Tony's Random Thoughts

TVB Interview

2011-08-15T23:38:00.005+08:00

Question 1: As a leading Hong Kong financial industry player, can you share with us the challenges that HK experts are facing, especially in exporting their services to overseas or mainland?

Answer: HKG is an international financial centre with many participants from all over the world. The international participants have overseas offices or were originally from overseas. The challenge that HK based financial services firms have to face is how to offer our services overseas. We can tie-up with an overseas firm or set up our own offices. In order to consider the most appropriate option, we need to spend substantial time and resources studying the overseas market, identifying potential partners, and negotiating the appropriate set-up. Many HK based firms do not have the resources to do this on our own.

Question 2: Would you share with us your experiences of joining HK Trade Development Council’s delegation to Moscow and St. Petersburg which led by the Financial Secretary in 2009 and Asian Financial Forum?

Answer: I have participated in many TDC delegations in China, Asia and Europe. Many HK based financial services firms have explored the markets in China and Asia but Europe has always been a little too far away both in terms of distances and time zones. The TDC’s delegation to Moscow and St. Petersburg was very useful to me personally as I was able to gauge the level of interest in the HK financial market from similar sized organisations in the Russian Federation, and from potential clients.

Many companies in Russia are looking at various financial centres for fund raising but have been disappointed in the European markets’ recent performance. They have come to realise that HKG is an important financial centre for China, and that many M&A deals can be done with Chinese entities through HKG. Russian financial advisors are also looking at tying up with partners in HKG in order to compete with the international banks.

I have attended every AFF since its inauguration. In addition to the high quality of the speakers, I have found it an excellent venue to meet potential partners. By coming to HKG to attend the AFF they already have interest in either investing in HKG or developing HKG tie ups. You might even say that they are more or less pre-qualified so we are talking to people with genuine intent.

Question 3: What is the contribution of HKTDC in promoting HK financial services to the world?

Answer: The problems faced by HK based financial services institutions are the same ones faced by HKG manufacturers and traders in the early years. How do we reach international markets with our services? How do we identify potential partners in international markets?

In the same way that TDC has helped the manufacturers and traders, it is now helping financial services firms. In addition to manufacturing and trading, HKG is now an international financial centre. The TDC has recognised this shift and has re focused itself to assist HKG financial services firms to tackle overseas markets.

The job is different and much harder. We do not have physical products to sell or show in exhibitions. What we have is our network, knowledge, expertise, and perhaps some physical infrastructure e.g.. internet trading etc. Without the leadership of TDC, I would not have been able to even consider overseas markets. The investment in time and efforts (not to mention costs) would have been too big.
In the same way that the TDC helped HKG become the premier trading centre of the world (with China as our work shop), it is now helping promote HKG as an international financial centre.

International financial institutions were successful in bringing foreign capital to China. Now that China has accumulated USD2.4 trillion of foreign currency reserves, HKG will become the fund raising centre for many international companies.

How much of "Made in China" is made in China?

2011-08-15T23:04:00.001+08:00

The Federal Reserve Bank of San Francisco published a study which tries to answer this question. The short answer is US consumers spent 2.7% of total personal expenditure on goods which are "Made in China". The study goes further is point out that out of every dollar spent on these goods, $0.55 goes to US businesses and workers for marketing, rents, transportation, electricity, etc. Thus, only $0.45 goes towards the costs of "Made in China" goods.

However, the study did not go far enough in analysing the $0.45 that supposedly goes to China. Many US businesses (read WalMart etc) have buying offices in China which places the orders with Chinese manufacturers. The goods are shipped off to the US after a hefty markup by the buying office to drop off the profits in a lower tax regime.

For example, an iPhone which retails for $500 "costs" $179 to make in China. Of the $179, $172.50 actually goes to parts that are not made in China. So $6.50 is the assembly costs that is earned by the Chinese or 1.3% of the retail price.

So why do we think that "everythjing we buy is made in China"? The answer is simply mis-perception. Blame this on the media.

We keep reading about the US trade deficit with China and how this is growing. However, as a percentage of total US production this is only a smal percentage (2.9% of a $10 trillion economy).

According to the study, 88.5% of consumer spending is on goods and services made in the US. The key word here is services, think mortagage repayment, car repayment, insurance payment, school fees, etc.

Forcing China to revalue the RMB upwards by 30% would only increase the Chinese component of the costs by $1.95, hardly enough to discourage imports from China but increasing costs to consumers.

Would US workers be willing to work for $500 per month assembling iPhones? Probably not, so the work and money will go to some other low costs countries. US businesses do their sum everyday. If they can make it cheaper and more efficiently somewhere else, they would have already done so. The benefit is passed on to US consumers in terms of lower prices, and to US businesses as higher profits which enable them to hire US employees.

The GTM/EGX 5th Annual Award Ceremony and Gala Dinner

2010-03-27T23:00:00.015+08:00

The following is the text of my Keynote Speech at the Global Trade Matters/Egyptian Exchange 5th Annual Awards to Outstanding Companies in Egypt

Opening Remarks

First of all I would like to thank Ashraf Naguib, Managing Director of GTM, for inviting me to participate at this event.

Address the Key Guests

Mr. Karim Helal, Chairman of the GTM/EGX Strategic Advisory Board

Members of the GTM/EGX Strategic Advisory Board

Distinguished Guests

I bring you greetings from China, the faraway land with a civilization that matches your own in antiquity

It is a great honor to be invited to participate in this very prestigious event to celebrate the achievements of Egypt’s top companies, and the men and women who have made them successful

First of all, I would like to offer my congratulations to the awardees. Not only have you survived the The Great Recession of 2007 ( I will not use the “D” word) but you have thrived and prospered in the most difficult financial and economic conditions since the 1930’s. You have every right to be proud of yourselves. Give each other a pat on the back. You are the Best of the Best!

But precisely because you are The Best, you must be asking yourselves “What’s Next? What am I going to do next year? Has the world economy recovered? Or, will we be like Japan and lose a decade, or two?”

The HKG Story: China’s Proxy

Ashraf asked me to share with you my thoughts, concerns and optimism for 2010.

Before I go on, I have a confession to make. I am not an economist nor am I a banker. I am a bean counter (an accountant) turned stockbroker. I don’t have any grand theories of economic boom and busts, nor do I have a prescription for “saving the world’s economy”.

All of you present today, run huge corporations with thousands of employees and revenues in the billions.. The fact that you are sitting here tonight is proof enough of your success. So I am not going to try to tell you how to run your business

However, in the 40 years since I started working in 1969, I have observed at first hand a few economic cycles and I have been fortunate enough to have participated in the miracle that turned China from a backward agricultural economy on the verge of starvation into the economic powerhouse that it is today.

I am sure you are all familiar with China’s economic statistics and I will not bore you with the details. However, I would like to talk a little bit about China’s proxy economy, HKG.

When I first returned to HKG in 1971, the Hang Seng Index had just closed the previous year at 211. The average daily turnover was USD2.6 million and the turnover for the whole of 1970 was USD778.4 million.

By the end of 2009, the HSI closed at 21,872. The average daily turnover was USD7.9 billion and the turnover for the year was USD1,979.4 billion. Per capita GDP was USD30,088.

During the past 4 decades, HKG benefitted by being the proxy for China. Foreign companies trading with China did so through HKG, and Chinese companies used HKG as a window on the world.

When China opened it’s doors, Chinese companies used HKG as the platform of choice in raising capital and much needed foreign exchange. Since the first Chinese company (Tsingtao Brewery) was listed in HKG in 1993, over 300 Chinese companies have have followed raising some USD280 billion in IPO and subsequent fund raising. Chinese companies now account for over 30% of the listed companies, over 60% of the market capitalisation, and over 70% of our daily turnover.

HKG benefitted by being on the doorstep of China but that is not the secret to our success. Many cities have had similar opportunities but by not evolving as the times changed, fell by the wayside. A prime example is Kashgar on the Old Silk Road. For many years, it was the point of entry in China and prospered for many years by being the conduit of goods between China and the rest of the world. Look at it now.

By the way, I am sure you have heard about China’s USD2.3 trillion foreign exchange reserves. Over 10% of that came through the HKG capital markets.

Yes, HKG benefited by being on the doorstep of China but the key is that we changed from being a trade entreport to a financial intermediary and we contributed to the country’s development.

Egypt and North Africa

When I talk to Western bankers and economists, they see the world as 3 regions: The Americas, Europe Middle East and Africa (EMEA), and Asia Pacific. My view of the world is a little more complicated based on population, proximity and store of resources:

North America and Canada

Latin America

Europe

Middle East and Africa

Russia

Central Asia

China and Asia Pacific

I believe that Egypt and Egyptian companies can and do play a similar role in Africa and the Middle East i.e. be the conduit between the Middle East and Africa, and the consumer nations. In terms of population and resources, Africa has the potential of being a stand alone economic entity. Forty years ago, who would have thought that China would be the economic power it is today?

Africa and China

There is a final ingredient in the mix. Don’t look to your tradional markets for growth!

In the 1800’s, British trading hongs in HKG made their fortunes by being the intermediary between China and Europe. In the 1960’s this role was surplanted by Chinese trading firms.

However, China would not have prospered without that great engine of consumption, the USA. Many companies and individuals in HKG started their fortunes by facilitating trade between China and the USA.

Most forecasters have called for anemic growth in Europe and the USA. So, where should your companies be looking for opportunities if not in their traditional marklets?

The answer, of course, is China. The annual trade between China and Africa amounted to some USD100 billion. Most of this in exports of energy and mining products from Africa to China and imports of Chinese manufactured goods.

However, the Chinese government is encouraging domestic consumption as a replacement for weak exports to the USA and Europe. It is pumping USD586 billion into the economy in 2009 and 2010 as a stimulus package. And remember, a dollar in China goes much further than a dollar in the US. When you combine this with a population of over 1.4 billion, and household and corporate savings amounting to 150% of GDP, this makes for a very scary growth story.

Just imagine selling one of your products to every Chinese! And that by the way is not so far fetched. China Mobile, the largest of 2 mobile phone operators, has 527 million users.

Conclusion

The Chinese economy grew at a comparatively anemic 8.7% last year (because of the Financial Tsunami) after a decade of double digit growth. As the world economy recovers, I expect China’s growth to resume the previous trajectory and wil one day take over as the engine of growth for the world.

To the companies represented in this room tonight, The Best of The Best in Egypt, I encourage you to take advantage of this once in a lifetime opportunity to participate in the growth of the Chinese economy.

1.4 billion Chinese customers are waiting for you. Go get them.

Thank you.

2010-01-19T13:42:00.003+08:00

The Prime Minister of Kazakhstan led a delegation to HK and paid a visit to the HK Exchange.

In the photo, I was explaining how we used to place orders on the old trading system.

The Prime Minister was accompanied by the Governor of the National Bank of Kazakhstan (the central bank) Mr. Marchanko, as well as the Head of the Kazakhstan Stock Exchange and the CEO of Samruk-Kazyna the sovereign wealth fund.

Yuan Settlement – What is it, Who will benefit, and What is the End Objective?

2009-07-05T22:35:00.004+08:00

Background

On 29 June 2009, Zhou Xiao Chun, Governor of the People’s Bank of China (the Chinese central bank) and Joseph Yam, Chief executive of the Hong Kong Monetary Authority (the de facto central bank and bank regulator in Hong Kong) signed a Memorandum of Understanding (“MOU”) putting into place a pilot scheme to allow the settlement of trade between HK and Mainland Chinese enterprises in Yuan (the Chinese currency also known as Renminbi or “RMB” i.e. “people’s currency”). The international currency symbol of the Yuan is “CNY”.

The MOU was quickly supplemented by detailed directives issued 2nd and 3rd July 2009 which laid out the conditions for the Yuan settlement.

What is it?

Under the Yuan settlement scheme, enterprises in China and Hong Kong trading with each other will be allowed to settle those trades in Yuan. The scheme will now allow enterprises whose costs are mainly in Yuan to reduce their foreign exchange exposure by using Yuan as the currency of trade. Previously, trades have been settled in foreign currencies, mainly US dollars which had weakened against the Yuan over the past 3 years.

Under the pilot scheme just announced, qualified enterprises in certain cities in the Yangtze (Shanghai) and Pearl River (Guangzhou, Zhuhai, Shenzhen and Dongguan) deltas will be allowed to participate. The list of eligible enterprises has yet to be announced but it is expected that no more than 500 enterprises will be eligible in the initial phase.

It is expected that all companies in Hong Kong and Macau trading with mainland enterprises will be allowed to participate.

In addition to companies Hong Kong and Macau, companies in the 10 Association of South East Asian Nations (“ASEAN”) will also be allowed to participate in using Yuan as the currency of trade and settlement with the to be designated Chinese enterprises.

In order to encourage the Chinese enterprises to use Yuan for trade and settlement, the Chinese Government will provide certain tax incentives.

What is the impact?

Since 2004, Hong Kong banks have been allowed to conducted limited Yuan business. This has been limited primarily to accepting deposits of Yuan from companies and individuals in Hong Kong. Most of these deposits are generated by retailers in Hong Kong from the spending of Mainland Chinese tourists travelling under the “independent travellers” scheme.

As of the end of March 2009, the Yuan deposits held by Hong Kong banks amounted to CNY 53 billion (USD 7.7 billion). While this may appear to be fairly substantial, it pales in significance when viewed against the USD 200 billion bi-lateral trade between Hong Kong and China.

Mainland banks will also allowed to lend Yuan to Hong Kong banks as part of trade finance settlement. However, under the detailed rules issued on 3 July 2009, the trade finance lending can only be for up to 1 month and is capped at 1% of the Mainland banks Yuan deposits as of the end of 2008. Foreign banks borrowing Yuan on the Chinese Mainland interbank market is capped at 8% of the its Yuan deposits at the end of 2008. Chinese banks will be required to provide the PBOC with detailed breakdowns of Yuan lending to foreign banks.

The limited amount of Yuan deposits in Hong Kong can be supplemented by a CNY 200 billion currency swap facility between the HKMA and the PBOC. Hong Kong banks requiring Yuan funds may borrow from the HKMA which will drawdown on the swap.

Under a separate arrangement, Hong Kong banks will also be allowed to issue Yuan denominated bonds on the Mainland and in Hong Kong to fund their Yuan business.

The stringent controls are put in place to discourage the flow of “hot” money into the Chinese economy if foreign banks were to be allowed to borrow unlimited amounts of Yuan.

What is the End Game?

China has been running massive trade surpluses with the US and has nearly USD 2 trillion in reserves. In march 2009, Premier Wen Jiao Bao of The People’s Republic of China indicated concerns about the huge amount of the country’s reserves held in US dollars and Zhou Xiao Chun the PBOC Governor has been talking about the need for a new world reserve currency.

The introduction of a limited pilot scheme to settle trade in Yuan is the first step towards the ultimate goal of internationalising the Yuan as an international currency of trade and settlement.
The inclusion of the ASEAN countries is an attempt at creating a Yuan currency block in South East Asia with smaller trading partner nations. For example, China is trying to create an ASEAN free trade zone based in Nanning, Guangxi.

In the meantime, as more Yuan circulate in the Hong Kong economy, it is conceivable that the Yuan will one day replace the US dollar as the base currency in the Hong Kong dollar peg.

Corporate Governance CITIC Pacific

2009-01-16T18:18:00.001+08:00

On 20 October 2008, Citic Pacific disclosed that it had incurred losses of HK$15.5 billion from using currency accumulators to hedge against a rise in the Australian dollar. Citic Pacific directors and management are being heavily criticized for not disclosing the losses earlier when they had known of the problem at least 6 weeks before the public announcement.

Company shares fell 42 percent between Sept 7, when the board learned of the company's exposure to risk, and Oct 20. Hong Kong's benchmark Hang Seng Index dropped 23 percent over the same period.

The red-chip group purchased equipment and supplies in Australian dollars and euros. To help fund the mining endeavor, group finance director Leslie Chang signed derivative contracts that stood to profit the company, as long as the US dollar grew weaker against the Australian currency.

When the financial crisis exerted a downward pressure on commodities prices last summer the Australian dollar fell sharply against the US dollar. The resulting loss may be the biggest derivatives loss ever reported by a Chinese company.
As a result of the losses, Citic Group had to step in to save the company from going under. Shareholders of Citic Pacific have now approved the issue to the parent Citic Group of US$1.5 billion in convertible bonds which on conversion will give the parent company majority control with 57.6% (up from 29.4%) diluting management shareholder Larry Yung.

According to a statement to the Stock Exchange, Citic Pacific revealed that its entire board of directors was being investigated by the SFC over the incident. Those under the investigation included Citic Pacific Chairman Larry Yung, Citic
Pacific Managing Director Henry Fan and 15 other directors of the
company, while Yung’s daughter, Frances Yung, former group finance
director Leslie Chang and former financial controller Chau Chi-yin were
not on the investigation list, papers reported.

Citic Pacific’s disclosure that all its directors were subject to the SFC’s investigation was made to comply with amendments to the Listing Rules that went into effect on 1 January. The amendments require continuous and timely disclosure by listed companies of information concerning directors who are subject to any investigation, hearing or proceeding by any securities regulatory
authority, or any judicial proceeding in which a violation of any securities
law or regulation is alleged. Many listed companies made similar announcements on Friday to comply with the amended rules since some of their board members were also Citic Pacific directors.

Investor Sentiment and Forecast for 2009

2009-01-16T08:16:00.004+08:00

The J.P. Morgan announced that the J.P. Morgan Investor Confidence Index in HK moved up slightly from the previous quarter when sentiment was at its weakest.

The Index is designed to measure the outlook of retail investors in the local market over the next six months. The index rose to 98 in December from 95 in September, when it fell below its neutral level of 100 for the first time since July 2006. The December index shows that overall investor confidence in Hong Kong has stabilized although investors are still wary of the risk of a deeper economic recession in the next six months.

Hong Kong investors anticipate that the employment market may deteriorate further over the next six months, according to the survey. 44% of those surveyed expect an increase in the Hang Seng Index over the next 6 months from the current level. 39% expect the Hang Seng Index to exceed 16,000 at the end of June 2009.

The index covers six areas: Hong Kong stock market performance, the local economic environment, the local investment environment, the global economic environment, personal asset valuations, and amount of investments. Each of those index components registered an increase in the latest survey, with the exception of plans to increase investments.

Both aggressive and conservative investors continue to shift their attention from overseas to the Hong Kong market. Portfolio strategists will tell you that the high concentration of equity investments in the local market may limit the potential scope for returns when the global economy begins to recover, and also increases the risk of portfolio volatility from over-dependence on a single market. However, all portfolio management theories have been thrown out the window this time around. So much for diversification (geographic, industry, asset class, currency). Everything got clobbered.

Of course, retail investors are always the worst predictors of the market.

I don't see any real improvements until after the April final results reporting season. HK has the longest reporting period of any of the developed markets. Final results have to be reported with 3 months.

Institutional investors are sitting on their hands right now and waiting for results announcements. No one wants to buy now and finish with egg on their faces when the results come out and the company announces huge "hedging losses".

So things will be very volatile between now and then. Morgan Stanley just downgraded Hsbc with a target of 52 (was 75 now 66). The market went up 1,200 points on the first 2 days of trading to 15,500 and now has given up more than 2,000 points!

"Blackout Period"

2009-01-10T13:40:00.003+08:00

Recently front-page advertisements have been taken out in the local papers protesting against a change in HK’s Stock Exchange rules which came into effect on 1 January 2009. Over 200 listed companies have signed a letter protesting this rule change that in their opinion will undermine the viability of Hong Kong’s market making it easier for unwarranted hostile takeovers, corporate exits, reduction in stock market liquidity and exodus of management talent.

Under the old rules directors and managers of listed companies were allowed to trade shares in their companies until a month before results are announced. The problem is that listed companies are allowed three months after the end of the period to report half-year results, and four months for the year-end. This meant that they were able to trade on information that was not publicly available between the end of the reporting period and the start of the “black out period” i.e. for two months before the interim results were reported, and three months for the final results.

In theory, the Listing Rules also require companies to announce meaningful events as soon as practicable, and the SFC does have the power to investigate insider dealing. But such disclosure is still problematic and after the fact. For example, recently Citic Pacific only disclosed news of a $2 billion currency loss six weeks after the fact was known to the directors.

Under the new rules which were originally promulgated in January 2008, directors and managers are not allowed to trade shares in their companies until after the results are announced. Therefore, if the companies continue to make full use of the 3 month interim reporting period and the four months final reporting period, directors and managers are barred from trading for a total of seven months.

In the US, financial results are reported quarterly and must be disclosed within 40 days of a quarter-end and 60 days of a year-end. Thus, if a listed company in HK can announce interim results within 40 days and final results within 60 days (using the US as rule as an example), the total “black out” period is only 100 days and not 7 months.

The problem, of course, is that auditors have to co-operate and the auditors would like to have as much time as possible after the year end before giving the company a clean bill of health because of their own scheduling. Also, companies may sometimes need more time after the year end to work with the auditors on the results.

On December 30th, the Stock Exchange announced that it would delay introduction of the new regime until April 1st. Opponents to the proposals hope the delay will become permanent.

Corporate governance advocates would like to introduce more frequent reporting to increase transparency, and to ban insider trading until important information has been publicly announced to level the playing field.

2009 Emerging Markets

2009-01-05T18:45:00.003+08:00

The MSCI Emerging Markets Index fell from 54% during 2008. Many have laughed at those who suggested that the emerging markets will perform better than the established markets. Sure, "de-coupling" did not occur. The problems in the US and Europe split over into all other markets. But by the same token, none of the popular investment concepts worked either. Diversification did not work, all markets and all industries got clobbered. The destruction of wealth occured in every market be it equities, commodities, currencies, you name it. If there was a theme for 2008, it was disintegration.

The housing slump in the US will take a couple of years (optimistic) to work itself out. This is not helped by the US governement pumping money into the system to prop up ailing banks. The urgency and market discipline will be lacking and the market will take a while to find the bottom and make the proper adjustments.

Unlike developed developed economies which have multiple drivers, most emerging markets have a central theme. They are energy based, commodities based or like China, simply a huge market that has only started moving. As the world starts to recover, the demand for these products will rise again leading the emerging markets out of the current difficulties.

These markets have fallen more than the developed markets simply because of the lack of liquidity. By the same token, there is more upside.

The MSCI China Index fell 60% in 2008 having risen some 370% from 1 November 2004 through 31 October 2007. Much of this was due to indiscriminate selling by hedge fund (to meet margin calls) and traditional funds (in anticipation of redemptions). Slowing demand for Chinese goods from the US and Europe will slow growth but the Chinese government will be spending over US$586 billion over the next 2 years to stimulate the economy with most going into infrastructure projects which will major consumers of energy and commodity products. Chinese stocks now trade at 12 times earnings compared to 53 times in October 2007.

Yes, China's growth will slow from over 11% in 2007 to an estimated 7.5% in 2009. The Chinese government is targetting growth of 8% which looks achievable given the stimulus package. We like Chinese stocks in the following sectors - energy, construction materials, banks, and retail products with strong franchiese.

Turning Crisis Into Opportunities

2008-11-27T13:49:00.003+08:00

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.

Kazakhstan: Development of the Financial Sector

2008-11-24T15:30:00.004+08:00

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.

Have We Seen The Bottom? Redux

2008-11-11T10:44:00.003+08:00

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!

The October Effect

2008-11-11T10:32:00.003+08:00

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.

USD586 Billion Stimulus Package

2008-11-10T22:25:00.003+08:00

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.

Investing Paradox

2008-11-04T15:05:00.002+08:00

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!

CITIC Pacific May Lose Up To HK$15.5 Billion

2008-10-21T12:12:00.003+08:00

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%.

China Update

2008-10-17T11:52:00.003+08:00

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.

Perspective on China

2008-10-16T22:01:00.003+08:00

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!

Just How Much Is US$700 Billion?

2008-10-16T21:44:00.002+08:00

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.

Black Wednesday --- Interest Rate Cuts

2008-10-09T12:11:00.003+08:00

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.

Another One Bites The Dust!

2008-10-06T12:54:00.003+08:00

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.

And While We Wait ....

2008-10-02T23:48:00.004+08:00

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!

Asia in Transition

2008-09-12T16:41:00.001+08:00

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.

Have We Seen The Bottom?

2008-09-09T07:36:00.004+08:00

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.

BOC Profits Hit By Sub Prime

2008-08-29T23:36:00.002+08:00

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.

How Much Did China Spend On The Olympics?

2008-08-26T13:44:00.003+08:00

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.

China Life Insurance (#2628)

2008-08-26T13:43:00.001+08:00

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.

Timing is Right

2008-08-19T10:01:00.002+08:00

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!

China Stocks Cheapest Level in Last 3 Years

2008-08-15T17:58:00.003+08:00

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.

China"s Inflation Down To 6.3% in July 2008

2008-08-15T17:51:00.003+08:00

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%.

IPO: China Southern Locomotive & Rolling Stock

2008-08-09T10:08:00.005+08:00

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.

HK Fx Reserves Rank 9th Worldwide

2008-08-09T08:40:00.005+08:00

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.

Why Buy Into The China Story?

2008-08-06T21:26:00.004+08:00

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.

How to invest in Chinese RMB?

2008-08-06T21:21:00.003+08:00

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.

HKEx Launched Gold ETF

2008-08-04T02:49:00.002+08:00

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

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It's Official! Sell-Off in Chinese Banks "Irrational"

2008-07-09T08:16:00.003+08:00

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.

Where is the A share Market Going?

2008-07-08T11:50:00.004+08:00

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.

Play With The Big Boys?

2008-07-07T22:08:00.004+08:00

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.

ICBC Redux

2008-07-04T09:20:00.002+08:00

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.

HK Near Bottom

2008-07-04T09:13:00.003+08:00

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.

Buy ICBC on Weakness

2008-07-04T01:03:00.002+08:00

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.

What's Wrong With +20% Profit Growth?

2008-07-04T00:10:00.002+08:00

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!!!

SJM's (#880) Offer Oversubscribed

2008-07-03T12:14:00.004+08:00

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.

HK's Exports Performance

2008-07-03T10:59:00.002+08:00

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.

HK Depositary Receipts (HDR)

2008-07-01T23:39:00.002+08:00

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.

GEM (Growth Enterprise Market)

2008-07-01T22:40:00.000+08:00

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.

China's Foreign Currency Reserves US$1.8 Trillion

2008-06-28T00:48:00.000+08:00

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.

Retesting the 22,000 Support

2008-06-12T15:31:00.001+08:00

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.

Is it time to buy China Construction Bank?

2008-05-16T19:14:00.002+08:00

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

Oil reaches USD120 per barrel

2008-05-08T19:17:00.001+08:00

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

"Broker anonymity" or "What do you have to hide?"

2008-03-26T20:26:00.011+08:00

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.

Fed intervenes in the US Market!

2008-03-21T10:47:00.005+08:00

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.

The Asia Era: Challenges and Opportunities After The Subprime Mess

2008-03-21T10:36:00.003+08:00

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 (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.

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 NSE grew at 122% and 115%. Except for Japan, all Asian markets enjoyed double digit growth.

During 2007, the NYSE and LSE each grew at a paltry rate of 1.5%. 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.

The ASF is the annual gathering of the representatives of the securities industries in the Asia Pacific region. The objective of the ASF is to allow delegates to share experience and to explore opportunities in co-operation. Currently, markets represented on the ASF include Japan, Korea, China, Chinese Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Australia, India, and Vietnam. The ASF 2008 in Hong Kong will be the 13^th in the series of annual meetings.

The ASF will consist of market reports by representatives of each market, followed by panel discussions lead by well known market professionals. This year, the panels will focus on Risk Management and what we can learn from the subprime crisis, and How to Take Advantage of Opportunities in Asia.

What If The Fed Gave A Party And Nobody Came?

2008-02-05T16:17:00.000+08:00

The thought on the minds of investors since the Fed cut interest rates last week was "Why there isn't a stronger reaction?" The answer of course was that the cut was too late. The Fed waited until it could see the statistics reflect a slow down. By definition, that means that we have already started moving downhill by the time the numbers show up on their radar screen.

Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.

Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.

So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.

Better Late Than Never!

2008-01-23T21:25:00.000+08:00

Hong Kong's Hang Seng Index rose 2,332 points (10.7%) to close at 24,090. The HSI had declined more than 10,000 points from the peak in October 2007 and was in danger of breaching the 21,400 support level, closing 21,757 on 22 January 2008. Since October 2007, the HSI had given up almost all the gains in 2007 which began the year at just over 20,000.

The catalyst was the Fed cutting Fed Funds rate by 0.75% from 4.25% to 3.50%. The Fed Discount rate was cut by the same percentage from 4.75% to 4.00%. The last time the Fed made such a large cut was in August 1982.

The expectation is that the Fed will continue to cut rates aggressively at the meeting next week, perhaps by as much as 0.50%. The Fed is expected to cut rates down to 2.75% by April, and 2.0% by September. How low can it go? The lwest was 1.0% on 25 June 2003.

Will cutting interest rates help? Almost certainly. The problems with providing liquidity to banks through the discount facility is that the banks do not want to borrow. They have sufficient cash. The problem is that they need capital injection because of the book losses they have taken from revaluing the "sub prime loans". By cutting interest rates, the Fed makes it easier for borrowers to keep up their payments. Taken together with the US Government's efforts to negotiate a moratorium on interest vrates re-setting, this will reduce the expected default rate, and allow the banks to start valuing the sub prime based securities at closer to their real value rather than the current "fire sale" levels.

Why didn't the Fed cut by 0.50% in December 2007 instead of the miserly 0.25%? The reason given was that there were still inflation worries, and the Fed wanted to try injecting liquidity directly to banks through the discount facility. That did not really address the problem of pending defaults on sub prime mortgage loans. Only a moratorium on restting interest rates, and a reduction of the rates will achieve the aim of stabilising the market.

The HK market reacted positively to the rate cut. However, we still expect the market to be volatile over the next 6 weeks until the rate cuts take effect. In the short term, we are looking for 27,000 for the near term and up to 34,000 sometime during 2008.

Will Sub Prime Choke Growth in China

2008-01-17T20:28:00.000+08:00

The HK stock market fell over 3,000 points over the past 5 days. Yesterday, 16 January 2008, it fell 1,300 points. The HKEx shares fell from a high of HK$268 to HK$170.

There are 2 main factors at work: concerns over the impact of the sub prime crisis in the US, and tightening of monetary measures by the PRC authorities.

Sub Prime Crisis
The sub prime 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.

Tightening in China

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.
The current impact is temporary and mostly emotive. When banks in China start announcing their results we will see that they continue to expand their lending.
Impact on Exports to the US.

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.

Conclusion

The present correction represents an opportunity to buy into the market at attractive levels. I particularly like the Chinese financials, and the HKEx.

The Chinese Are Coming! The Chinese Are Coming!

2007-12-20T17:16:00.000+08:00

To paraphrase Paul Revere.

Moragn Stanley just 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 defacto 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.

Waiting For The Fed

2007-12-12T10:26:00.000+08:00

The Federal Open Market Committee announced it would cut the federal-funds rate, charged on overnight loans between banks, by a quarter-point to 4.25%. The move met most expectations, although some had hoped for a half-point cut.

The Fed has cut short-term interest rates by a full point since its first move lower this year on Sept. 18. The Fed's accompanying statement mentioned apparently slowing economic growth, as a result of mounting damage from the correction in housing markets, as well as slowing in business and consumer spending. Those who had hoped for a half-point cut to the discount rate were also disappointed. The Fed cut the discount rate, charged on direct loans to commercial banks, by a quarter-point to 4.75%, which left the spread between the two rates unchanged.

To some, the Fed statement seems out of touch with reality and missed an opportunity to bolster confidence in the credit markets.

The accompanying guidance was difficult to interpret. It did not address the balance of risks between growth and inflation and appears to be a compromise with the inflation hawks. Although it did mention slowing growth, but it also said that "some inflation risks remain" because of energy and commodity prices. The language about inflation risks was identical to language in the last FOMC statement.

Is the Fed for real? It doesn't seem to know that the market is very weak and expectations are what is driving the market.

Markets reacted badly. The Dow Jones Industrial Average fell 294.26, or 2.1%, to 13432.77.

How To Fix The Sub Prime Mess?Lessons From The Asian Financial Crisis

2007-12-05T07:40:00.001+08:00

The Bush Administration is proposing to freeze the resets on sub prime 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.

The argument is that if the rate on sub prime loans are capped, then the investors will suffer (i.e. get less interest than they expected) and borrowers will therefore benefit (i.e. pay less than they would have). Who would then buy US assets?

This is a "prime" example of classroom theorising vs. market savvy. We are often bombarded by learned commentators, professors and such like, that it's "Economics 101", as if the label itself gives it credence just like the pieces of parchment on their walls. My answer is it's "Market Behaviour 101" that matters.

By capping the rate on sub prime loans, lenders will be able to keep receiving payments. It's the income stream that matters. The alternative is that borrowers will just give up and hand the properties back. The banks will then have to try to sell the properties into a weak market, get much less than their original principal, and write-off the difference.

The recent price paid by a hedge fund for e-Trade puts this at about 35 cents on the dollar. Less me ask you, would you prefer to get 95 cents (by foregoing some interest) or 35 cents. Mind you, the increase of interest on reset was not a "sure thing", i.e. the borrower has the option to repay or refinance. Who knows, if this had not blown up, they may have been able to refinance. So the lenders are only giving up something which had a theoretical value which they may or may not have counted on in the first place. They may actually have expected the borrower to refinance and get the loans off their books.

So what are we asking them to do by capping the rates? Only that they refinance the loans at some thing close to the market rate and not punitive.

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 pillored 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 belie the dire predictions of the "learned" community.

Text books on economics are written after the fact. Different people will extract and interprete 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.

When "sub-prime" loans were the thing to be in, the captains of our financial industry were greedily fighting their way to the "feeding troughs" to get a piece of the action, afraid of losing out. In the now famous words of a certain Mr. Prince, previously of Citigroup, "When the music starts, you have to dnace". Now that "sub-prime" is a pariah, the vultures are waiting for the carcass to rot (i.e. they want 35 cents on the dollar) and trying to scare off anyone who wants to take the not yet dead bodies away for treatment by saying "let nature takes its' course, let them die!"

That's "Market economics 101". Sometimes, it is necessary to take some action that the "pure" economists abhor. Let's try and save what we can. 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.

Looking For 2 Rate Cuts From The Fed

2007-12-04T21:08:00.000+08:00

Asian markets finished mixed, with Tokyo stocks edging lower. Hong Kong gaining on hopes of a U.S. interest-rate cut.

Market Indices
Australia All Ordinaries 6588.80 - 0.13%
Bombay Sensex* 19529.50 - 0.38%
Hong Kong Hang Seng 28879.59 + 0.77%
Japan Nikkei 15480.19 - 0.95%
Shanghai Composite 4915.88 + 0.97%
Singapore STI 3527.87 + 0.18%
South Korea Composite 1917.83 + 0.81%
Taiwan Weighted 8651.28 + 0.79%

*Late trading

HK Continues To Move Up

2007-12-03T22:05:00.000+08:00

Asian shares ended mixed. Profit-taking drove Tokyo and Shanghai lower, while Hong Kong advanced on strong blue chips buying in anticipation of the Fed lowering interest rates..

China Railway shares surged 69% on their Shanghai debut, on expectations China's infrastructure demand will remain robust in coming years. This augurs well for the H-share debut in HK on Thursday.

Market Indices
Australia All Ordinaries 6597.20 + 0.05%
Bombay Sensex* 19587.36 + 1.16%
Hong Kong Hang Seng 28907.77 + 0.92%
Japan Nikkei 15628.97 - 0.33%
Shanghai Composite 4868.61 - 0.07%
Singapore STI 3558.61 + 1.06%
South Korea Composite 1902.43 - 0.19%
Taiwan Weighted 8583.84 - 0.03%

*Late trading

Asian Markets Continues Strength

2007-11-30T23:34:00.000+08:00

Asian markets finished mostly higher, as shares rose on expectations of a U.S. interest-rate cut.

Market Indices
Australia All Ordinaries 6593.60 + 1.33%
Bombay Sensex* 19363.19 + 1.89%
Hong Kong Hang Seng 28643.61 + 0.57%
Japan Nikkei 15680.67 + 1.08%
Shanghai Composite 4871.77 - 2.63%
Singapore STI 3521.27 + 1.24%
South Korea Composite 1906.00 + 1.51%
Taiwan Weighted 8586.40 + 1.65%

*Late Trading

Sub Prime Fatigue Sets In

2007-11-29T07:26:00.000+08:00

The US market closed last night up 331 or 2.6% to 13290, a two-day rally of more than 500 points. Wednesday's buying frenzy was sparked by fresh hopes of a Fed rate cut, signs of life in the battered financial sector and plunging oil prices dwon $4 to $90.

The Fed said that the economy looks weak and that housing will not recover until late 2008. One of the Fed governors also said that the Fed must be flexible on interest rates. This is seen as code words that the Fed will cut interest rates aggressively.

All that, and SUB PRIME FATIGUE. It seems that daily one bank or another is setting aside provisions for sub prime based securities. It's gotten to the stage that if you do not announce provisions, the company is immediately suspect. Think about it! If everyone around you are taking US$8 billion provisions, you would be a fool not to take a similar amount even if you don't need it or need a lower number. You can always write it back when the market becomes more sane, and take a big bonus in that year. If you don't take a big enough number now, and come back for more later, your job is on the line.

Asian stocks rallied, tracking an overnight surge on Wall Street amid hopes of another interest-rate cut. Hong Kong and Shanghai both finished more than 4% higher.

Market Indices
Australia All Ordinaries 6507.20 + 1.16%
Bombay Sensex* 19003.26 + 0.34%
Hong Kong Hang Seng 28482.54 + 4.06%
Japan Nikkei 15513.74 + 2.38%
Shanghai Composite 5003.33 + 4.16%
Singapore STI 3478.22 + 3.22%
South Korea Composite 1877.56 + 2.34%
Taiwan Weighted 8447.03 + 2.06%

*Late trading

Yoyo Market

2007-11-28T20:55:00.000+08:00

Asian markets finished mostly lower Wednesday, with oil companies and blue chips weighing on Japan's benchmark index, snapping a three-day winning streak. However, HK finished up slightly after to-ing and fro-ing all day. We expected the index to open higher and it did by about 120. Then it dipped into negative territory, and went back and forth. If not for the weakness in HSBC (#5) we would have finished up higher especially with the US up 215 overnight.

Bank of China (#3988) is still weak after Temasek the Singapore Government investing arm sold 5% of its' holdings. It seems to me that now may be a good time to buy BOC.

Other Mainland companies looking for cornerstone investors may now have second thoughts about the investment horizon of Temasek.

Market Indices
Australia All Ordinaries 6432.80 - 0.94%
Bombay Sensex* 18942.84 - 0.97%
Hong Kong Hang Seng 27371.24 + 0.59%
Japan Nikkei 15153.78 - 0.45%
Shanghai Composite 4803.39 - 1.19%
Singapore STI 3369.72 - 0.09%
South Korea Composite 1834.69 - 1.35%
Taiwan Weighted 8276.26 - 1.19%

*Late trading

Black Monday Follows Black Friday

2007-11-27T10:13:00.000+08:00

In the US, the Friday after Thanksgiving is known as "Black Friday". The market reacted quite well, and HK followed suit yesterday going up more than 1,000. But last night, amid concerns about the fall out from sub prime, credit woes and recession fears, the Dow industrials tumbled roughly 240 points, more than erasing their bounce on Black Friday. The financial sector was particularly hard-hit, with Citigroup sinking 6% to less than $30 a share and Goldman Sachs off 4%. The yield on the 10-year Treasury note plunged to a two-year low.

Asian markets followed the US lead down, though Tokyo and South Korea recovered from early losses to finish higher.

Market Indices
Australia All Ordinaries 6493.60 - 0.61%
Bombay Sensex* 19143.32 - 0.54%
Hong Kong Hang Seng 27210.21 - 1.51%
Japan Nikkei 15222.85 + 0.58%
Shanghai Composite 4861.11 - 1.97%
Singapore STI 3372.64 - 1.34%
South Korea Composite 1859.79 + 0.24%
Taiwan Weighted 8375.76 - 1.79%

*Late trading

2007-11-26T23:16:00.000+08:00

November 26, 2007

Most Asian markets rallied, as investors took heart from rosy U.S. shopping figures. Hong Kong surged 4.1% and Seoul soared 4.7%.

Market Indices
Australia All Ordinaries 6533.20 + 2.20%
Bombay Sensex* 19247.54 + 2.09%
Hong Kong Hang Seng 27626.62 + 4.09%
Japan Nikkei 15135.21 + 1.66%
Shanghai Composite 4958.84 - 1.46%
Singapore STI 3418.58 + 2.79%
South Korea Composite 1855.33 + 4.65%
Taiwan Weighted 8528.33 + 2.23%

*Late trading

The Thru Train Stops

2007-11-24T23:13:00.000+08:00

Trading throughout the week was weak as the double whammy of sub prime problems in the US, and the news that the Chinese government is turning off the illegal funds flow dominated the news.

Apparently, the Shenzhen Branch of the PBOC (people's Bank of China, the Central Bank) instructed the Shenzhen Banks to limit the amount of cash that can be withdrawn by customers to try and stem the flow of illegally remitted funds to HK. The Mainland authorities were concerned that Chinese ccitizens were abandoning the Mainland market for HK where the same shares can be bought at a lower price.

The thru train (where chinese citizens will be allowed to invest directly in the HK market) has now been put back with no date. This is apparently caused by concerns that the Mainland investors are not sophisticated enough to play in the open HK market against foreign hedge funds who will offload shares to them at a high price. Hmm, interesting concept that. They can buy the same shares of dual listed companies in HK at a lower price than in China but we are still worried that they are buying them at too high a price in HK?

I guess since HK is an open market, the hedge funds can take their money and run which is not possible on the Mainland since China is a closed market. However that still leaves the investor with shares that are still cheaper than what they have to pay for them on the Mainland.

Uncle 4 Strikes Again!

2007-11-23T23:08:00.000+08:00

After the yo-yo gyrations of the past few days. yesterday provided some relief as the HK market gained some precious ground. This time, it's because Uncle Four (aka Mr. Lewe Shau Kww) our local "Warren Buffet" told reporters that he thinks the market will still finish the year around 30,000, and he is putting some HK$10 billion into it.

Market Indices
Australia All Ordinaries 6392.40 - 0.04%
Bombay Sensex* 18852.87 + 1.76%
Hong Kong Hang Seng 26498.13 + 1.90%
Japan Nikkei** 14888.77 + 0.34%
Shanghai Composite 5032.13 + 0.96%
Singapore STI 3315.57 + 0.08%
South Korea Composite 1772.88 - 1.45%
Taiwan Weighted 8342.20 - 1.85%

*Late trading
**Closed for holiday

Crude Oil at US$99 Per Barrel

2007-11-22T23:10:00.001+08:00

Asian markets were mostly lower. Hong Kong and Shanghai shares felled on U.S. economic concerns and a broader decline in Chinese markets.

Crude-oil futures broke above $99 a barrel in early trading yesterday, and energy analysts see little to reverse the trends that have sent crude on its record breaking spree.

The weakening U.S. dollar, the currency used to buy and sell oil globally, is helping reinforce the notion that oil prices could remain high. The dollar sank to a new low against the euro yesterday on pessimism about the American economy and speculation the U.S. will cut interest rates again. Combined with strong global energy demand, the market appears willing to bear prices that would have shocked many in months past.

The survey of energy analysts did say, however, that prices would simmer down at the end of 2008, as the world's richest economies begin to slowdown.

Market Indices
Australia All Ordinaries 6395.10 - 0.85%
Bombay Sensex 18526.32 - 0.40%
Hong Kong Hang Seng 26004.92 - 2.30%
Japan Nikkei 14888.77 - 0.34%
Shanghai Composite 4984.16 - 4.41%
Singapore STI 3312.88 - 1.03%
South Korea Composite 1799.02 - 0.44%
Taiwan Weighted 8499.37 + 0.18%

It's the US Economy Now, Is It?

2007-11-21T19:24:00.000+08:00

Asian stocks fell sharply at concerns that the U.S. economy, the most important export market for many of the region's companies, would continue to weaken.

Market Indices
Australia All Ordinaries 6450.20 - 0.62%
Bombay Sensex * 18602.62 - 3.52%
Hong Kong Hang Seng 26618.19 - 4.15%
Japan Nikkei 14837.66 - 2.46%
Shanghai Composite 5214.22 - 1.50%
Singapore STI 3347.20 - 2.65%
South Korea Composite 1806.99 - 3.49%
Taiwan Weighted 8484.11 - 2.27%

*Intraday

You Win Some, and Lose Some

2007-11-20T19:25:00.000+08:00

Asian stocks and currencies regained some ground in a late-session sentiment shift, with currency moves highlighting an easing of the risk aversion that earlier weighed on markets.

Market Indices
Australia All Ordinaries 6490.20 - 1.68%
Bombay Sensex* 19506.84 - 0.64%
Hong Kong Hang Seng 27771.21 + 1.13%
Japan Nikkei 15211.52 + 1.12%
Shanghai Composite 5293.70 + 0.45%
Singapore STI 3438.27 + 0.78%
South Korea Composite 1872.24 - 1.12%
Taiwan Weighted 8680.86 + 0.00%

*Intraday

Chinese Regulators Order Lending Freeze

2007-11-19T19:27:00.000+08:00

The Dow industrials tumbled more than 1.5% to close below 13000 for just the second time since August 16, dragged down by fresh worries about the housing and credit markets.

Asian markets ended mostly lower. Hong Kong stocks declined on concerns related to fund inflows from mainland China.

In an attempt to halt the rampant investment that is threatening to overheat the world's fastest growing major economy, Chinese regulators, over the past few weeks, have ordered commercial banks to freeze lending through the end of this year.

A China Banking Regulatory Commission official in Shanghai confirmed that local and Chinese subsidiaries of foreign banks have been requested to ensure that loans outstanding at year end don't exceed Oct. 31 levels.

Beijing's options are limited. Raising interest rates would lift the level of its currency, the yuan, to levels that exporters might find uncomfortable.

The lending freeze may, among other things, weaken earnings of key companies listed on the stock market and leave less cash in the financial system that might flow into the market.

Market Indices
Australia All Ordinaries 6601.30 + 1.15%
Bombay Sensex * 19633.36 - 0.33%
Hong Kong Hang Seng 27460.17 - 0.56%
Japan Nikkei 15042.56 - 0.74%
Shanghai Composite 5269.81 - 0.87%
Singapore STI 3411.72 - 0.85%
South Korea Composite 1893.47 - 1.70%
Taiwan Weighted 8680.71 - 0.96%

*Intraday

Curbs on Illegal Funds Flow

2007-11-16T23:24:00.000+08:00

Asian markets fell, with Hong Kong plummeting 3.95% on worries that China is cracking down on illegal fund outflows into the city's stock market.

Market Indices
Australia All Ordinaries 6526.10 - 1.04%
Bombay Sensex* 19698.36 - 0.44%
Hong Kong Hang Seng 27614.43 - 3.95%
Japan Nikkei 15154.61 - 1.57%
Shanghai Composite 5316.27 - 0.91%
Singapore STI 3440.96 - 1.05%
South Korea Composite 1926.20 - 1.11%
Taiwan Weighted 8764.82 - 1.58%

*Late trading

Wall Street Sneezes and We All catch A Cold

2007-11-15T22:00:00.000+08:00

Asian markets ended lower following declines on Wall Street. Expectations of rising interest rates in China weighed on Hong Kong and Shanghai shares.

Market Indices
Australia All Ordinaries 6594.40 - 0.84%
Bombay Sensex* 19784.89 - 0.72%
Hong Kong Hang Seng 28751.21 - 1.42%
Japan Nikkei 15396.30 - 0.67%
Shanghai Composite 5365.26 - 0.88%
Singapore STI 3477.59 - 1.34%
South Korea Composite 1947.74 - 1.26%
Taiwan Weighted 8905.41 - 0.42%

*Late trading

End of Correction? That is the Question!

2007-11-14T18:44:00.000+08:00

The US market rose 316 overnight and HK went up 1,362 to close at 29,166 on HK$149 billion turnover. China Mobile up 9% and accounted for 363 points of the rise.

Property counters were all up except for New World Properties which fell against the trend. Mongolian Energy #276 fell 16% from $13.80 to $11.56 after rising as high as $14.42 and then falling to as low as $9.60 before recovering near the close.

Market Indices
Australia All Ordinaries 6650.00 + 1.20%
Bombay Sensex* 19868.18 + 4.37%
Hong Kong Hang Seng 29166.01 + 4.90%
Japan Nikkei 15499.56 + 2.47%
Shanghai Composite 5412.69 + 4.94%
Singapore STI 3531.45 + 1.61%
South Korea Composite 1972.58 + 2.05%
Taiwan Weighted 8942.93 + 2.47%

*Late trading

Yen broke 110 to the Dollar

2007-11-12T23:17:00.000+08:00

Hong Kong ended 3.88% lower, Tokyo dropped about 2.5% and Shanghai shed more than 2. The dollar briefly fell below ¥110 before regaining ground. But the damage has been done. The market is waiting for the unwinding of the Yen carry trade.

Market Indices
Australia All Ordinaries 6523.30 - 1.27%
Bombay Sensex* 18669.20 - 1.26%
Hong Kong Hang Seng 27665.73 - 3.88%
Japan Nikkei 15197.09 - 2.48%
Shanghai Composite 5187.73 - 2.40%
Singapore STI 3510.95 - 2.46%
South Korea Composite 1923.42 - 3.37%
Taiwan Weighted 8670.61 - 3.35%

*Late trading

HK Hit with Aftershocks

2007-11-08T21:54:00.000+08:00

The HK market took a big hit as the US market dropped 360 last night. After falling over 1,000 points, the market clawed its way back to close down 3%. Not a bad result considering. However, the exchange's processing capacity is more worrying.

Yesterday, all brokers reported a massive slowdown in the exchange's computer system when entering orders for Alibaba's trading debut. Some orders were left in limbo for up to 10 minutes waiting on the exchange's system to process them.

Unfortunately, during this period, we were unable to amend or cancel the orders. All we had was a message that the order was under processing. When the order was finally processed, the price may have moved beyond the specified range resulting in the order being rejected after sitting in the processing queue. Then it had to be re-entered again.

The entire issue can be avoided by increasing the size of the order queue. This is especially important after the trading spreads were narrowed and shares often trading beyond the 24 spread range. the resulting re-input and processing of orders increased the demand on processing cycles and increased line traffic. Technically, the exchange's order processing system did not slow down. By limiting the order procesing queue, the workload was pushed back into the communications network and the participants' own systems. The result is that market depth is reduced and orders have to be input many times before they can be executed. From the exchange's standpoint, increasing the capacity will mean more trades execution and bigger profits. Let's get this fixed as soon as possible.

Market Indices
Australia All Ordinaries 6568.50 - 2.37%
Bombay Sensex* 19058.93 - 1.20%
Hong Kong Hang Seng 28760.22 - 3.19%
Japan Nikkei 15771.57 - 2.02%
Shanghai Composite 5330.02 - 4.85%
Singapore STI** 3673.01 - 0.27%
South Korea Composite 1979.56 - 3.11%
Taiwan Weighted 8937.58 - 3.90%

*Late trading
**Closed for holiday

Marking Time ....

2007-11-07T20:20:00.000+08:00

HK opened strong but succumbed to some profit taking. it still managed to close up for the day. Over the last 2 days, we have recovered half of the 1,500 point loss on Monday. It seems that with the availability of information over the internet, TV etc. the markets adjustments are shorter in duration but bigger in fluctuations. This is to be expected as everyone now have access to the news at virtually the same time.

Market Indices
Australia All Ordinaries 6728.10 + 1.04%
Bombay Sensex* 19274.16 - 0.65%
Hong Kong Hang Seng 29708.93 + 0.92%
Japan Nikkei 16096.68 - 0.98%
Shanghai Composite 5601.78 + 1.18%
Singapore STI 3673.01 - 0.27%
South Korea Composite 2043.19 - 0.54%
Taiwan Weighted 9300.22 + 0.08%

*Late trading

Steady Does It

2007-11-06T23:03:00.000+08:00

The HK market kept an even keel and managed to claw back some of the losses from yesterday. Investrors were still jittery and some have obviously decided to take some money off the table now that the "thru train" appears to have been delayed.

A series of bad news came out over the weekend when Wen Jia Bao said that the thru train will need further swtudy to ensure it does not adversely affect the Chinese market. The concern there is that too much money will leave the Shanghai market causing a crash on the Mainland.

The CSRC also reminded funds that they are to invest no more than 30% in any one market. Again, this is clearly aimed at curbing the flow of money to HK because currently, QDII funds are only allowed to invest in 1 overseas market and that is HK. There appears to be a big worry that Chinese investors will be buying into HK just in time for foreign investors to cash out, and be left holding over priced shares. This seems a bit rich because the H-shares traded in HK are a a deep discount to the corresponding A-shares in China. For example, PetroChina trades at a 150% premium to HK. Shares in HK are still cheap compared to China.

The main worry is that foreign investors will take advantage of gullible Chinese investors to off load their shares. Let them off load their shares if they want to. The story is China and they cannot afford not to buy in at the start.

Going back to PetroChina. This is definitely overvalued on the Mainland market. It is twice the market capitalisation of Exxon although it earns half the profits and have half the reserves. It is valued at 54x forecast earnings vs. Exxon 13x. Even the HK shares are over valued at 22x. Even if it manages to double the reserves and profits, it should only then be wirth as much as Exxon because oil is an international commodity.

Another story today is the listing of Alibaba. The IPO price was HK$13.50. The shares traded on the grey market yesterday at around HK$25. It opened at HK$32. Traded briefly below HK$30 and then went as high as HK$39.50 before closing slightly lower. At HK$13.50 it listed at 55x forward earnings. People expect this to the Chinese Google. There are some differences. Google is a consumer to consumer platform while Alibaba is business to business. There are a lot more consumers than there are businesses. If it is so great a deal, why have the strategic investors decided to cash out by selling their shares?

PetroChina: World's Biggest Company By Market Capitalisation

2007-11-06T09:31:00.000+08:00

PetroChina's shares tripled in value on trading debut in Shanghai. It surged past Exxon Mobil to become the world's most highly valued company by market capitalization. But is this a true value?

If we applied the share price of PetroChina Co. on the Shanghai Stock Exchange to the whole of the company, China's major oil and gas producer would have a market cap of around $1.08 trillion, making it the world's biggest company. But only a mere 2.2% of its share capital is sold in the Chinese IPO and about 86% of its shares are still held by the state-owned parent.

Since very few shares are publicly traded spread -- scarcity that can drive up prices. If we were to value the company by tradeable shares the total value of PetroChina's publicly traded shares would be about $72.5 billion. In addition, PetroChina's Class A shares in China are trading at around 50 times this year's forecast earnings, compared with 20 times earnings for its Hong Kong-listed stock. Big oil companies average of 10 times forecast earnings internationally.

As I have said before, Exxon has higher reserves than PetroChina. Enough said.

Detour of the Thru Train

2007-11-05T23:18:00.000+08:00

The HK market has been running ahead of itself when it was announced in mid August that the Bohai Branch (Tianjin City) of the Bank of China will be allowed to trade HK stocks for Chinese investors. We were anticipating that all of China can invest in HK stocks either thru the BOC or some other bank as we had expected that other banks will be allowed into the scheme. The announcement put paid to that as it was originally set up as an "experiment" in Tianjin only. The Chinese authorities got cold feet after seeing the response. They were afraid that all chinese investors will go to HK and the China stock market will fall. Stocks that are listed inbothe HK and china, trade at a 60% premium in China.

There is also some turf wars as the tianjin experiemnt was announced by the China Banking Regulatory Commission and the China Securities Regulatory Commission got very upset and warned everyone that it could bring the chinese market down. Of course no one wanted to be the one responsible for causing the collapse of the chinese market and so everyone backed off. The end result may be the collapse of the HK market.

Market Indices
Australia All Ordinaries 6620.10 - 1.58%
Bombay Sensex* 19590.78 - 1.93%
Hong Kong Hang Seng 28942.32 - 5.01%
Japan Nikkei 16268.92 - 1.50%
Shanghai Composite 5634.45 - 2.48%
Singapore STI 3670.18 - 1.21%
South Korea Composite 2015.76 - 0.18%
Taiwan Weighted 9308.60 + 0.38%

*Late trading

Citigroup Worries the Street

2007-11-02T17:20:00.000+08:00

The Dow industrials closed down 362.14, or 2.6%, at 13567.87, slammed by fresh credit worries a day after the Fed rate cut. The financial sector led the selloff, with Citigroup down nearly 7% and J.P. Morgan and AIG each off 6%. Exxon Mobil's shares slid 3% after its below-forecast earnings. The Nasdaq ended the day 2.25% lower, and the S&P fell 2.6%, its worst day since early August. Oil fell more than $1 a barrel.

In spite of HK banks cutting interest rate, the HK market followed the US by dropping 1,024 points to 30,468 just managing to hold on above 30,000. Turnover was not particularly high at HK$154 billion.

Asian markets fell sharply, as investors digested fresh evidence of a weakening U.S. economy and the prospect that they can't count on further support from the Federal Reserve.

Market Indices
Australia All Ordinaries 6726.70 - 1.85%
Bombay Sensex* 19960.68 + 1.20%
Hong Kong Hang Seng 30468.34 - 3.25%
Japan Nikkei 16517.48 - 2.09%
Shanghai Composite 5777.80 - 2.31%
Singapore STI 3715.32 - 2.32%
South Korea Composite 2019.34 - 2.12%
Taiwan Weighted 9273.09 - 3.39%

*Intraday trade

The Waiting Game

2007-11-01T11:00:00.001+08:00

The HK market opened fairly strong but eventually fell back. The hope of a 50 basis point cut was over optimistic. At the end of the trading day the HSI rose 140 to 31,492.

Will the HKAB follow through on rate the cut? It seems almost certain that they will. Yesterday, the HKMA injected HK$7.8 billion to mop up excess US$ as too much liquidity was flowing in to HK. With the US$ weakening, and the RMB expected to increase at the rate of at least 2% p.a. we are seeing a replay of using the HK stock market as a proxy for the currency (remember the hedge funds attack on the HK$ in 1998?) except this time it is the reverse. Since foreign investors cannot buy RMB or A-shares on the Mainland, they are opting to buy H-shares (Chinese companies listed in HK)as a proxy for the RMB since their assets and income streams are in RMB.

Market Indicies
Australia All Ordinaries 6853.60 + 1.10%
Bombay Sensex* 19724.35 - 0.57%
Hong Kong Hang Seng 31492.88 + 0.45%
Japan Nikkei 16870.40 + 0.79%
Shanghai Composite 5914.28 - 0.68%
Singapore STI 3803.56 - 0.06%
South Korea Composite 2063.14 - 0.08%
Taiwan Weighted 9598.23 - 1.17%

*Late trading

Greenspan Redoubt! Irrational Exuberance?

2007-10-31T22:29:00.000+08:00

The HK market consolidated in advance of the Fed meeting dropping 285 to 31,352. There were hopes that the Fed would cut 50 basis points but that proved to be overly optimistic. In any event, the Fed cut was 0.25% to 4.5%, and discount was cut to 5%. The US marklet softened initially but came back with 137 point rise.

Market Indices
Australia All Ordinaries 6779.10 + 0.10%
Bombay Sensex* 19837.99 + 0.28%
Hong Kong Hang Seng 31352.58 - 0.90%
Japan Nikkei 16737.63 + 0.52%
Shanghai Composite 5954.76 + 0.98%
Singapore STI 3805.70 + 0.19%
South Korea Composite 2064.85 + 0.61%
Taiwan Weighted 9711.37 - 0.48%

*Late trading

HK New High!

2007-10-30T21:31:00.000+08:00

HK closed on a new high, again! And this time, the property stocks suffered a sell off in the afternoon on fears of fund raising via placements (SHK Properties placed HK$11 billion yesterday after the market close). HK and Shanghai were the only 2 markets in Asia to close higher.

The Chinese financials did very well again today, especially China Construction Bank. The word on the street is we are looking at HK$10.

Market Indices
Australia All Ordinaries 6772.50 - 0.52%
Bombay Sensex* 19783.51 - 0.97%
Hong Kong Hang Seng 31638.22 + 0.16%
Japan Nikkei 16651.01 - 0.28%
Shanghai Composite 5897.19 + 2.60%
Singapore STI 3798.45 - 0.56%
South Korea Composite 2052.37 - 0.51%
Taiwan Weighted 9757.93 - 0.52%

*Late trading

HS Index up 1,181!

2007-10-29T16:53:00.000+08:00

The HK market set another new high today rising 1,181 points (3.89%) to close at 31,586 on turnover of HK$178 billion. Shanghai rose 165 (2.83%) to close at 6,034. Shares throughout the region rose on the back of a 134 points rise in the DJIA last Friday and Nikkei's increase of 192 today.

In HK the property stocks led the advance on expectations that the Fed will continue to cut interest rates further with some expecting a 50 basis point cut.

Market Indices
Australia All Ordinaries 6808.20 + 1.37%
Bombay Sensex* 19977.67 + 3.82%
Hong Kong Hang Seng 31586.90 + 3.89%
Japan Nikkei 16698.08 + 1.17%
Shanghai Composite 5747.99 + 2.83%
Singapore STI 3819.78 + 1.28%
South Korea Composite 2062.92 + 1.72%
Taiwan Weighted 9809.88 + 1.85%

*Late trading

ICBC = I Can Buy Chinese (But Carefully!)

2007-10-28T09:10:00.000+08:00

At the 12th Asia Securities Forum in Cebu, Philippines in March this year, I gave a presentation on the HK Securities Market which covered the listing of Chinese companies. At that time, I out up a slide that says ICBC (not Industrial and Commercial Bank of China but I Can Buy Chinese) as my prediction of where the market was going.

Since then of course, the HSI has hit a historical high of 30,400 moving up in leaps and bounds but still lagging the Shanghai market. Let there be no misunderatnding. HK is the proxy market for China. The Shanghai and Shenzhen markets are closed to foreigners except through QFII (Qualified Foreing Institutional Investors programme) which has a tiny US$10 billion quota shared by 50 institutions (the recent turnover in HK is between US$15-20 billion per day with a historical high of US$25 billion).

If you buy the China Story then you have to buy in HK. About 60% of the market value and 75% of the daily turnover are in Chinese stocks. The Gulf States' national budgets were based on US$35 per barrel. Now that oil is US$85, where is all that excess cash going? Certainly not to the US. Of the BRIC countries (Brazil, Russia, India, China) China has the most compelling story and the most advanced market through it's proxy in HK. When I visited ADIA (Abu Dhabi Investment Authority, the earliest and biggest Middle Eastern government investment fund) early this year, I was surprised to see Chinese nationals sitting across the table. They were hired by ADIA out of the China to research Chinese stocks.

Having said all that, I am always asked what companies to buy. My answer has always been the Chinese financials. Don't get me wrong, they are probably not the hottest thing around but in my mind they are the safest. What other in dustry has regulators sitting on top to ensure that things do not go badly wrong?

I cannot say the same for Chinese resource companies.

Recently, Chinese resource companies have been bid sky high. I am not convinced that they are worth the valuations. The market is huge, that much I agree. But resource companies are valued on the basis of their reserves and the price of their products. On the basis of reserves, the Chinese resource comapnies are valued at double their western counterparts. Do we expect their existing reserves or the prices to suddenly double?

Warren Buffett recently sold Berkshire Hathaway's 1.3% stake in PetroChina (#00857), China's largest oil company (an the largest company in China on market value). At about US$440 billion, it is the world's No. 2 company based on market value, behind ExxonMobil's $508 billion valuation. PetroChina trades for more than 20 times estimated 2007 profits, or twice its historic price/earnings multiple (Exxon's P/E is 13x and other Western oil companies such as Chevron and ConocoPhillips trade at around 10x). Berkshire bought its stake four years ago for less than US$500 million, and may have made as much as US$4 billion on the sale.

Although huge valuation gaps between Chinese and U.S. companies exist outside the resource sector, I am more relaxed because the pebetration of financial products is miniscule. China Life Insurance (LFC) has a market value of $245 billion, five times that of MetLife or Prudential Financial.

However, we cannot apply the same arguments to resource companies in China because oil and coal are fungible international commodities. Also, it is difficult for Chinese resource companies to buyout Western resource companies because of politics. US Congressional opposition frustrated an attempted takeover of Unocal by China's state-owned oil company in 2005; Unocal later was sold to Chevron.

The key to high stock-market values in China is that ordinary Chinese investors have little choice because of capital restrictions on investing overseas and the scarcity value created by the thin floats in many big Chinese companies. PetroChina, now 88%-owned by the Chinese government, will sell Chinese investors US$9 billion of Class A shares to be listed on the Shanghai Stock Exchange. But the government's stake will slip only to 86%. Until now, PetroChina's shares have traded only in Hong Kong and as ADRs on the New York Stock Exchange. If all the company's shares were freely held, PetroChina would not command such a high valuation.

Since Chinese investors cannot buy Western stocks, comparison between PetroChina and Exxon is only useful for Western investors who can buy both. PetroChina is listed in HK and trades at more reasonable value precisely because HK is an open market with no capital or investors restrictions.

The only thing going for PetroChina is that its profits are depressed by price controls in the Chinese market for gasoline, other oil products and natural gas. The company gets about $3 per thousand cubic feet of natural gas, half of what Exxon nets. The gradual lifting of price controls in China will boost PetroChina's refining and natural-gas profits but prices will have to double before PetroChina and Exxon trades at similar PE's.

St. Louis-based Peabody Energy, the world's largest private-sector coal producer, trades at 30 times earnings while China Shenhua trades at 60x. China's largest coal company, China Shenhua Energy (#01088), is valued at $200 billion. When China Shenhua was listed in Shanghai earlier this month, its share price doubled in value. It since has risen to RMB 77 per share. China Shenhua, which already was listed in Hong Kong, now has a market value of about $190 billion, more than 10 times Peabody's value. Yet its annual production and reserves are less than Peabody's. But China Shenhua gets far higher prices for its coal than Peabody, and has power and railroad assets.

Hang Seng Index at historical high 30,405

2007-10-26T22:01:00.001+08:00

Finally we broke through the 30,000 resistance level, and resoundingly so by rising 550 points to 30,405. The hope is that the Federal Reserve will cut interest rate by 50 basis points because of the bad news coming out of the US.

The HK dollar moved to the string side of the peg against the US dollar because of the inflows of funds into HK. Most of this is destined for the stock market as a proxy for the RMB since the chinese currency is not convertible. The H shares have assets in RMB and earn RMB.

Market Indices
Australia All Ordinaries 6716.40 + 1.08%
Bombay Sensex* 19243.17 + 2.52%
Hong Kong Hang Seng 30405.22 + 1.84%
Japan Nikkei 16505.63 + 1.36%
Shanghai Composite 5589.63 + 0.49%
Singapore STI 3766.82 + 1.61%
South Korea Composite 2028.06 + 2.60%
Taiwan Weighted 9631.51 + 0.66%

*Intraday trading

Reversal of Fortunes?

2007-10-25T23:17:00.000+08:00

Hong Kong closed at a record high, but Shanghai plunged on interest-rate worries and concerns that the central government will clamp down on inflation.

Market Indices
Australia All Ordinaries 6644.80 - 0.11%
Bombay Sensex* 18770.89 + 1.39%
Hong Kong Hang Seng 29854.49 + 1.78%
Japan Nikkei 16284.17 - 0.45%
Shanghai Composite 5562.39 - 4.80%
Singapore STI 3707.14 + 1.59%
South Korea Composite 1976.75 + 2.24%
Taiwan Weighted 9568.26 + 1.33%

*Intraday trading

29,997: So near and yet so far.

2007-10-24T20:30:00.000+08:00

The HK market opened strong on the back of a 109 point rise on the DJIA overnight. The HSI got within 29,997 before retreating from the pyschological barrier of 30,000 finishing in negative territory.

Market Indices
Australia All Ordinaries 6652.10 - 0.38%
Bombay Sensex* 18602.52 + 0.59%
Hong Kong Hang Seng 29333.53 - 0.15%
Japan Nikkei 16358.39 - 0.56%
Shanghai Composite 5843.10 + 1.21%
Singapore STI 3666.28 - 0.79%
South Korea Composite 1933.36 - 0.75%
Taiwan Weighted 9442.62 - 0.63%

*Intraday trading

HK UP 1,003

2007-10-23T16:13:00.000+08:00

This is a market in transition. It can't decide whether it is too high or whether it is poised for further gains. After the correction yesterday the market was up 3.54% to finish at 29,376 virtually unchanged from Thursday last. Current month futures closed at 29,481 (a premium of over 104), and next month futures closed at 259,525 (a premium of 148).

Chinese financials staged a recovery. I must admit I am partial to the Chinese banks and insurance companies. They have regulators (CBRC and CIRC) sitting on top of them to make sure they don't go too far off track, and they can legitimately profit from the stock market rise. Just imagine buying into HSBC in 1971 at HK$4 and holding until now. Well, you can dream on or you can buy the Chinese banks.

HK Stocks Dropped 1,091 points

2007-10-22T23:04:00.000+08:00

As expected the HK market followed the US down. However, the drop was actually less than expected being only 3.7%. Compared with 26 Ocotber 1987 when the market fell 45% when it re-opened after a 4 day clsosure, and 10% on 23 october 1997 this was literally a drop in the bucket.

Market Indices
Australia All Ordinaries 6592.10 - 1.95%
Bombay Sensex* 17441.30 - 0.68%
Hong Kong Hang Seng 28373.63 - 3.70%
Japan Nikkei 16438.47 - 2.24%
Shanghai Composite 5667.33 - 2.59%
Singapore STI 3642.64 - 2.81%
South Korea Composite 1903.81 - 3.36%
Taiwan Weighted 9360.63 - 2.61%

*Intraday trading

October 19, 1997: Then and Now

2007-10-20T13:59:00.000+08:00

Yesterday was the 20th anniversary of the Black Monday Crash of 19 October 1997. Right on cue the US market fell 366 points. Are we looking at a repeat of the crash. I think not.

There are some similarities but the differences are very significant.

1. On 19 October 1997, the market crashed 22.6% (508 points0 in 1 day. This time, the drop was only 2.6%.

2. Back then the average P/E was 22x and treasury bonds were yielding 10%. Now the average P/E is 18x and Treasuries are yielding only 5%.

3. In 1997, the US$ was under attack and in order to counteract rate rises by the Bundesbank (which was fighting inflation in Germany) the Federal reserve had to raise interest rates. Now, the Fed is cutting interest rates to offset the effects of the sub-prime mess. So are all the other central banks.

One final point, even if the market falls, remember that 18 months later, the market was back up to where it was before the crash. Sit tight.

HK market was closed for a holiday on Friday 19 October 2007. The Shanghai marker recovered its nerve somewhat when the CSRC denied that it was looking to arbitrage the HK and Shanghai prices for dual liosted stocks.

Oil Prices Put Damper on Share Prices

2007-10-19T21:10:00.000+08:00

HK was closed for a holiday.

Market Indices
Australia All Ordinaries 6723.30 - 0.85%
Bombay Sensex* 17596.61 - 2.20%
Hong Kong Hang Seng** 29465.05 + 0.57%
Japan Nikkei 16814.37 - 1.71%
Shanghai Composite 5818.04 - 0.12%
Singapore STI 3747.98 - 1.62%
South Korea Composite 1970.10 - 1.75%
Taiwan Weighted 9611.72 - 0.26%

*Late trading
**Market closed for holiday

The Big 30

2007-10-18T20:50:00.000+08:00

HK breached the 30,000 level in intra-day trading on the back of reports that the CSRC is studying mechanisms to arbitrage the prices of stocks listed in bothe HK and Shanghai. Shanghai fell 3.5% on fears that the arbitrage will hit Shanghai prices as investors gravitate towards the HK market. The HSI touched 30,025 but closed lower at 29,465 when the CSRC said it was misquoted.

Climbing a Wall of Worry

2007-10-17T22:32:00.000+08:00

The HK market opened down but closed up. There appears to be buying support at around 28,500. Yesterday, the story was the changing leadership. Today, there were concerns that the Chinese economy is running too hot.

Market Indices
Australia All Ordinaries 6696.10 - 0.23%
Bombay Sensex 18715.82 - 1.80%
Hong Kong Hang Seng 29298.71 + 1.19%
Japan Nikkei 16955.31 - 1.07%
Shanghai Composite 6036.28 - 0.92%
Singapore STI 3839.73 + 0.76%
South Korea Composite 1983.94 - 1.09%
Taiwan Weighted 9562.16 - 0.32%

17th Party Congress

2007-10-16T21:48:00.000+08:00

Yesterday, the market was up over 700 points as the 17th Communist Party Congress got under way. Today it was down because there is concern that the new leadership may implement measures to cool the economy and therefore "burst the bubble". What new leadership?

All major decisions are taken at the premier and vice premier level. There may be changes at the head of various departments, etc. but the working level will also remain the same. So, there will be very little rocking of the boat by the "new brooms". The concept of a "new broom" is a very westernised. In the West, new leaders typically fought their way to the top, and are anxious to "clean house" so that they start anew. In the East, one gets to the top by being a team player, and we can expect the major directions to remain unchanged as new leadsers are picked to carry on the work of the old.

Most Asian markets fell on renewed credit-crunch jitters and profit-taking, but Shanghai shares bucked the trend, closing at another record high. Yesterday, Shanghai topped 6,000 for the first time rising 5 times over 2 years. Many have compared Shanghai to Taiwan in the early 90's which also rose 5 times in 18 months. However, we must remember that taiwan continued to double over the next 2 years before it came crashing down.

HSBC took a pounding because of Citi's write downs, and this brought all the financials down with it, including the Mainland ones.

Market Indices
Australia All Ordinaries 6692.00 - 0.70%
Bombay Sensex* 19081.23 + 0.12%
Hong Kong Hang Seng 28954.55 - 1.98%
Japan Nikkei 17137.92 - 1.27%
Shanghai Composite 6092.05 + 1.03%
Singapore STI 3810.72 - 1.33%
South Korea Composite 2005.76 - 1.46%
Taiwan Weighted 9592.47 + 0.78%

*Intraday trading

Hong Kong: China's Proxy Market

2007-10-15T23:05:00.000+08:00

Asian indexes mostly rose, with oil and blue-chip gains driving Chinese markets to record closes while technology gains boosted Tokyo shares ahead of earnings reports. HK rose 702 to close at 29,540 which is yet another new high.

The HK market is being re-rated. Back in 1997, we had 6 million of population and 800,000 investors. Now with the announced QDII, through train, and other investors potentially coming from the Mainland, the market is looking very different from a domestic demand standpoint. Then we need to add the demand from overseas investors who is looking at HK as a proxy market for the Mainland because over 60% of the HK market capitalisationa dn over 70% of the daily turnover are in Maionland stocks.

The main investors are from the Middle-East. When I visited Saudi Arabia and Abu Dhabi early this year, I was told by their government investment authories that their national budget is based on US$35 per barrel. With oil now at US$85 per barrel, the excess need to be invested somewhere. Of the BRIC countries (Brazil, Russia, India, and China) HK is the biggest market and has the best regulatory and corporate governance environment.

Market Indices
Australia All Ordinaries 6751.60 - 0.13%
Bombay Sensex* 19085.12 + 3.60%
Hong Kong Hang Seng 29540.78 + 2.44%
Japan Nikkei 17358.15 + 0.16%
Shanghai Composite 6030.08 + 2.15%
Singapore STI 3862.02 + 0.12%
South Korea Composite 2035.39 + 0.44%
Taiwan Weighted 9518.45 + 0.23%

*Intraday trading

Xinxin Mining up 119%

2007-10-12T22:11:00.000+08:00

Asian indexes declined, as profit taking on financial, real-estate and exporter shares following Wall Street's overnight decline reversed a week of record highs. HK opened weak and was down over 600 points at one stage. However, bargain hunting crawled back some of the losses to close down 294 at 28,838.

The one bright spot was the newly listed share which closed at $14.24 (high $14.90)on the IPO price of $6.50.

Top 5 IPO debuts in 2007
119.08%: Xinxing Mining 12 Oct 2007
97.74%: China High Speed Transmission Equipment 4 Jul 2007
81.76%: Tiangong International 26 Jul 2007
78.95: Emperor capital 24 Apr 2007
77.45%: Hildili Industry 21 Sep 2007

Market Indices
Australia All Ordinaries 6760.10 - 0.29%
Bombay Sensex* 18377.02 - 2.30%
Hong Kong Hang Seng 28838.37 - 1.01%
Japan Nikkei 17331.17 - 0.73%
Shanghai Composite 5903.26 - 0.17%
Singapore STI 3857.25 - 0.48%
South Korea Composite 2026.44 - 1.57%
Taiwan Weighted 9496.47 - 2.07%

*Intraday Trading

HS Index at 29,000

2007-10-11T22:08:00.000+08:00

The HK market rose 562 points to close at a record 29,133.

The following statistics are made available by the HKEx:

Securities market
- The Hang Seng Index closed at a record high of 29133.02 today, up 563.69 points.
- Today's securities market turnover value was $179,409 million, the second largest in history.
- Today's closing market capitalisation was a new high of $21,512 billion. The previous trading day's (10 October 2007) closing market capitalisation was $21,061 billion.