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!
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