infrastructure but the government is addressing this weakness ith major planned investments. Many predicted that China's economy will suffer the "post Olympics blues", and to some extent the stock market seemed to bear this out as it has retreated 60% from the October 2007 peak. However, this is due more to the sentiment and cpncerns about the subprime crisis in the US.
Many countries do suffer slowdowns in their economies after hosting the Olympics because so much has been spent on the required facilites. China spent US$42 billion over the past 6 years on Olympics related projects. However, this represents only 0.5% of the RMB51 trillion spent on fixed assets investments over the same period of time. Travel up and down the coastal region and you can see the results of this investment in infrastrucutre. Over the next 2 years, China has budgeted over RMB400 billion per year (ie the equivalent of the total spending on Olympics each year) for infrastrucure developments with much of the it aimed at the interior.
Can China afford it? You bet! the Chinese foreign currency reserves have just hit US$1.906 billion as of the end of September 2008 rising from US$1.809 trillion in August 2008. China has had fiscal surpluses since the 1985, and expect the surplus this year to to be RMB600 billion (US$87 billion). It is growing at the rate of 30% in the first 8 months of 2008.
China has room to stimulate growth. While the US was gorging on easy credit, China had raised lending interest rates 8 times since April 2006, raised deposit interest rates 6 times since August 2006, and raised banks' reserve requirements 18 times since July 2006 17.5% of deposits. In September 2008, China announced limited cuts to the lending rate of 0.27% to 7.2%, deposit rate cut to 4.14%, and cut reserve requirements to 16.5% for smaller banks to encourage them to lend to SME's (small, medium enterprises). On 8 October 2008, China announced across the board cuts to reduce lending rates to 6.93%, deposit rates to 3.87%, and reserve ratios to 17%.
Over the next 12 months, we can expect to see further cuts to the interest rates and reserve ratios as China stimulates the domestic economy to make up for any shortfalls from reduced exports to US and Europe.
China will celebrate its' 60th Anniversary on 1 October 2009, and we can expect it to put on a big birthday party!
China is the fastest growing of the so-called BRIC (Brazil, Russia, India and China) countries. All four countries have massive land masses and that is where the similarities end. Brazil, Russia and China have natural resources, and India and China are the two most populous countries in the world. But only China has it all - land mass, large population, natural resources, and most important of infrastructure.
The interior of China still lacks investment and infrastructure but the government is addressing this weakness ith major planned investments. Many predicted that China's economy will suffer the "post Olympics blues", and to some extent the stock market seemed to bear this out as it has retreated 60% from the October 2007 peak. However, this is due more to the sentiment and cpncerns about the subprime crisis in the US.
Many countries do suffer slowdowns in their economies after hosting the Olympics because so much has been spent on the required facilites. China spent US$42 billion over the past 6 years on Olympics related projects. However, this represents only 0.5% of the RMB51 trillion spent on fixed assets investments over the same period of time. Travel up and down the coastal region and you can see the results of this investment in infrastrucutre. Over the next 2 years, China has budgeted over RMB400 billion per year (ie the equivalent of the total spending on Olympics each year) for infrastrucure developments with much of the it aimed at the interior.
Can China afford it? You bet! the Chinese foreign currency reserves have just hit US$1.906 billion as of the end of September 2008 rising from US$1.809 trillion in August 2008. China has had fiscal surpluses since the 1985, and expect the surplus this year to to be RMB600 billion (US$87 billion). It is growing at the rate of 30% in the first 8 months of 2008.
China has room to stimulate growth. While the US was gorging on easy credit, China had raised lending interest rates 8 times since April 2006, raised deposit interest rates 6 times since August 2006, and raised banks' reserve requirements 18 times since July 2006 17.5% of deposits. In September 2008, China announced limited cuts to the lending rate of 0.27% to 7.2%, deposit rate cut to 4.14%, and cut reserve requirements to 16.5% for smaller banks to encourage them to lend to SME's (small, medium enterprises). On 8 October 2008, China announced across the board cuts to reduce lending rates to 6.93%, deposit rates to 3.87%, and reserve ratios to 17%.
Over the next 12 months, we can expect to see further cuts to the interest rates and reserve ratios as China stimulates the domestic economy to make up for any shortfalls from reduced exports to US and Europe.
China will celebrate its' 60th Anniversary on 1 October 2009, and we can expect it to put on a big birthday party!
Just How Much Is US$700 Billion?
Actually, not a lot as it represents only about 5% of GDP. By way of compariosn, Germany's rescus package of US$400-536 billion is 12-16% of GDP, and the UK's package of US$835 billion is 30%. Russia's package is 10% of its' GDP.
Can the US afford to add to the national debt? We were all treated to the news media's hysteria about there being not enough digits to show the new national debt. To put this in perspective, the total debt (including the package) is 62% of GDP, while the corresponding figures for the Eurozone is 75%, and Japan a whopping 180% of GDP.
More worrying is whether the US consumer can make it through the coming economic slowdown. In 1986, US household debt anounted to 80% of disposable income, growing to 100% by 2000, and 140% in 2007. US households do not have any savings to speak of, with many treating the built up equity in their homes as their savings which they have tapped regularly as housing prices moved up. Now that housing prices have fallen, many will be faced with diminhed savings and even calls from their banks to repay home equity lines. With money already spent or invested in additional real estate, the prospects are not good.
Bankers are now worried that the next crisis will be in consumer credit such as uncollectible credit card debts.
Can the US afford to add to the national debt? We were all treated to the news media's hysteria about there being not enough digits to show the new national debt. To put this in perspective, the total debt (including the package) is 62% of GDP, while the corresponding figures for the Eurozone is 75%, and Japan a whopping 180% of GDP.
More worrying is whether the US consumer can make it through the coming economic slowdown. In 1986, US household debt anounted to 80% of disposable income, growing to 100% by 2000, and 140% in 2007. US households do not have any savings to speak of, with many treating the built up equity in their homes as their savings which they have tapped regularly as housing prices moved up. Now that housing prices have fallen, many will be faced with diminhed savings and even calls from their banks to repay home equity lines. With money already spent or invested in additional real estate, the prospects are not good.
Bankers are now worried that the next crisis will be in consumer credit such as uncollectible credit card debts.
Thursday, October 09, 2008
Black Wednesday --- Interest Rate Cuts
Stock markets around the world fell as the credit crisis reduced confidence in the banking system leading to questions about the economic prospects with many economists forecasting recession and some even likening the current to the 1929 depression.
For the record, there are a number of similarities in how the crisis came about. No, they did not have sub prime and Alt A mortgages, and they did not have CDO's back then. But what they did have was a period of easy credit. The major difference between then and now is that our central bankers have learned their lessons and have intervened massively. Back then, the US government believed that government should not intervene in the market and kept this up until 1933.
Some may argue that the intervention came too late. Would it have been better to start intervening in 2007 when it became apparent that sub prime mortgages are being defaulted on? I guess we will never know. Still, better late than never.
The Hang Seng Index fell 8% to below 16,000 for the first time in 3 years. The HKMA cut interbank interest rate by 1.5% to 2%. The discount rate is 2.5% which is below the Hibor. In effect the HKMA and other central banks are acting a intermediaries to the banking system Banks with surplus funds are reluctant to lend to other banks and prefer to place the funds with the HKMA which then re-lends to banks needing short term funding.
Yesterday, the China announced that from today interest rates will be cut by 0.27% with lending rate at 6.93% and deposit rate at 3.87% (that's a spread of 3.06%, not bad if you can get it). At the same time, all banks will have their reserves requirements cut by 0.5% to 17% meaning that they will be able to lend more.
Some analysts on the mainland are negative on bank stocks because they believe that by cutting the lending rate this will cut into the banks profitability. Wrong! For banks, the most important drivers of profitability are the spread (i.e. the difference between the deposit rate it pays to depositors and the rate at which it lends to the borrowers) and the reserve requirement (i.e. how much they can lend out). As long as they maintain their spread, they will make more profits by lending more.
In fact, during periods of high interest rates, banks are actually less profitable because borrowers shy away from paying the high rates unless they are desperate (and therefore may be bad credit risks). Bad debts tend to rise when interest rates are high. So, low interest rates are good for the banks. Borrowers are more willing to borrow, investments make more sense because of the lower costs, and failure to repay is less.
By the way, China Construction Bank announced that 98% of their busines is in China and therefore their direct exposure to the credit crisis is limited.
For the record, there are a number of similarities in how the crisis came about. No, they did not have sub prime and Alt A mortgages, and they did not have CDO's back then. But what they did have was a period of easy credit. The major difference between then and now is that our central bankers have learned their lessons and have intervened massively. Back then, the US government believed that government should not intervene in the market and kept this up until 1933.
Some may argue that the intervention came too late. Would it have been better to start intervening in 2007 when it became apparent that sub prime mortgages are being defaulted on? I guess we will never know. Still, better late than never.
The Hang Seng Index fell 8% to below 16,000 for the first time in 3 years. The HKMA cut interbank interest rate by 1.5% to 2%. The discount rate is 2.5% which is below the Hibor. In effect the HKMA and other central banks are acting a intermediaries to the banking system Banks with surplus funds are reluctant to lend to other banks and prefer to place the funds with the HKMA which then re-lends to banks needing short term funding.
Yesterday, the China announced that from today interest rates will be cut by 0.27% with lending rate at 6.93% and deposit rate at 3.87% (that's a spread of 3.06%, not bad if you can get it). At the same time, all banks will have their reserves requirements cut by 0.5% to 17% meaning that they will be able to lend more.
Some analysts on the mainland are negative on bank stocks because they believe that by cutting the lending rate this will cut into the banks profitability. Wrong! For banks, the most important drivers of profitability are the spread (i.e. the difference between the deposit rate it pays to depositors and the rate at which it lends to the borrowers) and the reserve requirement (i.e. how much they can lend out). As long as they maintain their spread, they will make more profits by lending more.
In fact, during periods of high interest rates, banks are actually less profitable because borrowers shy away from paying the high rates unless they are desperate (and therefore may be bad credit risks). Bad debts tend to rise when interest rates are high. So, low interest rates are good for the banks. Borrowers are more willing to borrow, investments make more sense because of the lower costs, and failure to repay is less.
By the way, China Construction Bank announced that 98% of their busines is in China and therefore their direct exposure to the credit crisis is limited.
Monday, October 06, 2008
Another One Bites The Dust!
How appropriate! The Queens hit really hits the nail on the head. Over the past 2 weeks, we saw the demise of the "investment banking" business model.
Bear Stearns was acquired by JP Morgan, Lehman Brothers filed for bankruptcy protection under Chapter 11, Merrill Lynch was driven into the arms of Bank of America in a "shot gun" marriage, and Goldman Sachs and Morgan Stanley sought the protection of the Fed by applying for and being granted status as a "commercial bank".
Let's get something straight. These were never banks in the common useage of the word. They were merely securities dealers who grew too big and decided that that they needed a more exalted name. Banks usually take deposits from consumers and make loans. The so-called "investment banks" took no deposits, instead borrowing from banks and big investors through various vehicles such as bonds and "repo" agreements.
What does the change in status mean?
First of a;ll they will now come under the supervision of the banking regulators and will be able to access the Fed's discount window. Most important of all, as a bank they will be able to designate certain securities as "long term" holdings and therefore can value them at cost (less impairment) and not mark-to-market (and take the hit in their income statements).
What's the downside?
As securities dealers, they were not covered by the FDIC, nor were they regulated or supervised by the banking regulators. They will now be required to file financial returns to the banking regulators and maintain commercial bank reserves. Lehman Brothers was infamously geared at 35 times capital ie their borrowing are 35 times their paid up capital. Lehman owed US$613 billion as of 31 May 2008.
Commercial banks are required to maintain capital reserves of at least 8%. In China the China Banking Regulatory Commission (CBRC) requires commercial banks to have 16.5% reserves. HK securities dealers are required to have $40 of capital for every $100 they lend to clients for margin purchases.
"Investment banking" will never be the same again. The Glass Steagal Act forced banks to spin off their securities dealing arms in 1933, and regulation fell to the SEC which must shoulder a good part of the blame for not properly supervising the "investment banks" and their toxic products. Admittedly, it is difficult for supervisors earning US$80,000 a year to debate complex products with "investment bankers" earning tens of millions of dollars in bonuses.
The current agruments about "naked short selling" is a case in point. In HK, only certain stocks with sufficient market capitalisation are eligible for short selling. And, you can only "short sell" if you have already borrowed the stock before hand. If settlement is not effected on T+2 ie 2 days after the trade day, the seller is subject to "buy-in" at the then market and will be penalised. Borrowers will also be required to post and maintain a margin with the lender (usually around 105% of the market price).
In the US, sellers do not need to have borrowed the stock before the sale and therefore they do not need to post any margin unless the price goes up, and then only for any price difference. Thus, the number of shares that are sold short may be many times the number of shares available.
In HK, we learnt our lesson during the Asian Financial Crisis and have tightened the rules to ensure settlement on T+2 so that it is not possible to maintain open "naked short" positions for more than 2 days. Also, "short selling" must be disclosed.
I can remember Christopher Cox saying that the US is the "gold standard" in regulations and supervision when he took office as SEC chairman. I wonder if anyone still believes him. The performance of the Bernanke, Paulson ands Cox before the House says a lot. Bernanke was studious as a professor (which he was), Paulson was selling the package like the "investment banker" that he still is. Cox was totally out of his depth. I would not be surprised if he is replaced soon by someone who actually knows how the market works.
Bear Stearns was acquired by JP Morgan, Lehman Brothers filed for bankruptcy protection under Chapter 11, Merrill Lynch was driven into the arms of Bank of America in a "shot gun" marriage, and Goldman Sachs and Morgan Stanley sought the protection of the Fed by applying for and being granted status as a "commercial bank".
Let's get something straight. These were never banks in the common useage of the word. They were merely securities dealers who grew too big and decided that that they needed a more exalted name. Banks usually take deposits from consumers and make loans. The so-called "investment banks" took no deposits, instead borrowing from banks and big investors through various vehicles such as bonds and "repo" agreements.
What does the change in status mean?
First of a;ll they will now come under the supervision of the banking regulators and will be able to access the Fed's discount window. Most important of all, as a bank they will be able to designate certain securities as "long term" holdings and therefore can value them at cost (less impairment) and not mark-to-market (and take the hit in their income statements).
What's the downside?
As securities dealers, they were not covered by the FDIC, nor were they regulated or supervised by the banking regulators. They will now be required to file financial returns to the banking regulators and maintain commercial bank reserves. Lehman Brothers was infamously geared at 35 times capital ie their borrowing are 35 times their paid up capital. Lehman owed US$613 billion as of 31 May 2008.
Commercial banks are required to maintain capital reserves of at least 8%. In China the China Banking Regulatory Commission (CBRC) requires commercial banks to have 16.5% reserves. HK securities dealers are required to have $40 of capital for every $100 they lend to clients for margin purchases.
"Investment banking" will never be the same again. The Glass Steagal Act forced banks to spin off their securities dealing arms in 1933, and regulation fell to the SEC which must shoulder a good part of the blame for not properly supervising the "investment banks" and their toxic products. Admittedly, it is difficult for supervisors earning US$80,000 a year to debate complex products with "investment bankers" earning tens of millions of dollars in bonuses.
The current agruments about "naked short selling" is a case in point. In HK, only certain stocks with sufficient market capitalisation are eligible for short selling. And, you can only "short sell" if you have already borrowed the stock before hand. If settlement is not effected on T+2 ie 2 days after the trade day, the seller is subject to "buy-in" at the then market and will be penalised. Borrowers will also be required to post and maintain a margin with the lender (usually around 105% of the market price).
In the US, sellers do not need to have borrowed the stock before the sale and therefore they do not need to post any margin unless the price goes up, and then only for any price difference. Thus, the number of shares that are sold short may be many times the number of shares available.
In HK, we learnt our lesson during the Asian Financial Crisis and have tightened the rules to ensure settlement on T+2 so that it is not possible to maintain open "naked short" positions for more than 2 days. Also, "short selling" must be disclosed.
I can remember Christopher Cox saying that the US is the "gold standard" in regulations and supervision when he took office as SEC chairman. I wonder if anyone still believes him. The performance of the Bernanke, Paulson ands Cox before the House says a lot. Bernanke was studious as a professor (which he was), Paulson was selling the package like the "investment banker" that he still is. Cox was totally out of his depth. I would not be surprised if he is replaced soon by someone who actually knows how the market works.
Thursday, October 02, 2008
And While We Wait ....
Don't You Just Love The US Political System?
The US Senate has passed the bailout plan with a few changes, and this will go back to the House of Representatives for a vote on Friday night US Time. While we sit and wait for the US political system to decide whether to turn the life support system on or off, let's consider what happened.
The Dow fell 777 points (or about 8%) on 29 September 2008 after the House rejected the original bailout plan. This wiped out US$1 trillion of market capitalisation or wealth. This of course does not include the subsequent (consequent?) falls in the rest of the world and the wealth that was destroyed as a result of that decision.
But I Use A Professional Fund Manager!
Fund managers are just starting to realise that their much vaunted "asset allocation" models just do not work. Actually, they only ever worked in their own minds, and never did in reality. The world markets are so interlinked that they all fell (and sometimes rose, albeit not too frequently in the past few months) at the same time. Geographic allocations did not work, industry diversification did not work. Portfolio theory did not work. Why are we paying the fund managers to manage our money with their fancy theories and strategies if they cannot stay out of trouble any better than you or me?
The Chinese have a saying which goes, "When the tide rises, so does the ship". Conversely, when the tide falls, so does the ship. In other words it is easy to be a star when all markets are going up.
So What Is This De-leveraging?
Between 1980 and 2007, US household debt rose from 50% of GDP to 100%. At the same time, US financial sector debt rose from 21% to 116%. Everyone now knows that Lehman was leveraged at 35 to 1 i.e. it uses 1 dollar of capital and borrowed 35. Securities companies in HKG have to have $40 capital for every $100 lent out i.e. 1.5times leverage.
So Who's Minding The Store?
Well, it is obvious that Christopher Cox and the SEC were not. Because if they were, you would not have have Enron and WorldCom, and now Bear Stearns and Lehman. I can remembers when Christopher Cox became Chairman of the SEC, he was asked why Chinese companies chose HKG for their listing instead of NYSE. He answer was classic Western arrogance ... because the US is the GOLD STANDARD of regulations and companies that choose not to list in the US are engaging in regulatory arbitrage. That is a barely polite way of saying that HK not not properly regulated.
HK has remained relatively untouched by the sub prime mess. This is because we lived through the Asian Financial Crisis, the Dotcom Bubble, the Bird Flu Crisis, and the SARS Crisis. It seems that we went from one crisis to another after the handover of HKG by the British back to the Chinese in 1997. Maybe the fortune tellers were right after all, the handover did bring many crisis although they were unrelated to the change in sovereignty.
Anyway, we learnt from each and put in place appropriate measures to make sure that the problems doe not recur. An appropriate example, is the handling of short selling. Only certain stocks which are deemed to have sufficient liquidity are eligible for short selling, and short sellers have to have already borrowed the stock before they actually short sell. Sellers who are unable to deliver the stock they sold on settlement date (in HKG it is T+2) while be subject to buy-in by a broker nominated by the clearing house. At the very least, the short seller will be hit with additional brokerage and other charges, plus a penalty. If the market has moved up since the short sell, the seller will also incur a loss on the difference.
"Naked short selling" and delayed settlement means that short sellers do not incur the costs of borrowing the stock (with margins of 105% of the price and the need to post margin if the stock moves up. Of course, they object to the banning of "naked short selling".
China and HKG
The Shanghai index has fallen by over 60% from over 6,000 to as low as 1,800. Meanwhile, HK's Hang Seng Index has faller from 31,000 to as low as 16,000 intra day before reversing course to close flat. The "spike down" to 16,000 occurred twice and this appears to be the support level.
Separately, many shares which were listed over the past 2 years are trading at or near their IPO prices. This creates a problem for the Chinese authorities, as the major banks, insurance companies, and social security fund invested heavily in the IPO's of SOE's (state owned enterprises). Below this level, they will have take write downs and begin the downward spiral that we are now seeing in the US.
The Chinese government appears to understand this and has started making moves to limit the effect of the US slowdown. It had just cut interest rates after raising them since 2006 and also reduced banks reserve requirements to stimulate the economy. It is rumoured that an amount equivalent to the Olympics related spending of US$42 billion (which was spread over the 6 years of preparations) will be spent in the coming 2 years on infrastructure which will give the economy a boost after the clampdown over the past 12 months.
The Chinese has learnt that intervention must be quick and must early before the problem becomes intractable. It is easy to take the high moral ground when you are not feeling the pain. Asian governments were lectured on the evils of government intervention during the Asian Financial Crisis, and HK was pilloried for daring to intervene in the stock market to see off the hedge fund speculators who were using it as proxy for shorting the HK dollar. Now that the shoe's on the other foot, "how does it feel?"
I am waiting with bated breathe for the vote. Let's hope that US politicians can stop their posturing and selfish views for long enough to do the right thing!
The US Senate has passed the bailout plan with a few changes, and this will go back to the House of Representatives for a vote on Friday night US Time. While we sit and wait for the US political system to decide whether to turn the life support system on or off, let's consider what happened.
The Dow fell 777 points (or about 8%) on 29 September 2008 after the House rejected the original bailout plan. This wiped out US$1 trillion of market capitalisation or wealth. This of course does not include the subsequent (consequent?) falls in the rest of the world and the wealth that was destroyed as a result of that decision.
But I Use A Professional Fund Manager!
Fund managers are just starting to realise that their much vaunted "asset allocation" models just do not work. Actually, they only ever worked in their own minds, and never did in reality. The world markets are so interlinked that they all fell (and sometimes rose, albeit not too frequently in the past few months) at the same time. Geographic allocations did not work, industry diversification did not work. Portfolio theory did not work. Why are we paying the fund managers to manage our money with their fancy theories and strategies if they cannot stay out of trouble any better than you or me?
The Chinese have a saying which goes, "When the tide rises, so does the ship". Conversely, when the tide falls, so does the ship. In other words it is easy to be a star when all markets are going up.
So What Is This De-leveraging?
Between 1980 and 2007, US household debt rose from 50% of GDP to 100%. At the same time, US financial sector debt rose from 21% to 116%. Everyone now knows that Lehman was leveraged at 35 to 1 i.e. it uses 1 dollar of capital and borrowed 35. Securities companies in HKG have to have $40 capital for every $100 lent out i.e. 1.5times leverage.
So Who's Minding The Store?
Well, it is obvious that Christopher Cox and the SEC were not. Because if they were, you would not have have Enron and WorldCom, and now Bear Stearns and Lehman. I can remembers when Christopher Cox became Chairman of the SEC, he was asked why Chinese companies chose HKG for their listing instead of NYSE. He answer was classic Western arrogance ... because the US is the GOLD STANDARD of regulations and companies that choose not to list in the US are engaging in regulatory arbitrage. That is a barely polite way of saying that HK not not properly regulated.
HK has remained relatively untouched by the sub prime mess. This is because we lived through the Asian Financial Crisis, the Dotcom Bubble, the Bird Flu Crisis, and the SARS Crisis. It seems that we went from one crisis to another after the handover of HKG by the British back to the Chinese in 1997. Maybe the fortune tellers were right after all, the handover did bring many crisis although they were unrelated to the change in sovereignty.
Anyway, we learnt from each and put in place appropriate measures to make sure that the problems doe not recur. An appropriate example, is the handling of short selling. Only certain stocks which are deemed to have sufficient liquidity are eligible for short selling, and short sellers have to have already borrowed the stock before they actually short sell. Sellers who are unable to deliver the stock they sold on settlement date (in HKG it is T+2) while be subject to buy-in by a broker nominated by the clearing house. At the very least, the short seller will be hit with additional brokerage and other charges, plus a penalty. If the market has moved up since the short sell, the seller will also incur a loss on the difference.
"Naked short selling" and delayed settlement means that short sellers do not incur the costs of borrowing the stock (with margins of 105% of the price and the need to post margin if the stock moves up. Of course, they object to the banning of "naked short selling".
China and HKG
The Shanghai index has fallen by over 60% from over 6,000 to as low as 1,800. Meanwhile, HK's Hang Seng Index has faller from 31,000 to as low as 16,000 intra day before reversing course to close flat. The "spike down" to 16,000 occurred twice and this appears to be the support level.
Separately, many shares which were listed over the past 2 years are trading at or near their IPO prices. This creates a problem for the Chinese authorities, as the major banks, insurance companies, and social security fund invested heavily in the IPO's of SOE's (state owned enterprises). Below this level, they will have take write downs and begin the downward spiral that we are now seeing in the US.
The Chinese government appears to understand this and has started making moves to limit the effect of the US slowdown. It had just cut interest rates after raising them since 2006 and also reduced banks reserve requirements to stimulate the economy. It is rumoured that an amount equivalent to the Olympics related spending of US$42 billion (which was spread over the 6 years of preparations) will be spent in the coming 2 years on infrastructure which will give the economy a boost after the clampdown over the past 12 months.
The Chinese has learnt that intervention must be quick and must early before the problem becomes intractable. It is easy to take the high moral ground when you are not feeling the pain. Asian governments were lectured on the evils of government intervention during the Asian Financial Crisis, and HK was pilloried for daring to intervene in the stock market to see off the hedge fund speculators who were using it as proxy for shorting the HK dollar. Now that the shoe's on the other foot, "how does it feel?"
I am waiting with bated breathe for the vote. Let's hope that US politicians can stop their posturing and selfish views for long enough to do the right thing!
Friday, September 12, 2008
Asia in Transition
The year 2007 marked a major turning point in the financial world order. The market capitalization of the Americas (USD22.5 trillion), Europe Middle East and Africa (USD20.3 trillion) and Asia Pacific (USD19.7 trillion) were roughly equal. Over the next decade, the Asian markets are expected to continue their phenomenal growth with the expansion of the economies of China and the Indian sub continent as the new engines of growth.
During 2007, the New York Stock Exchange and the London Stock Exchange each grew at a paltry rate of 1.5%. Over the next several years, the US and European markets will be pre-occupied with dealing with the aftermath of the subprime debacle. New regulations expected to be put in place to prevent similar problems will handcuff the principal US and European markets in the same way that Sarbanes-Oxley inhibited US market growth in the wake of WorldCom and Enron.
Asia had always played catch up with the US and European spheres of influence. For a while, Japan rose to financial super power status on the back of the cheap capital that it was able to export. However, the financial deregulation that proved to be its’ undoing, and Japan was brought back down to earth experiencing a “lost decade” where its’ economy stagnated.
We are now seeing a resurgence of Asian strength. This time, the growth is internal. Except for Japan which had negative growth in 2007, the other Asian markets Korea, China, Chinese Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore, Australia, India, and Vietnam all experienced substantial double digit growth.
Of the top 5 growth markets in 2007, the top 4 were in the 2 most populous countries China and India. Shanghai and Shenzhen grew at 303% and 244%, and Bombay and National Stock Exchange of India grew at 122% and 115%.
Of the top 10 markets by capitalization, four were from Asia (Japan, Shanghai, HK, and India). In aggregate, these four markets had capitalization of US$12.5 trillion vs. US$10.1 trillion for EMEA, and US$21.7 trillion for the Americas.
The Asians are Coming, the Asians are Coming!
The largest market, of course, is the US where the NYSE and NASDAQ together account for US$19.6 trillion. However, every day we hear of more fallout from the subprime debacle with US investment and commercial banks losing tens of billions of US$ due to write downs
Morgan Stanley announced a 4th quarter loss of US$3.59 billion, the first in its history, and an injection of US$5 billion. But this time, unlike Citigroup (US$7 billion) and UBS (US$10 billion), it is not the Middle-East cavalry that is coming to the rescue. It is the China Investment Corp ("CIC") the Chinese sovereign-wealth investment fund set up to funnel some of the excess trade surplus dollars back into the world market.
The CIC had previously made a US$3 billion investment as a cornerstone investor in the Blackstone Group's IPO. So far, only a minor portion of the earmarked US$200 billion has been used. The sub-prime crisis has single-handedly changed the landscape of international funds flow and ownership. This is a 180 degree turnaround from just a few short months ago, when the US objected to Dubai buying up US Ports, and to China investing in Unocal. Before that, the US also objected to Hutchison a HK listed company investing the Panama Canal on the dubious allegation that it is a de facto proxy of the Chinese Government. Now, Middle East and Chinese money is welcomed with open arms. Money is green and it doesn't matter if the owner is brown or yellow.
Chinese companies have also invested in Standard Bank (ICBC US$5.6 billion), Barclays Bank (China Development Bank US$2.98 billion), and Fortis (Ping An Insurance (US$2.7 billion). Chinese M&A deal flow has been mostly outwards with the top 5 accounting for close to US$20 billion while the top 5 inflows were a measly US$3.8 billion.
Just as the Middle East is recycling petrol dollars, the Chinese are recycling trade dollars.
Lessons From Asia
The Bush Administration is proposing to freeze the resets on subprime loans in order for borrowers to be able to continue to pay their mortgages. This of course is politically expedient. But is it good economics, some ask. Many have condemned the proposal as going against the original spirit of the contract and therefore will undermine the competitiveness of the US dollar as a store of value, and the attractiveness of the US economy as the storehouse of wealth. Recently, the SEC had given notice that it would strictly enforce “short selling” regulations to ensure that “short sellers” have actually borrowed stock that they are selling.
During the Asian Financial Crisis, the HK government was castigated by many "free market" thinkers for intervening in the stock market to stop speculators using it as a proxy for shorting the HK dollar. Similarly, the Malaysian government was pilloried for imposing exchange controls. In both cases, the governments saw the need to protect the local economy from excessive outside intervention and took the appropriate steps. The current strength of the economies belies the dire predictions of the "learned" community.
Text books on economics are written after the fact. Different people will extract and interpret facts in different ways. In time, some of these lessons will be "Economics 101". People tend to forget the market is made up of individuals who are prone to the emotions of fear and greed.
That's "Market economics 101". Sometimes, it is necessary to take some action that the "pure" economists abhor. The alternative is that we will be faced with a bigger problem of a collapse as borrowers renege, banks start writing off bad debts, and the credit crunch becomes a black hole.
How Will Sub Prime Impact Asia
The subprime crisis will take some time to work its’ way through. There is a real problem in that the underlying assets may not be as good as it should be because mortgage originators have been cutting corners and lending to unqualified borrowers. However, the extent of the problems in the financial market is magnified by the fact that there is no market for the CDO’s securitized by mortgages regardless of the quality of the underlying assets.
So far, we have seen financial institutions writing off tens of billions of US$. There have been delinquencies in mortgage payments but not to the extent suggested by the financial markets which have over reacted as usual. Just because Merrill Lynch (US$15 billion) and Citigroup (US$18 billion) have had to write off tens of billions of US$, the market is expecting every bank to have to do the same.
JP Morgan has just announced write-offs of less than US$1.3 billion much less than Merrill or Citigroup.
The US government has been mulling measures to stave off a recession and a collapse of the housing market.
Tightening in China
The Chinese has a different problem. Instead of trying to stimulate the economy, the Chinese Government is trying to hold back inflation. The Chinese government announced that the banks reserve ratio will be further tighten to 15% in an attempt to rein in inflation. In a mature economy where the deposit base is stable, increasing the reserve ratio will mean less money can be lent out. But in China where the deposit base is growing at double digits, increasing the reserve ratio will very little impact on banks’ ability to lend.
Some people are concerned that exports to the US will fall because the US economy may go into a recession. In looking at exports, we must remember that only a small component of that is value added in China. The rest are raw material and energy costs. Therefore, we cannot compare the entire value of exports to GDP (which measures value added) as some have done.
Using only value added in China, exports are not a large component of GDP. In fact with the Chinese economy expanding at double digits, any shortfall in exports may be made up for by increased domestic consumption.
Analysts have bemoaned the slowdown in profits growth at Chinese companies which fell from 42% for the 1st 6 months of 2007 to 20% in 2008. Anywhere else, a 20% profit growth would have been trumpeted as outstanding. When you have been used to exceptional high growth, it is a big come down to just high growth.
Last year’s profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
In the first half of 2008, the shares in Chinese banks have fallen 43% in Shanghai, and 13% in HK wiping out US#300 billion of market value. However, JP Morgan believes that the current sell-off in the Chinese banks is irrational due to misplaced fears over margins, bad debts, etc. according to a recent report.
There remains a lingering economic racism. Asian companies with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on subprime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Asian companies can "cherry pick" and choose the "best of breed" partner for each new product.
Many in the western world point to the “fact” that Asian economies will not be able to avoid tripping into a recession because “when the US sneezes, Asia catches a cold”. In particular, they like to point out that Asian central banks have not done a good job in steering their economies. “Just look at the Asian Financial Crisis”, they say. Well, somehow they seem to have forgotten that the US Federal Reserve Bank and the European Central Bank stood by while the subprime bubble inflated. Apparently, the Asian central banks do not have a monopoly for making mistakes.
The Asia Era
The huge internal markets in Asian countries mean that internal consumption will be able to take over as the engines of growth when the US economy falters. Already, growth in Asian markets exceeds growth in more traditional US and European markets. In time, intra Asian trade will replace trade with US and Europe, in the same way that trade within the European Union is exceeding trade with the US.
The challenge for Asian economies is to reduce the gap between rich and poor and build a solid middle class which will be the foundation for the Asian Era.
During 2007, the New York Stock Exchange and the London Stock Exchange each grew at a paltry rate of 1.5%. Over the next several years, the US and European markets will be pre-occupied with dealing with the aftermath of the subprime debacle. New regulations expected to be put in place to prevent similar problems will handcuff the principal US and European markets in the same way that Sarbanes-Oxley inhibited US market growth in the wake of WorldCom and Enron.
Asia had always played catch up with the US and European spheres of influence. For a while, Japan rose to financial super power status on the back of the cheap capital that it was able to export. However, the financial deregulation that proved to be its’ undoing, and Japan was brought back down to earth experiencing a “lost decade” where its’ economy stagnated.
We are now seeing a resurgence of Asian strength. This time, the growth is internal. Except for Japan which had negative growth in 2007, the other Asian markets Korea, China, Chinese Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore, Australia, India, and Vietnam all experienced substantial double digit growth.
Of the top 5 growth markets in 2007, the top 4 were in the 2 most populous countries China and India. Shanghai and Shenzhen grew at 303% and 244%, and Bombay and National Stock Exchange of India grew at 122% and 115%.
Of the top 10 markets by capitalization, four were from Asia (Japan, Shanghai, HK, and India). In aggregate, these four markets had capitalization of US$12.5 trillion vs. US$10.1 trillion for EMEA, and US$21.7 trillion for the Americas.
The Asians are Coming, the Asians are Coming!
The largest market, of course, is the US where the NYSE and NASDAQ together account for US$19.6 trillion. However, every day we hear of more fallout from the subprime debacle with US investment and commercial banks losing tens of billions of US$ due to write downs
Morgan Stanley announced a 4th quarter loss of US$3.59 billion, the first in its history, and an injection of US$5 billion. But this time, unlike Citigroup (US$7 billion) and UBS (US$10 billion), it is not the Middle-East cavalry that is coming to the rescue. It is the China Investment Corp ("CIC") the Chinese sovereign-wealth investment fund set up to funnel some of the excess trade surplus dollars back into the world market.
The CIC had previously made a US$3 billion investment as a cornerstone investor in the Blackstone Group's IPO. So far, only a minor portion of the earmarked US$200 billion has been used. The sub-prime crisis has single-handedly changed the landscape of international funds flow and ownership. This is a 180 degree turnaround from just a few short months ago, when the US objected to Dubai buying up US Ports, and to China investing in Unocal. Before that, the US also objected to Hutchison a HK listed company investing the Panama Canal on the dubious allegation that it is a de facto proxy of the Chinese Government. Now, Middle East and Chinese money is welcomed with open arms. Money is green and it doesn't matter if the owner is brown or yellow.
Chinese companies have also invested in Standard Bank (ICBC US$5.6 billion), Barclays Bank (China Development Bank US$2.98 billion), and Fortis (Ping An Insurance (US$2.7 billion). Chinese M&A deal flow has been mostly outwards with the top 5 accounting for close to US$20 billion while the top 5 inflows were a measly US$3.8 billion.
Just as the Middle East is recycling petrol dollars, the Chinese are recycling trade dollars.
Lessons From Asia
The Bush Administration is proposing to freeze the resets on subprime loans in order for borrowers to be able to continue to pay their mortgages. This of course is politically expedient. But is it good economics, some ask. Many have condemned the proposal as going against the original spirit of the contract and therefore will undermine the competitiveness of the US dollar as a store of value, and the attractiveness of the US economy as the storehouse of wealth. Recently, the SEC had given notice that it would strictly enforce “short selling” regulations to ensure that “short sellers” have actually borrowed stock that they are selling.
During the Asian Financial Crisis, the HK government was castigated by many "free market" thinkers for intervening in the stock market to stop speculators using it as a proxy for shorting the HK dollar. Similarly, the Malaysian government was pilloried for imposing exchange controls. In both cases, the governments saw the need to protect the local economy from excessive outside intervention and took the appropriate steps. The current strength of the economies belies the dire predictions of the "learned" community.
Text books on economics are written after the fact. Different people will extract and interpret facts in different ways. In time, some of these lessons will be "Economics 101". People tend to forget the market is made up of individuals who are prone to the emotions of fear and greed.
That's "Market economics 101". Sometimes, it is necessary to take some action that the "pure" economists abhor. The alternative is that we will be faced with a bigger problem of a collapse as borrowers renege, banks start writing off bad debts, and the credit crunch becomes a black hole.
How Will Sub Prime Impact Asia
The subprime crisis will take some time to work its’ way through. There is a real problem in that the underlying assets may not be as good as it should be because mortgage originators have been cutting corners and lending to unqualified borrowers. However, the extent of the problems in the financial market is magnified by the fact that there is no market for the CDO’s securitized by mortgages regardless of the quality of the underlying assets.
So far, we have seen financial institutions writing off tens of billions of US$. There have been delinquencies in mortgage payments but not to the extent suggested by the financial markets which have over reacted as usual. Just because Merrill Lynch (US$15 billion) and Citigroup (US$18 billion) have had to write off tens of billions of US$, the market is expecting every bank to have to do the same.
JP Morgan has just announced write-offs of less than US$1.3 billion much less than Merrill or Citigroup.
The US government has been mulling measures to stave off a recession and a collapse of the housing market.
Tightening in China
The Chinese has a different problem. Instead of trying to stimulate the economy, the Chinese Government is trying to hold back inflation. The Chinese government announced that the banks reserve ratio will be further tighten to 15% in an attempt to rein in inflation. In a mature economy where the deposit base is stable, increasing the reserve ratio will mean less money can be lent out. But in China where the deposit base is growing at double digits, increasing the reserve ratio will very little impact on banks’ ability to lend.
Some people are concerned that exports to the US will fall because the US economy may go into a recession. In looking at exports, we must remember that only a small component of that is value added in China. The rest are raw material and energy costs. Therefore, we cannot compare the entire value of exports to GDP (which measures value added) as some have done.
Using only value added in China, exports are not a large component of GDP. In fact with the Chinese economy expanding at double digits, any shortfall in exports may be made up for by increased domestic consumption.
Analysts have bemoaned the slowdown in profits growth at Chinese companies which fell from 42% for the 1st 6 months of 2007 to 20% in 2008. Anywhere else, a 20% profit growth would have been trumpeted as outstanding. When you have been used to exceptional high growth, it is a big come down to just high growth.
Last year’s profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
In the first half of 2008, the shares in Chinese banks have fallen 43% in Shanghai, and 13% in HK wiping out US#300 billion of market value. However, JP Morgan believes that the current sell-off in the Chinese banks is irrational due to misplaced fears over margins, bad debts, etc. according to a recent report.
There remains a lingering economic racism. Asian companies with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on subprime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Asian companies can "cherry pick" and choose the "best of breed" partner for each new product.
Many in the western world point to the “fact” that Asian economies will not be able to avoid tripping into a recession because “when the US sneezes, Asia catches a cold”. In particular, they like to point out that Asian central banks have not done a good job in steering their economies. “Just look at the Asian Financial Crisis”, they say. Well, somehow they seem to have forgotten that the US Federal Reserve Bank and the European Central Bank stood by while the subprime bubble inflated. Apparently, the Asian central banks do not have a monopoly for making mistakes.
The Asia Era
The huge internal markets in Asian countries mean that internal consumption will be able to take over as the engines of growth when the US economy falters. Already, growth in Asian markets exceeds growth in more traditional US and European markets. In time, intra Asian trade will replace trade with US and Europe, in the same way that trade within the European Union is exceeding trade with the US.
The challenge for Asian economies is to reduce the gap between rich and poor and build a solid middle class which will be the foundation for the Asian Era.
Tuesday, September 09, 2008
Have We Seen The Bottom?
It is very hard to predict the top and bottom of a market. Chartists use a combination of many indicators, volume, price volatility, etc. to measure change in investor sentiments.
Very often, the top and especially the bottom occur when there has been a in investors' sentiments. At the top, you don't suddenly see people rushing for the exits, rather, the opposite as ever more people join the line at the "ATM machine" where there is "free" money.
Bottoms are even harder to predict. How much further can the market drop? Just like at the top commentators keep changing the target. However, changes in sentiment at the bottom is very subtle. It is often a final surrender when everyone decides that the market has nowhere to go but down.
So, have we seen the bottom? In terms of sentiment, I still cannot detect the sense of abject surrender. However, I have seen the interest of retail clients decline to levels that are 20% of the peak or less. HK retail investors have been through many cycles, and many are using only spare cash for the stock market so there is less need to meet margin calls. Also, 60% of the market is dominated by institutions and although they will trim their portfolios, they also know that when the market turns around, it is very difficult to buy back in, so they will always hang on to the core holdings.
But every market turning point needs a trigger. And the trigger this time is the takeover of Fannie Mae and Freddie Mac by the US Government.
Many will remember that HK Government was castigated by the world for "interfering in the free market" by intervening in the currency market to protect the HK dollar's peg to the US dollar at a time when all Asian currencies were being sold off by hedge funds. When the hedge funds found they could not borrow enough HK dollars for shorting they decided to short the HK stock market as a proxy. The market fell from around 18,000 to around 6,000 before the HK Government stepped in to buy blue chips in the open market. That marked the turning point. The shares bought were subsequently injected into a new vehicle called the Tracker Fund (#2800) and HK residents were allowed to buy into this at around the 12,000 level, But that is another story.
The US Government had decided to "rescue" the 2 mortgage companies and put the credibility of the US Government behind the papers they issued. The minority shareholders are out of luck, but that is unavoidable. However, financial institutions around the world breathed a sigh of relief because if they failed, banks around the world will have to go through another round of write downs.
The financial markets are all about credibility, sentiment, and liquidity. In the past few months, the US Fed had injected liquidity into the system and will continue to do so. By taking engineering the takeover of Bear Sterns, and now taking over Fannie and Freddie, it is now putting some much needed credibility into the market. There is nothing that can be done about sentiment. Investors will either decide it is time to buy or time to sell.
A very interesting thing happened on the HK market. Cocal Cola announced that it is buying out the shareholders of Huiyuan Juice (#1886) at HK$12.20 which is the highest price achieved after the stock was listed at around HK$6. The stock was trading at about HK$4 at the time of the announcement. The interesting thing is that Coca Cola had decided to buy into the China market with 1.4 billion consumers rather than to try and build their franchise and distribution network. Huiyuan owned close to 50% of the pure juice market in China. At HK$4, it was valued at HK$6billion. Even at HK$12 it is only HK$18 billion (or 18 times P/E).
Buy or sell Huiyuan? Coke will privatise the company if it gets enough acceptance to the offer. If it doesn't, then it will have to maintain the listing. Will Huiyuan become "Coke China"? That is the question. I suspect that Coke will want to list its' own shares someday in China (as and when it is allowed) rather than a subsidiary. Some are hoping for a better offer from Coke to sweeten the deal. Or, maybe a competing bid?
However, there are still regulatory hurdles and the deal is by no means assured, although I cannot believe that Coke would go this far without some indications that it will be approved. There is 20%-25% upside if the deal goes through.
My advise to clients who already hold this is to decide whether the upside is attractive enough or to look for the next value stock to be taken over now that Coke had started the ball rolling. For the HK and China markets, this may be the trigger that changes sentiments.
Note: Clients and entities affiliated with the author holds some positions in this stock.
Very often, the top and especially the bottom occur when there has been a in investors' sentiments. At the top, you don't suddenly see people rushing for the exits, rather, the opposite as ever more people join the line at the "ATM machine" where there is "free" money.
Bottoms are even harder to predict. How much further can the market drop? Just like at the top commentators keep changing the target. However, changes in sentiment at the bottom is very subtle. It is often a final surrender when everyone decides that the market has nowhere to go but down.
So, have we seen the bottom? In terms of sentiment, I still cannot detect the sense of abject surrender. However, I have seen the interest of retail clients decline to levels that are 20% of the peak or less. HK retail investors have been through many cycles, and many are using only spare cash for the stock market so there is less need to meet margin calls. Also, 60% of the market is dominated by institutions and although they will trim their portfolios, they also know that when the market turns around, it is very difficult to buy back in, so they will always hang on to the core holdings.
But every market turning point needs a trigger. And the trigger this time is the takeover of Fannie Mae and Freddie Mac by the US Government.
Many will remember that HK Government was castigated by the world for "interfering in the free market" by intervening in the currency market to protect the HK dollar's peg to the US dollar at a time when all Asian currencies were being sold off by hedge funds. When the hedge funds found they could not borrow enough HK dollars for shorting they decided to short the HK stock market as a proxy. The market fell from around 18,000 to around 6,000 before the HK Government stepped in to buy blue chips in the open market. That marked the turning point. The shares bought were subsequently injected into a new vehicle called the Tracker Fund (#2800) and HK residents were allowed to buy into this at around the 12,000 level, But that is another story.
The US Government had decided to "rescue" the 2 mortgage companies and put the credibility of the US Government behind the papers they issued. The minority shareholders are out of luck, but that is unavoidable. However, financial institutions around the world breathed a sigh of relief because if they failed, banks around the world will have to go through another round of write downs.
The financial markets are all about credibility, sentiment, and liquidity. In the past few months, the US Fed had injected liquidity into the system and will continue to do so. By taking engineering the takeover of Bear Sterns, and now taking over Fannie and Freddie, it is now putting some much needed credibility into the market. There is nothing that can be done about sentiment. Investors will either decide it is time to buy or time to sell.
A very interesting thing happened on the HK market. Cocal Cola announced that it is buying out the shareholders of Huiyuan Juice (#1886) at HK$12.20 which is the highest price achieved after the stock was listed at around HK$6. The stock was trading at about HK$4 at the time of the announcement. The interesting thing is that Coca Cola had decided to buy into the China market with 1.4 billion consumers rather than to try and build their franchise and distribution network. Huiyuan owned close to 50% of the pure juice market in China. At HK$4, it was valued at HK$6billion. Even at HK$12 it is only HK$18 billion (or 18 times P/E).
Buy or sell Huiyuan? Coke will privatise the company if it gets enough acceptance to the offer. If it doesn't, then it will have to maintain the listing. Will Huiyuan become "Coke China"? That is the question. I suspect that Coke will want to list its' own shares someday in China (as and when it is allowed) rather than a subsidiary. Some are hoping for a better offer from Coke to sweeten the deal. Or, maybe a competing bid?
However, there are still regulatory hurdles and the deal is by no means assured, although I cannot believe that Coke would go this far without some indications that it will be approved. There is 20%-25% upside if the deal goes through.
My advise to clients who already hold this is to decide whether the upside is attractive enough or to look for the next value stock to be taken over now that Coke had started the ball rolling. For the HK and China markets, this may be the trigger that changes sentiments.
Note: Clients and entities affiliated with the author holds some positions in this stock.
Friday, August 29, 2008
BOC Profits Hit By Sub Prime
You would have thought when you read this headline that Bank of China (#3988) had lost a lot of money (just like the US banks did). Well, I did anyway.
China's 3rd largest bank actually made RMB42 billion in profits, up 42% year on year. The headline refers to the fact that it lags behind other state owned banks in profit GROWTH! ICBC (#1398) grew 57% and CCB (#939) grew 71%.
As China's foreign exchange bank, BOC has a lot of foreign currency (USD) assets and the rise of the RMB against the USD has led to revaluation losses. But goes around, comes around. When the USD starts to strengthen again, it will mean revaluation profits.
But BOC's biggest handicap vis-a-vis ICBC and CCB is the lack of a large domestic deposit and customer base. When you buy China concept, you want to buy Chinese assets and income streams, not someone who holds a lot of foreign currency assets. may as well buy HSBC.
China's 3rd largest bank actually made RMB42 billion in profits, up 42% year on year. The headline refers to the fact that it lags behind other state owned banks in profit GROWTH! ICBC (#1398) grew 57% and CCB (#939) grew 71%.
As China's foreign exchange bank, BOC has a lot of foreign currency (USD) assets and the rise of the RMB against the USD has led to revaluation losses. But goes around, comes around. When the USD starts to strengthen again, it will mean revaluation profits.
But BOC's biggest handicap vis-a-vis ICBC and CCB is the lack of a large domestic deposit and customer base. When you buy China concept, you want to buy Chinese assets and income streams, not someone who holds a lot of foreign currency assets. may as well buy HSBC.
Tuesday, August 26, 2008
How Much Did China Spend On The Olympics?
The commonly used figure is RMB300 billion. Of this, USD100 million was spent on the opening and closing ceremonies alone.
All this is at the "China Price". That is, a dollar in China goes a lot further than a dollar in the US or the UK. I don't think we will ever get to see another Olympics like this as no other government will be willing to spend so much on the Games.
India is the only other country with a large population and low cost. And the infra structure will certainly need to be upgraded. However, with a democratically elected government it is unlikely to be able to devote so much of the national resources to putting on the Games.
All this is at the "China Price". That is, a dollar in China goes a lot further than a dollar in the US or the UK. I don't think we will ever get to see another Olympics like this as no other government will be willing to spend so much on the Games.
India is the only other country with a large population and low cost. And the infra structure will certainly need to be upgraded. However, with a democratically elected government it is unlikely to be able to devote so much of the national resources to putting on the Games.
China Life Insurance (#2628)
Earnings in the 1st half of 2008 came to RMB15.8 billion (down 31% from last year) due mainly to investment losses.
Most people think that insurance companies make money from the premiums they charge. Even though the premiums are hefty, on balance most insurance companies break even on a multi year basis. However, they get to bill policy holders at the start of the life of the insurance and get to keep the premium until they have to make pay outs (most of the time delaying further from the time of the claim). They make their money from investing the premiums received.
Last year insurance companies in China had a bumper year with the Chinese stock market rising to an all time high. They were helped further by being given preferential treatment in allocation of IPO shares. The Chinese market is down over 60% from the peak, and instead of investment income the insurance companies are faced with investment losses/. This is not helped by the accounting treatment of having to write down unrealised losses.
Premium income was RMB79 billion, up 24%. Investment income fell 47% due to write downs of RMB6.49 billion in unrealised losses. China Life was saved from further losses because their investment in VISA IPO (USD300 million) rose substantially.
China Life is China's largest insurer. No. 2 insurer, Ping An, reported 1st half profits of RMB9.7 billion, up 2%.
Is it time to buy Chinese insurance companies. I think not. The China insurance regulator has been urging insurance companies to reduce their portfolios. I would have thought that now is a good time to increase the proportion of marked down securities. Thus, when the market recovers, the insurance companies will not be able to participate because they have sold down their investments.
Most people think that insurance companies make money from the premiums they charge. Even though the premiums are hefty, on balance most insurance companies break even on a multi year basis. However, they get to bill policy holders at the start of the life of the insurance and get to keep the premium until they have to make pay outs (most of the time delaying further from the time of the claim). They make their money from investing the premiums received.
Last year insurance companies in China had a bumper year with the Chinese stock market rising to an all time high. They were helped further by being given preferential treatment in allocation of IPO shares. The Chinese market is down over 60% from the peak, and instead of investment income the insurance companies are faced with investment losses/. This is not helped by the accounting treatment of having to write down unrealised losses.
Premium income was RMB79 billion, up 24%. Investment income fell 47% due to write downs of RMB6.49 billion in unrealised losses. China Life was saved from further losses because their investment in VISA IPO (USD300 million) rose substantially.
China Life is China's largest insurer. No. 2 insurer, Ping An, reported 1st half profits of RMB9.7 billion, up 2%.
Is it time to buy Chinese insurance companies. I think not. The China insurance regulator has been urging insurance companies to reduce their portfolios. I would have thought that now is a good time to increase the proportion of marked down securities. Thus, when the market recovers, the insurance companies will not be able to participate because they have sold down their investments.
Tuesday, August 19, 2008
Timing is Right
After yesterday's decline of 5.3%, the Shanghai index has dropped over 60% from the peak of October 2008, average P/E is now 15x compared to US of 23x (although HK is cheaper still at 13x).
The Chinese authorities are concentrating on the Olympics right now but as soon as that is over, the focus will move back to the economy. Over the past month, the authorities have already announced a loosening of loans to SME's. In the wake of the snow disaster in the first quarter and the Sichuan earthquake, trhere will be massive infrastructure programmes. Over the next 2 years, these are estimated at over USD200 billion a year.
With inflation starting to come back under control and oil prices moving back down, the authorities now has more room to move. Don't forget, 2009 is the 60th anniversary of the birth of New China. Celebrations in Ocotber 2009 will eclipse the Olympics which after all is for the foreigners and external media to say that we have arrived. The 60th anniversary is for the Chinese citizens. So the economy better be good!
The Chinese authorities are concentrating on the Olympics right now but as soon as that is over, the focus will move back to the economy. Over the past month, the authorities have already announced a loosening of loans to SME's. In the wake of the snow disaster in the first quarter and the Sichuan earthquake, trhere will be massive infrastructure programmes. Over the next 2 years, these are estimated at over USD200 billion a year.
With inflation starting to come back under control and oil prices moving back down, the authorities now has more room to move. Don't forget, 2009 is the 60th anniversary of the birth of New China. Celebrations in Ocotber 2009 will eclipse the Olympics which after all is for the foreigners and external media to say that we have arrived. The 60th anniversary is for the Chinese citizens. So the economy better be good!
Friday, August 15, 2008
China Stocks Cheapest Level in Last 3 Years
China stocks are trading at levels last seen since 3 years ago. P/E in Shanghai is 19x compared with 20x in June 2005, and 26x for S&P 500. But you should still buy the same stocks in HK as they are only trading at 13x.
Start accumulating for the long term.
Start accumulating for the long term.
China"s Inflation Down To 6.3% in July 2008
After hitting a high of 8.7% in February 2008, the inflation rate trended downwards and was 6.3% in July 2008 (5.6% same period last year).
With inflation slowing, this gives the Beijing room to start reducing interest rates and increasing the amount that banks can lend in order to boost economic growth. This shows that Beijing's efforts at reigning in growth is working and inflation for the year should come in around 7% which will still be below GDP growth expected at 10%.
With inflation slowing, this gives the Beijing room to start reducing interest rates and increasing the amount that banks can lend in order to boost economic growth. This shows that Beijing's efforts at reigning in growth is working and inflation for the year should come in around 7% which will still be below GDP growth expected at 10%.
Saturday, August 09, 2008
IPO: China Southern Locomotive & Rolling Stock
Stock Code: 1766
Number of Offering Shares: 1,600,000,000 H Shares (subject to Over-allotment option)
Number of Public Offer Shares: 160,000,000 H Shares (subject to adjustment)
Maximum Offer Price: HK$2.76 per Share (HK$2,787.85 per board lot)
Sponsors: China International Capital; Macquarie Capital
Time Table
Offer Period: 13 August 2008 before 12:00 noon
Allocation Result & Refund: August 20, 2008 (Wednesday)
Dealing commences on: August 21, 2008 (Thursday)
Application cut off time if applied through Goldride Securities Limited
- Financing required: August 12, 2008 12:00
- Apply with full deposit: August 12, 2008 16:00
Financing: 90% financing available
- Minimum application amount for margin financing: HK$500,000
- Interest rate applicable (indication only, subject to change): 3.5% p.a
Application Charges: HK$50.00
Clients who intend to make applications through Goldride Securities Limited should contact your accounts executives prior to the cut off time. Clients are requested to deposit sufficient money into their securities account prior to the placement of orders. The margin finance facility will only be available while funding lasts.
Number of Offering Shares: 1,600,000,000 H Shares (subject to Over-allotment option)
Number of Public Offer Shares: 160,000,000 H Shares (subject to adjustment)
Maximum Offer Price: HK$2.76 per Share (HK$2,787.85 per board lot)
Sponsors: China International Capital; Macquarie Capital
Time Table
Offer Period: 13 August 2008 before 12:00 noon
Allocation Result & Refund: August 20, 2008 (Wednesday)
Dealing commences on: August 21, 2008 (Thursday)
Application cut off time if applied through Goldride Securities Limited
- Financing required: August 12, 2008 12:00
- Apply with full deposit: August 12, 2008 16:00
Financing: 90% financing available
- Minimum application amount for margin financing: HK$500,000
- Interest rate applicable (indication only, subject to change): 3.5% p.a
Application Charges: HK$50.00
Clients who intend to make applications through Goldride Securities Limited should contact your accounts executives prior to the cut off time. Clients are requested to deposit sufficient money into their securities account prior to the placement of orders. The margin finance facility will only be available while funding lasts.
HK Fx Reserves Rank 9th Worldwide
HK Fx reserves grew to USD157.7 billion at the end of Jul 2008 (up 0.6%from USD157.6 billion at the end of June 2008). The world's largest foreign currency holdings: China, Russia, India, Taiwan, South Korea, Brazil, Singapore, and HK.
But HK is the only place with no currency controls. In China the government restricts the amount of foreign currency that can be held by the residents and exchanges RMB for your foreign currency holdings. If you need to get foreign currency, for example for travel and trade you will need to apply to exchange your RMB.
China has loosened Fx controls in the past few years on the back of increased foreign currency reserves, and Chinese citizens now can exchange USD20,000 per year. However, that does not mean that they can carry that much out of the country.
In India, citizens can invest USD200,000 per year overseas.
But HK is the only place with no currency controls. In China the government restricts the amount of foreign currency that can be held by the residents and exchanges RMB for your foreign currency holdings. If you need to get foreign currency, for example for travel and trade you will need to apply to exchange your RMB.
China has loosened Fx controls in the past few years on the back of increased foreign currency reserves, and Chinese citizens now can exchange USD20,000 per year. However, that does not mean that they can carry that much out of the country.
In India, citizens can invest USD200,000 per year overseas.
Wednesday, August 06, 2008
Why Buy Into The China Story?
Bank of East Asia: Earnings dives 52% in 1st half 2008 due to losses in financial instruments while net profits from maniland China operations rose 50% or 26% of income(excluding writedowns).
HSBC: 29% down in earnings
StanChart Bank: 30% growth in 1st half profits. Operating profits from China operations (excluding last year's one off profits) were up 50%. India first half pre tax profits up 89% while HK accounts for 25% of profits. The bank is looking to list in India and China eventually.
If the foreign banks are looking to list in China, and China accounts for over 50% of their profits, then it is obvious that the Chinese banks themselves are a good buy. The competition will be growing but the pace of foreign banks expansion into China is restricted and they will not have a major deposit base.
The analogy is the foerign banks in HK find it difficult to compete with HSBC, StanfChart and bank fo China for local deposits relying instead on borrowing from them on the inter bank market.
The biggest assets of the Chinese banks are their huge deposit base and branch networks. A foreign will have no chance of duplicating that.
HSBC: 29% down in earnings
StanChart Bank: 30% growth in 1st half profits. Operating profits from China operations (excluding last year's one off profits) were up 50%. India first half pre tax profits up 89% while HK accounts for 25% of profits. The bank is looking to list in India and China eventually.
If the foreign banks are looking to list in China, and China accounts for over 50% of their profits, then it is obvious that the Chinese banks themselves are a good buy. The competition will be growing but the pace of foreign banks expansion into China is restricted and they will not have a major deposit base.
The analogy is the foerign banks in HK find it difficult to compete with HSBC, StanfChart and bank fo China for local deposits relying instead on borrowing from them on the inter bank market.
The biggest assets of the Chinese banks are their huge deposit base and branch networks. A foreign will have no chance of duplicating that.
How to invest in Chinese RMB?
RMB deposits in HK rose by RMB 48 billion from November 2007 to April 2008. By May 2008 RMB deposits were RMB 77.68 billion (three times RMB 26.16 billion in May 2007, and 87 times RMB 895 million when RMB deposits first started in HK in 2004).
RMB deposit rates: 1% pa
Morgan Stanley: RMB still undervalued. Expect RMB 6.60 by end 2008, and 6.30 by end 2009 to the USD.
Credit Suisse: 6.75 (2008) and 6.15 (2009)
HSBC: 6.77(2008) and 6.33 (2009)
How to take advantage of the strength of the RMB? Well, you can't buy RMB because of foreign exchange control but you can buy Chinese companies listed in HK with RMB assets and RMB income streams. The dividends is in RMB but converted to HK$ which is pegged to the US$. Therefore, this is a proxy for investing in RMB.
RMB deposit rates: 1% pa
Morgan Stanley: RMB still undervalued. Expect RMB 6.60 by end 2008, and 6.30 by end 2009 to the USD.
Credit Suisse: 6.75 (2008) and 6.15 (2009)
HSBC: 6.77(2008) and 6.33 (2009)
How to take advantage of the strength of the RMB? Well, you can't buy RMB because of foreign exchange control but you can buy Chinese companies listed in HK with RMB assets and RMB income streams. The dividends is in RMB but converted to HK$ which is pegged to the US$. Therefore, this is a proxy for investing in RMB.
Monday, August 04, 2008
HKEx Launched Gold ETF
The HKEx has just launched a Gold ETF (#2840). For those who wants to take a punt on the price of gold, this is a new vehicle which is a lot safer than gold futures or trading in commodities.
The SPDR Gold Trust is one of the world's largest commodity ETF (fund size > US$19billion). See www.spdrgoldshares.com.
Geolocate this post
Posted with LifeCast
The SPDR Gold Trust is one of the world's largest commodity ETF (fund size > US$19billion). See www.spdrgoldshares.com.
Geolocate this post
Posted with LifeCast
Wednesday, July 09, 2008
It's Official! Sell-Off in Chinese Banks "Irrational"
In the first half of 2008, the shares in Chinese banks have fallen 43% in Shanghai, and 13% in HK wiping out US#300 billion of market value. However, JP Morgan belivese that the current sell-off in the Chinese banks is irrational due to misplaced fears over margins, bad debts, etc. according to a recent report.
If you will recall, I have been saying just that for a number of months. Now it's official. At current levels, they are a BUY and HOLD for medium to long term and a trading opportunity for the short term.
I particularly like the Chinese banks without foreign shareholders. Those with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on sub prime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Chinese banks can "cherry pick" and choose the "best of breed" partner for each new product.
Actually, Chinese companies are a screaming BUY. The current pessimistic view is a result of "transference" i.e. anaylsts are projecting the current problems in the western economies to China. Too often I hear the argument that "If the US economy is down, how can the Chinese economy which depends on exports to the US remain bouyant?" Well we need to look at the portion of US exports to GDP and compare that to internal consumption which is growing soo rapidly that the Chinese government has to hold it down. In the US, the government is worrying about recession. In other words, internal consumption will make up for short fall in the US market. Also, exports to Europe and the rest of Asia are up.
At the end of the day, the best way to participate in a growing economy is through ownership of bank shares. You don't have to pick individual sectors.
If you will recall, I have been saying just that for a number of months. Now it's official. At current levels, they are a BUY and HOLD for medium to long term and a trading opportunity for the short term.
I particularly like the Chinese banks without foreign shareholders. Those with foreign partners are overvalued vis-a-vis their peers because of the "halo" effect. However, the foreign partners do not have control (either from management or operationally) and can only provide "technical" assistance for new products. The thinking is that with foreign partners on board, the banks are unlikely to make bad loans. Well, the HSBC subsidiary in the US made big bad decisions on sub prime too. When banks made bad decisions it doesn't matter who is on board. Without a steady partner, the Chinese banks can "cherry pick" and choose the "best of breed" partner for each new product.
Actually, Chinese companies are a screaming BUY. The current pessimistic view is a result of "transference" i.e. anaylsts are projecting the current problems in the western economies to China. Too often I hear the argument that "If the US economy is down, how can the Chinese economy which depends on exports to the US remain bouyant?" Well we need to look at the portion of US exports to GDP and compare that to internal consumption which is growing soo rapidly that the Chinese government has to hold it down. In the US, the government is worrying about recession. In other words, internal consumption will make up for short fall in the US market. Also, exports to Europe and the rest of Asia are up.
At the end of the day, the best way to participate in a growing economy is through ownership of bank shares. You don't have to pick individual sectors.
Tuesday, July 08, 2008
Where is the A share Market Going?
On average chinese companies (A Shares) will be posting +21% earnings growth. This of course falls short of the heady days of 2007 when they were posting multiples growth. However, 21% is nothing to sneeze at.
The average P/E of companies listed on the Shanghai exchange is now down to 21x from over 70x, and the index is down 60.
Time for a rebound.
The average P/E of companies listed on the Shanghai exchange is now down to 21x from over 70x, and the index is down 60.
Time for a rebound.
Monday, July 07, 2008
Play With The Big Boys?
The HKEx reminded brokers that the FTSE Xinhua China 25 Index will be rebalanced on 21 July. The related trading activities may start as early as next Friday as the rebalancing of the FTSE Xinhua China 25 Index will be effective the following Monday. Be prepared to see huge fluctuations during next Friday’s closing auction session.
In a down market, funds will first sell the stocks they don't want to keep or where they need to trim their holdings. Then they will look to buy into those that they want for their portfolios or add to their holdings. This is because they are not worried that the market will run away from them, and in fact would expect the market to retreat on their selling.
In a rising market, they take the opposite tactic by first buying the stocks they want and then selling the ones they don't want to keep.
Since we are in a down market, I would expect that they will sell first and buy in later. Keep this strategy in mind for your own trading.
In a down market, funds will first sell the stocks they don't want to keep or where they need to trim their holdings. Then they will look to buy into those that they want for their portfolios or add to their holdings. This is because they are not worried that the market will run away from them, and in fact would expect the market to retreat on their selling.
In a rising market, they take the opposite tactic by first buying the stocks they want and then selling the ones they don't want to keep.
Since we are in a down market, I would expect that they will sell first and buy in later. Keep this strategy in mind for your own trading.
Friday, July 04, 2008
ICBC Redux
Yesterday, I talked about ICBC (#01398). The bank has just announced that net profits for the first half of 2008 will be up at least 50%! This is in spite of the tightening of credit on the Mainland.
Profits were up over 77% for 2008Q1, and margins have been under some pressure in the second quarter. In 2007 first half profits were up over 60%. Overall, we should see the effects of tightening measures in the second half as investors move to longer term deposits increasing funding costs for banks. However, we expect fees and other non interest income to rise. Banks in China do not have the wide range of financial products that we are used to seeing, and the potential for increased profitability from these products will be substantial. We still maintain a strong BUY recommendation.
Profits were up over 77% for 2008Q1, and margins have been under some pressure in the second quarter. In 2007 first half profits were up over 60%. Overall, we should see the effects of tightening measures in the second half as investors move to longer term deposits increasing funding costs for banks. However, we expect fees and other non interest income to rise. Banks in China do not have the wide range of financial products that we are used to seeing, and the potential for increased profitability from these products will be substantial. We still maintain a strong BUY recommendation.
HK Near Bottom
Yesterday 3 July 2008, the Hang Seng Index (HSI) was down 2.1% to 21,242 with most stocks at 52 week low. At this level, stocks are trading at an average P/E is 13% with dividend yield is 3%, very close to historical lows.
The market has retreatced almost 5,000 points from the mid May high and may be due for a rebound. We have tested the 21,000 support level 3 times and it appears to be holding.
Accumulate China stocks with strong stories and earnings.
The market has retreatced almost 5,000 points from the mid May high and may be due for a rebound. We have tested the 21,000 support level 3 times and it appears to be holding.
Accumulate China stocks with strong stories and earnings.
Buy ICBC on Weakness
At HK$5.36 per share, ICBC is the biggest bank in the world by market capitalisation (US$252 billion). Just how big is that? Well, it's worth almost 2 times JP Morgan.
It also has reserves of US$130 billion which means it can afford to buy out Citigroup.
The sub prime crisis only had a minimal impact (thank god for unsophisticated bankers who don't understand "high finance") and is primed to grow while western banks are scrambling to rebuild their balance sheets after writing off billions in sub prime losses.
It also has reserves of US$130 billion which means it can afford to buy out Citigroup.
The sub prime crisis only had a minimal impact (thank god for unsophisticated bankers who don't understand "high finance") and is primed to grow while western banks are scrambling to rebuild their balance sheets after writing off billions in sub prime losses.
What's Wrong With +20% Profit Growth?
Analysts have bemoaned the slowdown in profits growth at Chinese companies which fell from 42% for the 1st 6 months of 2007 to 20% in 2008. Anywhere else, a 20% profit growth would have been trumpeted as outstanding. When you have been used to exceptional high growth, it is a big comedown to just high growth.
Last years profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
Last years profits growth have been boosted by returns from investments in the Mainland stock market. This year, not only have the stock market not grown but in fact had fallen by some almost 60% from the peak. Under fair value accounting, this would have hit the bottom line of companies which are still holding onto the stocks they bought last year. On top of this, there is the surge in oil price to add to costs of operations, and the effects of the blizzards in January and February which greatly affected sales. Not to mention interest rates hikes and a clamp down in bank lending.
+20% growth profits growth with all the bad news is nothing to sneeze at!!!
Thursday, July 03, 2008
SJM's (#880) Offer Oversubscribed
Stanley HO's SJM (stock code #880) HKD5.1 billion IPO was oversubscribed although the institutional portion (85% of the issue) was only 2x covered. The pricing is expected to be at the low end of the HKD3.08 to HKD4.08 indicative range. The stock will be traded on Monday, 10 July 2008.
The timing seems to be right for those willing to take a chance on this IPO as the Macau Government just announced that in the month of June 2008, Macau's casino revenues increased 69.7% year-on-year to Patacas 9.7 billion, the 3rd best month ever.
In the first 6 months of 2008, total casino revenues increased 54% to Patacas 58.5 billion. SJM with 27% is the leader, followed by Venetian at 22%, Wynn 17%, Melco 16%, Galaxy 10%, and MGM 8%. Although the headline numbers look good, the casinos have been locked in a price war over commission rebates to junket operators.
The timing seems to be right for those willing to take a chance on this IPO as the Macau Government just announced that in the month of June 2008, Macau's casino revenues increased 69.7% year-on-year to Patacas 9.7 billion, the 3rd best month ever.
In the first 6 months of 2008, total casino revenues increased 54% to Patacas 58.5 billion. SJM with 27% is the leader, followed by Venetian at 22%, Wynn 17%, Melco 16%, Galaxy 10%, and MGM 8%. Although the headline numbers look good, the casinos have been locked in a price war over commission rebates to junket operators.
HK's Exports Performance
How much has negative sentiment in the US and Europe affected HK? Let's take a look at HK's external trade figures. Total exports grew 9.4%, and 9.2% repectively in 2006 and 2007. In the 1st quarter of 2008, total ex[ports grew 10.5%. This is certainly not what was expected from the "sub prime" crisis. However, as the slowdown starts to bite in the US, we do expect growth to moderate in the 2nd quarter with slight improvements in the latter half of the year. Exports to the US which account for 12% was down 1%).
The 1st quarter's performance was enhanced by increased trade intra Asia, with significant increases in exports to the Mainland which accounts for 48% of our exports, was up 11%. Europe at 14% of exports was steady (up 8%) because of the weakness of the USD (HKD is pegged to the USD) vis-a-vis the Euro. The rest of Asia (14% of exports) was up 23%.
Overall, we expect HK exports to grow by a modest 7% in 2008 with China and Asia the main engine of growth.
Tuesday, July 01, 2008
HK Depositary Receipts (HDR)
Come 1 July 2008, companies already listed elsewhere in a jurisdiction acceptable to the HK authorities will be able to have their shares listed in HK by way of HK depositary receipts or "HDR". The sponsor for the HDR will either buy a batch of existing shares of the company in the home market or take a new issue of shares, and package them into a HDR which in turn will be listed in HK. This is very similar to a closed ended fund consisting of shares in a single company.
The idea is that a company that has met the listing requirement's of a regulated exchange will be able to list its shares without going through the whole application process for a new listing. This gets around the requirements of some countries that restrict their companies from listing on overseas markets. For example, many Russian listed companies have listed on the London Stock Exchange by way of "GDR's". A key requirement though is that the home market must be regulated to a similar level as HK.
Members of IOSCO, the international federation of securities regulators, have signed a multi-lateral memorandum of understanding (MOU) which would make it easier to regulate across boundaries. Therefore, companies listed in those markets will find it easier to list HDR's in HK. However, it seems that the demand comes mostly from companies whose home markets are still developing and therefore will not have been able to reach the requirements set out in the multi MOU.
The idea is that a company that has met the listing requirement's of a regulated exchange will be able to list its shares without going through the whole application process for a new listing. This gets around the requirements of some countries that restrict their companies from listing on overseas markets. For example, many Russian listed companies have listed on the London Stock Exchange by way of "GDR's". A key requirement though is that the home market must be regulated to a similar level as HK.
Members of IOSCO, the international federation of securities regulators, have signed a multi-lateral memorandum of understanding (MOU) which would make it easier to regulate across boundaries. Therefore, companies listed in those markets will find it easier to list HDR's in HK. However, it seems that the demand comes mostly from companies whose home markets are still developing and therefore will not have been able to reach the requirements set out in the multi MOU.
GEM (Growth Enterprise Market)
On 1 July 2008, new rules will come into effect in an effort to breath new life into GEM. The GEM Board hit a peak in 2004 with 21 companies raising over HK$2.7 billion when the HKEx closed the door on backdoor listings (pun intended). Since then, fewer companies seeking listings on the GEM Board and so far this year only 2 companies have come to market raising just over HK$200 million.
Why? Because the GEM Board is not as prestigious as Nasdaq on which it was modelled. There are many reasons including rubbish companies, crooked management, etc. The end result is that companies stayed away if they could wait for a listing on the Main Board. It is hoped that the new rules will raise the threshold a bit and keep out the truly undesreving.
Key provisions:
1. Positive cashflow of at least HK$20 million for the 2 years before listing
2. At least 2 years operations under the same management
3. Continuing reporting requirements made more stringent
4. Easier promotion to the Main Board
During the review of the performance of GEM, it had been suggested that rather than tightening the rules, it should go the route of the AIM Board in London where it is "caveat emptor" (let the buyer beware). However, it was decided that the HK investor is not sufficiently sophisticated to make the appropriate judgment on a stock. Let's see if the new rules will make any difference.
Footnote: Since 2004, corporate finance advisers have found ways around the backdoor listing prohibition.
Why? Because the GEM Board is not as prestigious as Nasdaq on which it was modelled. There are many reasons including rubbish companies, crooked management, etc. The end result is that companies stayed away if they could wait for a listing on the Main Board. It is hoped that the new rules will raise the threshold a bit and keep out the truly undesreving.
Key provisions:
1. Positive cashflow of at least HK$20 million for the 2 years before listing
2. At least 2 years operations under the same management
3. Continuing reporting requirements made more stringent
4. Easier promotion to the Main Board
During the review of the performance of GEM, it had been suggested that rather than tightening the rules, it should go the route of the AIM Board in London where it is "caveat emptor" (let the buyer beware). However, it was decided that the HK investor is not sufficiently sophisticated to make the appropriate judgment on a stock. Let's see if the new rules will make any difference.
Footnote: Since 2004, corporate finance advisers have found ways around the backdoor listing prohibition.
Saturday, June 28, 2008
China's Foreign Currency Reserves US$1.8 Trillion
China's foreign currency reserves reached US$1.8 trillion at the end of May 2008. In May the increase was US$40.3 billion but this was slow compared to an increase of US$75 billion in April. In China, the government exchanges RMB for foreign currencies earned by Chinese companies and citizens. This creates enormous inflationary pressures as RMB are created to soak up the foreign currencies.
The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.
The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.
The People's Bank of China, the central bank, then issues bonds to soak up the excess RMB. This means that banks are flushed with cash and so the government has to raise the banks reserve ratios to try and limit lending growth.
The central bank also suspects that there is "illegal" inflow of foreign currency betting on an increase in the RMB exchange rate. This "illegal" inflow consists of over billing foreign companies, or foreign companies under billing and leaving RMB balances behind.
Thursday, June 12, 2008
Retesting the 22,000 Support
I think we should look at the macro environment first.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
The sub prime crisis in the US and Europe will impact consumer spending in those countries and in turn impact China's exports. However, China's own internal growth is accelerating and this will offset the impact of any US and European downtuen.
With the winding down of building and construction for the Olympics, we had originally forecast a slowdown. However, the re-building in Sichuan will be substantial, and the knockon effect (i.e. improved construction materials etc.) will mean this sector will continue to develop.
Therefore, construction and building materials companies should be on your list.
I would stay away from insurance companies. Not because of their losses in Sichuan but because insurance companies make their money from investing the premiums they collect before having to make payouts. With the stock market falling in China since last year, the investment income will be low if not negative. therefore, I expect that insurance companies will be reporting much lower profits this year.
I would also stay away from Hsbc as it is a global bank with assets in the US and Eurpoe which will suffer from the sub prime and other write downs of securitied instruments. Stay with chinese banks.
Friday, May 16, 2008
Is it time to buy China Construction Bank?
The HK stock market rose 0.41% to close at 25,618 ending a week of big swings.
Top story for the day was the placement of 400 million shares of China Construction Bank (CCB #939) at HK$7.05 which is a discount of 2.5% to the market close of HK$7.23 yesterday. CCB closed today at 7.04 bid and 7.05 offer.
The 400 million is only 0.18% of the 224.7 billion shares issued and amount to only 1 day’s turnover in the stock. However, investors are concerned that other strategic investors who were allocated stock in the IPO will start selling. Bank of America which holds 9% will be able to sell in October 2008 at the end of the lock up period. Temasek still has 5.99% which it can sell.
Strategic investors sell their stakes for a variety of reasons which may or may not have anything to do with the company’s performance. Mostly, sales are made to replenish the strategic investors’ own capital and this may be the case in the aftermath of the subprime crisis. Sales by strategic investors do tend to dampen market interests because of the fear of an overhang of stock coming to the market.
As Temasek sold at this level last year, it is reasonable to assume that this would be a good level to use as a base. CCB went as high as HK$9.00 last year and I believe that it would go much higher as Chinese consumers discover banking and financial products, and more deposits find their way into the system.
Accumulate CCB at the current levels.
END
www.goldride.com
Top story for the day was the placement of 400 million shares of China Construction Bank (CCB #939) at HK$7.05 which is a discount of 2.5% to the market close of HK$7.23 yesterday. CCB closed today at 7.04 bid and 7.05 offer.
The 400 million is only 0.18% of the 224.7 billion shares issued and amount to only 1 day’s turnover in the stock. However, investors are concerned that other strategic investors who were allocated stock in the IPO will start selling. Bank of America which holds 9% will be able to sell in October 2008 at the end of the lock up period. Temasek still has 5.99% which it can sell.
Strategic investors sell their stakes for a variety of reasons which may or may not have anything to do with the company’s performance. Mostly, sales are made to replenish the strategic investors’ own capital and this may be the case in the aftermath of the subprime crisis. Sales by strategic investors do tend to dampen market interests because of the fear of an overhang of stock coming to the market.
As Temasek sold at this level last year, it is reasonable to assume that this would be a good level to use as a base. CCB went as high as HK$9.00 last year and I believe that it would go much higher as Chinese consumers discover banking and financial products, and more deposits find their way into the system.
Accumulate CCB at the current levels.
END
www.goldride.com
Thursday, May 08, 2008
Oil reaches USD120 per barrel
The HK stock market fell in line with the mainland market. The Hang Seng Index fell 651 to 25,610 (2.48%) while the Shanghai Index fell 4.13%.
Investors on the mainland are worried that there will be a flood of new shares from the end of the moratorium on majority shareholders, and the proposed share offering by Ping An Insurance of RMB 120 billion A shares and RMB 41 billion of bonds.
The price of oil reaching USD 120 also spooked investors especially since Goldman Sachs is now predicting USD 200 per barrel. Goldman was very prescient last year when they predicted that oil will top USD 100 per barrel by the yearend.
There were also rumours of housecleaning at the CSRC (China Securities Regulatory Commission) which added to market woes.
We do not see the market falling back to the 21,000 level where there had already been substantial consolidation, and has been tested 3 times. The market has fallen 10,000 from the high of 31,000 in October 2007 to the 21,100 level in January 2008. Since then the market has recovered about half the losses. Short term target on the upside is 27,000 to 28,000 with a downside to 24,000. At 24,000 there is good opportunity to accumulate shares for the next leg up.
The fallout from subprime is coming to an end. The bad news on the horizon is oil price.
END
Investors on the mainland are worried that there will be a flood of new shares from the end of the moratorium on majority shareholders, and the proposed share offering by Ping An Insurance of RMB 120 billion A shares and RMB 41 billion of bonds.
The price of oil reaching USD 120 also spooked investors especially since Goldman Sachs is now predicting USD 200 per barrel. Goldman was very prescient last year when they predicted that oil will top USD 100 per barrel by the yearend.
There were also rumours of housecleaning at the CSRC (China Securities Regulatory Commission) which added to market woes.
We do not see the market falling back to the 21,000 level where there had already been substantial consolidation, and has been tested 3 times. The market has fallen 10,000 from the high of 31,000 in October 2007 to the 21,100 level in January 2008. Since then the market has recovered about half the losses. Short term target on the upside is 27,000 to 28,000 with a downside to 24,000. At 24,000 there is good opportunity to accumulate shares for the next leg up.
The fallout from subprime is coming to an end. The bad news on the horizon is oil price.
END
Wednesday, March 26, 2008
"Broker anonymity" or "What do you have to hide?"
I addressed the World Federation of Exchanges Town Hall Meeting in Hong Kong today Wednesday 26 March 2008.
Dominant institutional brokers are demanding that exchanges move towards broker anonymity i.e. not display brokers' ids on the trading screens. What do they have to hide? For a start, many trade on their own book and they want to disguise their trades from clients. If you are advising a listed company, you certainly don't want the company to know that you are selling their shares on the open market.
Many also use their own capital to buy a block of shares which a client wants to sell. They then "slice and dice" the block and re-sell on the market, at a profit of course. How would you feel if you jsut sold a block to your broker and then see him seeing the same shares at a higher price.
Finally, clients like to monitor the execution of their trades, and without broker ids' on the trading screens, this is impossible to do.
The following is the text of my speech.
WFE Hong Kong Town Hall Meeting
26 March 2008
Panel 3: Market Quality – Changing the Competitive Environment
Good morning ladies and gentlemen.
The topic is very timely as exchanges compete for market share with each other and with trading venues such as ECN’s, ATS, etc. It is only natural that exchanges look at the “micro trading mechanisms” of these alternative venues and consider changes to your own market structures to compete effectively.
Recently, we have seen a move towards what is commonly known as “broker anonymity”. The demand appears to come from dominant brokerage houses which find it difficult to complete large client orders and attribute this to “front running” by other market participants. Let’s get this straight. “Front running” is used to describe the illegal behavior of a broker buying or selling ahead of a client order so as to profit from the subsequent movement in the market. There is nothing illegal for a broker to trade ahead of another broker because he thinks that other broker may be acting for a big client with a large order that may move the market.
Let me quote you a passage from a report supporting “broker anonymity” --- “Transparency invites market manipulation, increases volatility, distorts pricing and ultimately reduces liquidity”. Sounds counter intuitive doesn’t it?
“Market transparency” is the ability of market participants to observe information in the trading process. Pre-trading market transparency provides a level playing field for all stakeholders in a market and is a key component of price discovery. “Post trading transparency” is only sufficient as an audit trail to guard against market abuses. It is not a substitute for real time price discovery which tends to stablise prices, increase liquidity and lower transactional costs.
There are a number of stakeholders in a market, each with their own interests and agendas. We have the government representing public interests, the regulators who are there to protect the investing public, the issuers who need a properly functioning market for fund raising, investors (both institutional and retail), and intermediaries. Ultimately, the market is for issuers and investors, and the regulators and intermediaries are there to facilitate trading and to guard against abuses.
For investors and issuers, market quality is measured in terms of a level playing field, price stability, risk management, information flow, liquidity, and trading volumes. “Broker anonymity” tilts the playing field in favour of those in the know i.e. information on trade flows will be concentrated at the trading desks of the dominant brokerages, and available only to their favoured clients.
Investors and fund managers are overwhelmingly in favour of full transparency in trading and disclosure of broker identification on trading screens. This allows them to properly monitor the execution of their orders. Broker anonymity reduces the transparency in a market and makes it difficult for fund manager, who have a fiduciary duty to their clients to ensure that there is best execution, to monitor the execution of their orders.
As a matter of fact, there has been a trend towards more transparency in all aspects of the market. For example, price discovery is facilitated through pre-opening auction sessions. “Broker anonymity”, therefore, appears to be a step back to opaque markets where only the brokers know who is buying and who is selling.
As operators of exchanges, you have a fiduciary duty to your stockholders to maximize returns, and certainly increasing turnover and trade flow must be at the very top of your list of priorities. However, in every financial market, there are a number of stakeholders whose interests must be safeguarded.
Markets and trading venues developed and evolved to fill a need. Their trading structures are very much a product of their history, and development. To a large extent, there is no one market structure that fits all exchanges or even all stocks traded on a single exchange.
In HK, public interest is enshrined in the law that created the HKEx. Public consultations are conducted prior to the introduction of major new initiatives, and new products and trading practices are vetted by the SFC which takes a balanced approach and ensures that the interests of all stakeholders are considered.
In HK, our trading system is automatic order matching and therefore there is no partiality as brokers cannot choose their counterparty. Also, we can negotiate block trades off market, but these are required to be reported to the exchange to ensure transparency.
The market in HK is not as concentrated in the hands of a small number of brokers as in other market. The top 14 brokers account for 55% of the turnover, while the next 50 account for 30%. In the Australian market for example, the top 10 brokers account for 72% of turnover while the top 4 account for 37%.
In contrast to some markets where real time information is only available to brokers, institutional and retail investors in HK have always had access to the same information as brokerages. Moreover, HK does not have trade practices which restrict the flow of information from brokers to investors. We enjoy a very level playing field indeed.
Retail investors in HK account for some 37% of the turnover while institutional investors account for 56%. Proprietary trading only accounts for 7%. In overseas markets, proprietary trading account for a much higher percentage as brokers often take client positions onto their own books and then re-distribute into the market. This is another reason why large brokerage houses would prefer to hide their trading from the prying eyes of clients who may feel aggrieved.
HK does not have competing local exchanges, and that makes life “less interesting” for our exchange operator. However, many HK issues are traded on other exchanges, and we do want to bring that liquidity back onshore.
Overall market quality and integrity is what ultimately drives investors’ interests, and liquidity and turnover will gravitate towards quality markets. “Broker anonymity” is a short–term fix at the expense of market transparency and will detract from the attractiveness of a market to investors.
For exchanges with broker anonymity, I encourage you to provide more trading information to your ultimate clients, the investors, instead of less. The HKEx has made a business out of this and derives 8% of revenues from information services, and most of this drop directly to the bottom line.
We have the best practice in HK and there is no need to regress to a less transparent model.
Dominant institutional brokers are demanding that exchanges move towards broker anonymity i.e. not display brokers' ids on the trading screens. What do they have to hide? For a start, many trade on their own book and they want to disguise their trades from clients. If you are advising a listed company, you certainly don't want the company to know that you are selling their shares on the open market.
Many also use their own capital to buy a block of shares which a client wants to sell. They then "slice and dice" the block and re-sell on the market, at a profit of course. How would you feel if you jsut sold a block to your broker and then see him seeing the same shares at a higher price.
Finally, clients like to monitor the execution of their trades, and without broker ids' on the trading screens, this is impossible to do.
The following is the text of my speech.
WFE Hong Kong Town Hall Meeting
26 March 2008
Panel 3: Market Quality – Changing the Competitive Environment
Good morning ladies and gentlemen.
The topic is very timely as exchanges compete for market share with each other and with trading venues such as ECN’s, ATS, etc. It is only natural that exchanges look at the “micro trading mechanisms” of these alternative venues and consider changes to your own market structures to compete effectively.
Recently, we have seen a move towards what is commonly known as “broker anonymity”. The demand appears to come from dominant brokerage houses which find it difficult to complete large client orders and attribute this to “front running” by other market participants. Let’s get this straight. “Front running” is used to describe the illegal behavior of a broker buying or selling ahead of a client order so as to profit from the subsequent movement in the market. There is nothing illegal for a broker to trade ahead of another broker because he thinks that other broker may be acting for a big client with a large order that may move the market.
Let me quote you a passage from a report supporting “broker anonymity” --- “Transparency invites market manipulation, increases volatility, distorts pricing and ultimately reduces liquidity”. Sounds counter intuitive doesn’t it?
“Market transparency” is the ability of market participants to observe information in the trading process. Pre-trading market transparency provides a level playing field for all stakeholders in a market and is a key component of price discovery. “Post trading transparency” is only sufficient as an audit trail to guard against market abuses. It is not a substitute for real time price discovery which tends to stablise prices, increase liquidity and lower transactional costs.
There are a number of stakeholders in a market, each with their own interests and agendas. We have the government representing public interests, the regulators who are there to protect the investing public, the issuers who need a properly functioning market for fund raising, investors (both institutional and retail), and intermediaries. Ultimately, the market is for issuers and investors, and the regulators and intermediaries are there to facilitate trading and to guard against abuses.
For investors and issuers, market quality is measured in terms of a level playing field, price stability, risk management, information flow, liquidity, and trading volumes. “Broker anonymity” tilts the playing field in favour of those in the know i.e. information on trade flows will be concentrated at the trading desks of the dominant brokerages, and available only to their favoured clients.
Investors and fund managers are overwhelmingly in favour of full transparency in trading and disclosure of broker identification on trading screens. This allows them to properly monitor the execution of their orders. Broker anonymity reduces the transparency in a market and makes it difficult for fund manager, who have a fiduciary duty to their clients to ensure that there is best execution, to monitor the execution of their orders.
As a matter of fact, there has been a trend towards more transparency in all aspects of the market. For example, price discovery is facilitated through pre-opening auction sessions. “Broker anonymity”, therefore, appears to be a step back to opaque markets where only the brokers know who is buying and who is selling.
As operators of exchanges, you have a fiduciary duty to your stockholders to maximize returns, and certainly increasing turnover and trade flow must be at the very top of your list of priorities. However, in every financial market, there are a number of stakeholders whose interests must be safeguarded.
Markets and trading venues developed and evolved to fill a need. Their trading structures are very much a product of their history, and development. To a large extent, there is no one market structure that fits all exchanges or even all stocks traded on a single exchange.
In HK, public interest is enshrined in the law that created the HKEx. Public consultations are conducted prior to the introduction of major new initiatives, and new products and trading practices are vetted by the SFC which takes a balanced approach and ensures that the interests of all stakeholders are considered.
In HK, our trading system is automatic order matching and therefore there is no partiality as brokers cannot choose their counterparty. Also, we can negotiate block trades off market, but these are required to be reported to the exchange to ensure transparency.
The market in HK is not as concentrated in the hands of a small number of brokers as in other market. The top 14 brokers account for 55% of the turnover, while the next 50 account for 30%. In the Australian market for example, the top 10 brokers account for 72% of turnover while the top 4 account for 37%.
In contrast to some markets where real time information is only available to brokers, institutional and retail investors in HK have always had access to the same information as brokerages. Moreover, HK does not have trade practices which restrict the flow of information from brokers to investors. We enjoy a very level playing field indeed.
Retail investors in HK account for some 37% of the turnover while institutional investors account for 56%. Proprietary trading only accounts for 7%. In overseas markets, proprietary trading account for a much higher percentage as brokers often take client positions onto their own books and then re-distribute into the market. This is another reason why large brokerage houses would prefer to hide their trading from the prying eyes of clients who may feel aggrieved.
HK does not have competing local exchanges, and that makes life “less interesting” for our exchange operator. However, many HK issues are traded on other exchanges, and we do want to bring that liquidity back onshore.
Overall market quality and integrity is what ultimately drives investors’ interests, and liquidity and turnover will gravitate towards quality markets. “Broker anonymity” is a short–term fix at the expense of market transparency and will detract from the attractiveness of a market to investors.
For exchanges with broker anonymity, I encourage you to provide more trading information to your ultimate clients, the investors, instead of less. The HKEx has made a business out of this and derives 8% of revenues from information services, and most of this drop directly to the bottom line.
We have the best practice in HK and there is no need to regress to a less transparent model.
Friday, March 21, 2008
Fed intervenes in the US Market!
There is market intervention, and there is market intervention. But when it's done by the Fed, it's called saving the economy.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
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