Marking Time ....

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

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

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

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

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

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?

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!

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!

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!)

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

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?

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.

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

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

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

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

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

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

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

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

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%

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

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.

2007-08 Policy Address

In his Policy Address, the Chief Executive of the HKSAR outlined his plans for HK. From the financial standpoint the most important being a reduction in tax rates, and the building of massive infrastructure projects to facilitate the integration with the Mainland. The following is an extract.

10 Major Infrastructure Projects for Economic Growth
“Infrastructure development can bring about huge economic benefits... the value added would be more than $100 billion annually. In addition, some 250 000 additional jobs would be created.”

South Island Line: Construction to start in 2011
The Sha Tin to Central Link: Will connect the Northeast New Territories and Hong Kong Island via East Kowloon. Construction to start in 2010
The Tuen Mun Western Bypass and Tuen Mun-Chek Lap Kok Link: Upon completion in 2016, will link Deep Bay in Shenzhen, the Northwest New Territories and Hong Kong International Airport
The Guangzhou-Shenzhen-Hong Kong Express Rail Link: Construction of high-speed rail link between West Kowloon and Guangzhou will start in 2009
Hong Kong-Zhuhai-Macao Bridge: Aim to complete financial arrangements in the near future
Hong Kong-Shenzhen Airport Co-operation: Will study the feasibility of a rail connection between Hong Kong International Airport and Shenzhen Airport
Hong Kong-Shenzhen Joint Development of the Lok Ma Chau Loop: Will work with the Shenzhen authorities to develop the Lok Ma Chau Loop
West Kowloon Cultural District: Aim to enact legislation in mid-2008 so West Kowloon Cultural District Authority can be established as soon as possible
Kai Tak Development Plan: First cruise terminal berth expected to be operational in 2012
New Development Areas (NDAs): Will plan for NDAs to provide quality living space in the northern New Territories

Asian shares advanced following gains on Wall Street, with Shanghai closing at a record high while Hong Kong rose on banking-sector strength.

The HK stock market must have liked the policy direction as it rose to close at 28,569 with the Chinese financials leading the way.

Market Indices
Australia All Ordinaries 6744.60 + 0.85%
Bombay Sensex* 18658.25 + 2.07%
Hong Kong Hang Seng 28569.33 + 1.21%
Japan Nikkei 17177.89 + 0.10%
Shanghai Composite 5771.46 + 0.97%
Singapore STI 3814.45 - 1.33%
South Korea Composite 2041.12 + 1.34%
Taiwan Weighted** 9639.83 - 0.80%

*Intraday trading
**Market closed for holiday

Another Roller Coaster Day

Asian shares ended higher, as Japanese investors showed renewed confidence, while strong trading debuts from several companies propelled shares in Hong Kong and Shanghai.

HK opened up then down. When I left to go to a meeting it was down over 200. I was still at a meeting when the market closed up 457 to close at 28,228 on HK$129 billion turnover. Some were disappointed with the turnover, but we must remember that last year the daily average was only HK$30 billion, and in the first 6 months of this year it was only HK$60 billion. So HK$120 billion days are nothing to sneeze at.

Market Indices
Australia All Ordinaries 6687.70 + 0.31%
Bombay Sensex* 18174.74 + 4.30%
Hong Kong Hang Seng 28228.04 + 1.65%
Japan Nikkei 17159.90 + 0.56%
Shanghai Composite 5715.89 + 0.41%
Singapore STI 3865.75 + 1.19%
South Korea Composite 2014.13 + 0.07%
Taiwan Weighted 9639.83 - 0.80%

*Intraday trading

HK: International Financial Centre?

HK wants to be an international financial centre. In many ways, it already is. We have 70 of the world's top 100 banks operating here. Over 200 of the 280 banks operating in HK are foreign registered. Of the US$ 560 billion in deposits, over half is in foreign currencies. Most of the world's top investment banks are already here. And the list goes on.

But in terms of the geographical spread of our listed companies, we are still tied to China which accounts of over 60% of our market capitalisation, 70% of our daily trading volume, and 90% of our IPO's. So where did we go wrong?

Actually, we did nothing wrong. We are just a century or two too late. Over 100 years ago, London was already floating China railway bonds! When New York outgrew London because of the size of the US domestic economy (something we are already seeing with Shanghai and China) London became bankers to the world. New York was content as it was too insular and too busy. HK must not make this mistake.

We must make ourselves attractive to issuers in other markets and follow London's example. NY is wise to the game. It has already spent millions of dollars commissioning studies of its competitiveness. And so has London, after all it invented the term international financial centre. So it isn't going to be easy this time around. They didn't like losing the Chinese IPO market and sure as hell would not want anyone poaching in their backyard.

We have 3 problems:

1. All the major investment houses are either US or UK based.

They have divided up the world among their subsidiaries into The Americas, Europe Africa and the Middle East, and Asia. It would take a very brave banker from one of the Asian subsidiaries to poach on something in the Europe sphere of influence. And that is why so many Russian companies (over 200) are listed in London. The bankers in Moscow are all sent from the UK. That, and the loose listing regime of AIM (more on that later).

2. Bankers sent out here are looking to their year end bonuses and are reluctant to invest their time in developing other markets.

And who can blame them, after all they have quota's and targets to meet. And our local investment banks are too small to take on market development work.

3. Our listing regime does not make it easy to list in HK.

Our market grew out of a purely domestic (HK) need, and protection of the small retail investors figure very high in terms of priorities. However, retail investors now account for less and less of the market share but the legislation is still skewed towards their protection. Fund managers tell us that the rule of law is of paramount importance, and it is. Especially, after a market blow up when every man and his dog is "asking where are the regulators?". But in the overall scheme of things fund managers will go where there is a profit to be made. You don't keep your job for long if you refuse to go into a market because of a lack of regulations while everyone is making a bundle there.

Dubai International Financial Exchange has spent millions building an excellent legal and regulatory infrastructure but only has 3 listings in 3 years to show for it. Ultimately, a market has to have a balance of regulation and openess. That is where AIM has done extremely well.

So how to solve these problems? The HK Government has to take the lead in longer term market development. This is not unfamiliar territory. HK has an excellent organisation in the Trade development Council. The TDC was set up to promote HK products made by small and medium enterprises too small to market them effectively overseas. It has trade offices all over the world promoting HK products (these days they are mostly made in Shenzhen but designed and sold by HK firms), organising trade shows, and bringing buyers to HK to meet with local companies.

Recently, it has made a very far sighted move into promoting HK services (including financial services) as well as the more traditional products. I have been on numerous trade missions with them promoting HK as a listing destination including Saudi Arabia, Abu Dhabi, Dubai, Kazakhstan, Taiwan, Moscow and St. Petersburg not to mention the promotions into China. It has done a lot but much remains to be done.

We need to have financial services attachees or specialists in some of the TDC offices abroad who understand what HK can do and can sniff out opportunities for HK financial services firms e.g. fund raising for toll roads in Vietnam, golf courses in St. Petersburg, joint venture banks in Moscow, etc. We have done all this before in China. We have the expertise. We can do it again. But, we need to know that there are opportunities.

Then, we need financial specialists on the HK staff to co-ordinate the efforts on this side. And finally, we need HK government support to undertake some of these projects similar to Exim banks facilities and guaranties. If the US/UK banks are not interested, we may be able to bring in the Chinese banks. After all, they are already making acquisitions and forays abroad.

--------------------------------------------------------------------------------
Coming back down to earth, let's look at how the Asian markets fared.

Most shares made strong gains across the Asian-Pacific region. Hong Kong closed slightly lower on profit-taking pressure after tracking record gains in Shanghai as financial firms played catch-up following a week-long holiday.

Market Indices
Australia All Ordinaries 6667.20 + 0.75%
Bombay Sensex* 17372.79 - 2.30%
Hong Kong Hang Seng 27770.29 - 0.22%
Shanghai Composite 5692.75 + 2.53%
Singapore STI 3820.31 - 0.06%
South Korea Composite 2012.82 + 0.84%
Taiwan Weighted 9717.17 + 1.04%

*Intraday trading

Correction? What Correction?

Asian markets were mixed, with Japanese shares down ahead of a three-day weekend, while Hong Kong rebounded on bargain hunting following a two-session slump. Stocks in HKL resume the rally with 3.18% bounce. The benchmark Hang Seng Index rose 857 points to close at 27,831 which is still 1,000 points off the intra day high on Wednesday.

Market Indices
Australia All Ordinaries 6617.30 + 0.57%
Bombay Sensex* 17732.85 - 0.25%
Hong Kong Hang Seng 27831.52 + 3.18%
Japan Nikkei 17065.04 - 0.16%
Singapore STI 3822.62 + 1.03%
South Korea Composite 1996.03 - 0.38%
Taiwan Weighted 9617.26 - 0.11%

*Intraday trading

A 2-Day Correction ... Wonder of Wonders!

Asian markets ended lower, reacting to a lower close on Wall Street, as investors continued to take profits from recent gains. HK was not helped by an article in the South China Morning Post (SCMP) suggesting that the Chinese authorities have banned the simultaneous listings of Chinese companies on the Shanghai and HK exchanges. In future they are supposed to list in Shanghai first and then later in HK.

This of course will have an impact on the HK market. The paper suggested that companies would choose to list in Shanghai because of the higher P/E's compared to HK. They appear to have forgotten that Chinese shares do not enjoy the high P/E's on listing as the CSRC apparently puts pressure on companies to lower their P/E's in order to ensure "successful" underwriting and aftermarket trading.

That does not mean that it would not affect HK. If the company achieves a P/E of, say, 40 times in the aftermarket, how can the management justify a later listing in HK for half of that? Actually, it will be quite easy as there is no market for secondary issues in China, and any additional fund raising will typically cause the stock price to fall. However, in the meantime, while we are all learning the new realities, China keeps chugging along with the lion's share (25%) of the worldwide IPO market. Unfortunately HK has been relegated to 8th place.

You can see how this affected sentiment by the market performance yesterday and today. But isn't it uncanny that the market tanked immediately after lunch as if a signal has been given? Interesting!

Market Indices
Australia All Ordinaries 6579.90 - 1.28%
Bombay Sensex* 17753.27 - 0.53%
Hong Kong Hang Seng 26973.98 - 1.84%
Japan Nikkei 17092.49 - 0.62%
Singapore STI 3783.81 + 0.78%
South Korea Composite 2003.60 - 0.52%
Taiwan Weighted 9627.39 - 0.75%

*Intraday trading

Roller Coaster Day

Asian stocks ended mixed, as Tokyo shares hit a two-month high and Hong Kong stocks suffered harsh reversals from profit-taking. When we went to lunch today, the HK market was up some 300 points. After lunch, the HS Index plunged over 719 points to close at 27,479 with record turnover of HK$209 billion.

Is this the beginning of the end? Most likely not. The market was up over 1,000 yesterday for no apparent reason and surely it is due for a correction. Since mid August when the market plunged to 19,500 intra-day, we have gained a handsome 8,000 points. Surely time to take a little profit.

Market Indices
Australia All Ordinaries 6665.40 - 0.03%
Bombay Sensex* 17719.95 + 2.26%
Hong Kong Hang Seng 27479.94 - 2.55%
Japan Nikkei 17199.89 + 0.90%
Singapore STI 3754.62 - 1.03%
South Korea Composite** 2014.09 + 2.62%
Taiwan Weighted 9700.07 + 0.80%

*Intraday trading

Who says the market has to be "rational"?

On the back of a 190 point rise in the Dow on Monday, the HK market finished up over 1,057 at 28,199 accompanied by record turnover of HK$163 billion. Turnover this high can only be attributed to institutional buyers who are afraid of being left behind in the rush to "buy China".

As today is the first trading day of the last quarter, the tsunami of foreign institutional funds hitting our shores would guarantee that the year will end on a high note.

The following statistics are made available by the HKEx:
- The Hang Seng Index (HSI) closed at a record high of 28199.75 today, up 1057.28 points, the fourth largest point rise in history. It was the largest point rise since 20 August 2007 when the index was up 1208.50 points. The HSI's 3.90 per cent rise today was its largest in per cent terms since 19 September 2007 when the index was up 3.98 per cent.
- The Hang Seng China Enterprises Index (H-shares index) closed at a record high of 17973.87 today, up 955.93 points, or 5.62 per cent.
- Today's securities market turnover value was $163,942 million, the largest ever.
- Today's turnover value for H-share and red-chip companies was $74,737 million and $18,778 million respectively.
- Today's derivative warrants turnover was $27,987 million, the largest ever.
- A record high total of 1,019,309 trades were concluded today.
- Today's closing market capitalisation was a new high of $20,757.1 billion. The previous trading day's ( 28 September 2007 ) closing market capitalisation was $20,054.9 billion.

Top 10 daily turnover values in history (Up to 2 October 2007)
Daily turnover value in HK$
Main Board GEM Market total
Rank ($) ($) ($) Date
1 163,132,418,781 810,057,000^ 163,942,475,781 2/10/2007
2 148,575,515,387 634,708,800 149,210,224,187 28/9/2007
3 147,053,974,999 831,473,240 147,885,448,239 27/9/2007
4 140,057,412,983 814,970,399 140,872,383,382 24/9/2007
5 138,709,411,014 657,991,096 139,367,402,110 19/9/2007
6 132,283,181,902 710,132,583 132,993,314,485 21/9/2007
7 129,178,392,000 605,960,271 129,784,352,271 25/9/2007
8 126,346,932,691 696,609,067 127,043,541,758 27/8/2007
9 122,942,024,498 639,900,384 123,581,924,882 28/8/2007
10 121,055,884,537 1,314,151,868 122,370,036,405 1/8/2007
^ Figures rounded

Top 10 point rise in history
Up to 2 October 2007
Rank Point rise Date
1 1705.41 29/10/1997
2 1326.24 2/2/1998
3 1208.50 20/8/2007
4 1057.28 2/10/2007
5 978.66 3/9/1997
6 977.79 19/9/2007
7 816.07 25/9/2000
8 806.59 16/10/1998
9 723.99 17/3/2000
10 722.96 31/5/2000

Elsewhere in the region, stocks gained across Asia, with several major indices touching record levels as investors shrugged off continued credit-crunch woes.

Market Indices
Australia All Ordinaries 6667.60 + 1.33%
Bombay Sensex* 17328.62 + 0.22%
Hong Kong Hang Seng 28199.75 + 3.90%
Japan Nikkei 17046.78 + 1.19%
Singapore STI 3790.54 + 0.94%
South Korea Composite 2014.09 + 2.62%
Taiwan Weighted 9623.25 + 1.42%

*Intraday trading

Holiday in HK

Asian stocks rose modestly, with Tokyo ending higher after the release of a key corporate-sentiment survey. Markets in Hong Kong and Shanghai were closed for Chinese National Holiday holidays.

Market Indices
Australia All Ordinaries 6579.80 - 0.02%
Bombay Sensex 17328.62 + 0.22%
Hong Kong Hang Seng 27142.47 + 0.29%
Japan Nikkei 16845.96 + 0.36%
Singapore STI 3755.22 + 1.32%
South Korea Composite 1962.67 + 0.83%
Taiwan Weighted 9488.50 + 0.13%

So Who's Counting the New Highs?

Asian markets closed mostly higher, with Hong Kong and Shanghai ending at record high levels, but profit-taking dragged Japanese shares lower as institutional investors chase Asian themes over the past month.

This was most evident in the HK market which is a proxy for the Chinese Economy. Fund managers cannot be seen to have nee left behind in the final 2 quarters of the year.

The following statistics are made available by the HKEx:

Securities market
- The Hang Seng Index closed at a record high of 27142.47 today, up 77.32 points.
- Today's securities market turnover value was $149,210 million, the largest ever.
- Today's closing market capitalisation was a new high of $20,054.9 billion, exceeding the $20 trillion mark for the first time. The previous trading day's (27 September 2007) closing market capitalisation was $19,937.1 billion.

Market Indices
Australia All Ordinaries 6580.90 + 0.50%
Bombay Sensex* 17268.95 + 0.69%
Hong Kong Hang Seng 27142.47 + 0.29%
Japan Nikkei 16785.69 - 0.28%
Shanghai Composite 5552.30 + 2.64%
Singapore STI 3706.23 - 0.23%
South Korea Composite 1946.48 + 0.06%
Taiwan Weighted 9411.95 - 0.02%

*Intraday trading

We're Back!

Asian shares closed sharply higher as markets took their cue from Wall Street. Financial companies paced gainers in Japan, while Hong Kong reached a new record close.

The following statistics are made available by the HKEx:

Securities market
- The Hang Seng Index closed at a record high of 27065.15 today, up 634.86 points.
- Today's securities market turnover value was $147,885 million, the largest ever.
- Today's closing market capitalisation was a new high of $19,937 billion. The previous trading day's (25 September 2007) closing market capitalisation was $19,504 billion.

Market Indices
Australia All Ordinaries 6548.00 + 0.87%
Bombay Sensex* 17133.51* + 1.25%
Hong Kong Hang Seng 27065.15 + 2.40%
Japan Nikkei 16832.22 + 2.41%
Shanghai Composite 5409.40 + 1.33%
Singapore STI 3714.77 + 1.77%
South Korea Composite 1945.28 + 1.36%
Taiwan Weighted 9413.65 + 1.69%

* Intraday trading

HK Took A Holiday from Setting New Records

Asian shares closed mixed, with Shanghai losing ground on fears of further tightening, while Japan stocks posted slight gains and India's stock market reached another record high.

Market Indices
Australia All Ordinaries 6491.40 + 0.01%
Bombay Sensex 16921.39 + 0.13%
Hong Kong Hang Seng* 26430.29* - 0.46%
Japan Nikkei 16435.74 + 0.21%
Shanghai Composite 5338.52 - 1.61%
Singapore STI 3650.09 + 0.70%
South Korea Composite* 1919.26* + 0.54%
Taiwan Weighted 9257.47 + 1.67%

* Markets in Hong Kong and South Korea were closed for holidays.

Finally A Rest

Asian shares closed mixed, with airline companies weighing on indexes in Hong Kong and Shanghai, while metal stocks paced gainers in Japan, boosted by higher commodities prices.

Market Indices
Australia All Ordinaries 6490.90 + 0.46%
Bombay Sensex 16899.54 + 0.32%
Hong Kong Hang Seng 26430.29 - 0.46%
Japan Nikkei 16401.73 + 0.55%
Shanghai Composite 5425.88 - 1.08%
Singapore STI 3624.82 - 0.39%
South Korea Composite* 1919.26* + 0.54%
Taiwan Weighted* 9105.28* + 1.36%

* South Korean and Taiwanese markets were closed for holidays.

4th Consecutive High

Asian shares closed higher, with Hong Kong hitting a record close for the fourth consecutive day, while resource stocks led both Shanghai and Sydney to new record highs.

Market Indices
Australia All Ordinaries 6461.10 + 1.41%
Bombay Sensex* 16845.83* + 1.70%
Hong Kong Hang Seng 26551.94 + 2.74%
Japan Nikkei** 16312.61** - 0.62%
Shanghai Composite 5485.01 + 0.56%
Singapore STI 3639.02 + 2.73%
South Korea Composite** 1919.26** + 0.54%
Taiwan Weighted** 9105.28** + 1.36%

* Intraday trading
** As of Sept. 21. Japanese, South Korean and Taiwanese markets were closed Monday for holidays.

3rd Consecutive High

Hong Kong stocks reached their third consecutive record high. What can I say?

Market Indices
Australia All Ordinaries 6371.20 - 0.46%
Bombay Sensex* 16491.73 + 0.88%
Hong Kong Hang Seng 25843.78 + 0.56%
Japan Nikkei 16312.61 - 0.62%
Shanghai Composite 5454.67 - 0.28%
Singapore STI* 3544.69 - 0.22%
South Korea Composite 1919.26 + 0.54%
Taiwan Weighted 9105.28 + 1.36%

*Intraday trading

Most Asian indexes advanced for the second straight day. Hong Kong reaching a new record and Japanese stocks giving back early gains. Australia's central bank drained liquidity in a sign the credit crunch is easing its grip.

The story in HK is "same old, same old". Actually, it is getting a bit boring with new highs everyday. But as a trader, we must remember the old adage "Trade what you see, not what you think!" In other words don't argue with the market, you are not the only one with smarts.

Market Indices
Australia All Ordinaries 6400.90 + 0.61%
Bombay Sensex* 16347.95* + 0.15%
Hong Kong Hang Seng 25701.13 + 0.57%
Japan Nikkei 16413.79 + 0.20%
Shanghai Composite 5470.06 + 1.39%
Singapore STI 3552.46 - 1.17%
South Korea Composite 1908.97 + 0.33%
Taiwan Weighted 8983.03 + 0.63%

* Intraday trading

First Cut Is The Deepest

To paraphrase Rod Stewart's song.

The FOMC surprised everyone by cutting the Fed Funds rate by 1/2% instead of the widely expected 1/4%. The US market reacted by rising 335. HK opened up 900 and at one stage was up over 1,000. The market closed at 25,555 up 977 on heavy turnover of HK$138.7 billion.

The Fed moved aggressively in the first rate cut in 4 years sending out a very strong signal that it will do what is necessary to stop the sub prime woes from spilling into the broader market. The issue is one of moral hazard. Should the Fed bail out those financially irresponsible who put us into this mess in the first place. At the end, it was a no brainer. The Fed cannot afford to penalise the entire economy by punishing the irresponsible. Besides, a 1/2% cut will not bail out those who borrowed 100% at teaser rates and are now seeing their rates re-set to double.

The "Bernanke Put"? Not! However, the Fed also cut the discount rate by 1/2% to 5.25% in a bid to provide more liquidity to the market to facilitate roll overs of commercial papers.

Asian stocks and currencies surged in response to an aggressive Federal Reserve interest-rate cut, as the U.S. central bank moved to limit the risk of an economic downturn.

Market Indices
Australia All Ordinaries 6362.00 + 2.48%
Bombay Sensex* 16304.32* + 4.05%
Hong Kong Hang Seng 25554.64 + 3.98%
Japan Nikkei 16381.54 + 3.67%
Shanghai Composite 5395.26 - 0.55%
Singapore STI 3594.36 + 3.35%
South Korea Composite 1902.65 + 3.48%
Taiwan Weighted 8926.38 + 0.30%

* Intraday trading

Waiting for the Fed

In Hong Kong, property firms lost ground for a second day on profit-taking as we all waited with bated breath for the Fed meeting tonight (US time 18 September 2007). The expectation is that he will cut the Fed Funds rate by 1/4 percent. Some are hoping for a 1/2 percent cut.

I had just returned from a short visit to the US over the weekend. The man in the street does not appear too concerned about the economy which shows that the sub prime problems have only touched the edges so far. But! I was taking a stroll with my grandson one nioght and saw a "For Sale" sign outside a house on the development. It said, "New Price". This is a weak attempt to disguise "Reduced Further" that we see often in store sales. Homeowners are finding it more difficult to move their properties and can only mean that prices are coming DOWN.

The pain will be felt first by the builders and developers who have taken loans for the development. They will be forced to cut prices to liquidate their invnetory and repay loans. We are already seeing very generous incentives in the form of "upgrades" etc as they try to keep the top line prices from falling. The froth have gone out of the property market and everyone has adopted a "wait and see" attitude which is markedly different from the "buy before it's too late" mentality from the last 2 years. People are no longer camping out overnight to get in line to buy homes.

I went to my bank on Friday morning and was collared by a loans officer who offered me an equity loan on my house. No fees, no costs and a 1/2 percentage off the interest rate. On the surface, this appears to be business as usual. But this is in contrast to people lining up to take out 2nd mortgages to buy vacation homes, or investment properties. People are much more cautious and that can only mean that the adjustment has not yet run its course.

Market Indices
Australia All Ordinaries 6208.00 - 1.20%
Bombay Sensex* 15669.12* + 1.06%
Hong Kong Hang Seng 24576.85 - 0.09%
Japan Nikkei 15801.80 - 2.02%
Shanghai Composite 5425.20 + 0.07%
Singapore STI 3477.75 + 0.04%
South Korea Composite 1838.61 - 1.77%
Taiwan Weighted** 8899.91** - 1.46%

* Intraday trading
** As of Sept. 17. Markets were closed in Taiwan due to Typhoon Wipha.

HK retreated on Profit Taking

Asian shares closed mixed, with Hong Kong property firms dropping on profit-taking, while Shanghai reached another record close on strong gains from airlines and insurers.

Market Indices
Australia All Ordinaries 6283.70 - 0.51%
Bombay Sensex* 15504.43* - 0.64%
Hong Kong Hang Seng 24599.34 - 1.20%
Japan Nikkei** 16127.42** + 1.94%
Shanghai Composite 5421.39 + 2.06%
Singapore STI 3476.31 - 1.70%
South Korea Composite 1871.68 + 0.09%
Taiwan Weighted 8899.91 - 1.46%

* Intraday trading
** As of Sept. 14. Martkets were closed in Japan for a national holiday.

Yet Another New High!

Asian markets rose Friday after U.S. stocks rallied, with Japanese indexes lifted by metals stocks and exporters. Hong Kong shares reached their third record close.

Market Indices
Australia All Ordinaries 6315.70 + 1.14%
Bombay Sensex* 15603.80 - 0.07%
Hong Kong Hang Seng 24898.11 + 1.47%
Japan Nikkei 16127.42 + 1.94%
Shanghai Composite 5312.18 + 0.07%
Singapore STI 3536.40 + 0.91%
South Korea Composite 1870.02 + 1.19%
Taiwan Weighted 9031.63 + 1.17%

*Intraday trading

Another New High for HK!

Asian shares closed higher, with expectations of lower interest rates to come property firms pushing Hong Kong's benchmark Hang Seng Index to a new record.

Market Indices
Hong Kong Hang Seng 24537.02 + 0.93%
Japan Nikkei 15821.19 + 0.15%
Shanghai Composite 5273.59 + 1.95%
Singapore STI 3504.40 - 0.05%
South Korea Composite 1848.02 + 1.90%
Taiwan Weighted 8927.42 - 1.01%

*Intraday trading

Hong Kong Hits a Record High ...Again!

The Hang Seng Index closed up 357 points or 1.49 per cent at a record 24,310, after reaching an intraday high of 24329. The total market capitalisation of Hong Kong stocks also exceeded $18 trillion for the first time yesterday at $18.148 trillion.

While some commentators are castigating the HK Government for intervening in the market by buying 5.88% of the HKEx, investors were looking for the next stock to benefit from government intervention. Attention seem to be focused on the listed Mass transit Railway (MTR) ahead of a crucial vote on the merger with the unlisted Kowloon and Canton Railway Corporation (KCRC). Another candidate is the Link REIT which is under pressure from hedge funds to raise rents on shopping centres used by low income housing residents.

Market Indices
Hong Kong Hang Seng 24310.14 + 1.49%
Japan Nikkei 15797.60 - 0.50%
Shanghai Composite 5172.62 + 1.15
Singapore STI 3506.09 + 0.33%
South Korea Composite 1813.52 - 1.83%
Taiwan Weighted 9018.12 + 0.17%

*Intraday trading

Inflation Fears Hit Chinese Shares

China's inflation rose in August to the highest level in more than a decade while the country's August trade surplus climbed to its second-highest level ever. The Mainland's CPI rose 6.5% year on year (the target at the beginning of the year was 3%).

Investors were cautious that the central bank will further tighten liquidity. The central bank had raised interest rates 4 times this year, and increased bank reserve ratios 7 times. Shanghai fell 4.5% and Shenzhen fell 4.4%. HK managed to stay fairly steady because the valuations had not risen at the same pace as the Mainland markets.

China announced it's foreign exchange reserves is now almost US$1.4 trillion in July 2007. Since the first Mainland enterprise (Tsingtao Beer) listed in HK in 1993, Mainland enterprises have now raised US$200 billion in the HK market one-seventh of the country's foreign reserves. Yes, HK benefited from Mainland enterprises listing here, but we also played a part in building the financial infrastrucutre.

The recently announced through train, QDII relaxations etc. are aimed at reducing inflationary pressures on the Mainland by trying to divert some of the liquidity slooshing around into investments in HK.

Market Indices
Hong Kong Hang Seng: 23952.24 - 0.20%
Japan Nikkei: 15877.67 + 0.71%
Shanghai Composite: 5113.96 - 4.51%
Singapore STI: 3494.57 + 1.53%
South Korea Composite: 1847.36 + 0.63%
Taiwan Weighted: 9003.12 + 0.73%

*Intraday trading

Where the US Goes ... A Tale of 2 Markets

The HK market fell in early trading because of worries that Friday's weak US job data and DJIA drop of 249 points would carry over.

However, by the end of trading, the market had recovered its nerve and closed up at 23,999,70.

Market Indices
Hong Kong Hang Seng 23999.70 +0.07%
Japan Nikkei 15764.97 -2.22%
Shanghai Composite 5355.29 +1.50%
Singapore STI 3441.87 -1.35%
South Korea Composite 1835.87 -2.60%
Taiwan Weighted 8937.58 -0.89%

*Intraday trading

HK Inc.

The HK Governement announced that it now owns 5.88% of the HK Exchange (#388)making it the single largest shareholder. This drew criticism of market intervention.

Of course, in Singapore, the Government is majority owner (through GIC and Temasek) of almost all mbig listed companies. Somehow, Singapore has escaped criticism. Of course, HK does not complain to being held to higher standards.

Some complain that tighter integration of the HK and Mainland markets would expose HK to the risk of "policy" driving the market (i.e. vis-a-vis China). Maybe they have forgotten to take a look at the make up of the HK market. Over 50% of the market capitalisation is from mainland stocks, over 60% of the daily turnover are in Mainland stocks, and over 90% of the funds raised are for Mainland enterprises. Like it or not, HK is a proxy market for the Mainland.

Foreign investors are not allowed to invest directly in the Mainland. They do it either through the Qualified Foreign Institutional Investors (QFII) scheme or through the HK market. The quota for QFII is US$10 billion shared among 50 institutions (less than 1 day's turnover on the HKEx). No wonder the HK market is so active.

The HK Government already appoints 6 of the 13 directors of the HKEx including the Chairman and the CEO who is an ex-offico member of the Board. Also, investors need to get the approval of the Financial Secretary to own more than 5% of the shares.

Market Indices
Hong Kong Hang Seng 23982.61 - 0.28%
Japan Nikkei 16122.16 - 0.83%
Shanghai Composite 5277.18 - 2.20%
Singapore STI 3488.97 + 0.66%
South Korea Composite 1884.90 - 0.21%
Taiwan Weighted 9018.08 + 0.01%

*Intraday trading

Tighter Bank Reserves in China

The People's Bank of China (PBOC) raised the cash reserves that banks are required to keep up from 12% to 12.5%. This 0.5% increase will take RMB 170 billion off the table. The Chinese economy has been growing at a breakneck speed of over 9% per annum since it was opened 30 years ago.

The "non stop through train" to invest in HK shares will likely be delayed until after the 17th Congress while technical details are being worked out. However, at the same time the minimum RMB 300,000 required for investment in Qualified Domestic Institutional Investors scheme has been reduced to RMB 100,000. Which coincidentally is the same level as originally proposed for the through train for individual investors. Rumours are that it will be be increased to RMB 300,000 --- go figure! Seems like the CSRC, the CBRC, PBOC and SAFE really have to start talking to each other.

Market Indices
Hong Kong Hang Seng 24050.40 - 0.08%
Japan Nikkei 16257.00 + 0.61%
Shanghai Composite 5393.66 + 1.56%
Singapore STI 3466.06 + 0.61%
South Korea Composite 1888.81 + 1.24%
Taiwan Weighted 9017.08 + 1.16%

*Intraday trading

Putting the Worries Behind Us

Market Indices
Hong Kong Hang Seng 24069.17 + 0.77%
Japan Nikkei 16158.45 - 1.60%
Shanghai Composite 5310.71 + 0.31%
Singapore STI* 3441.10 + 1.93%
South Korea Composite 2534.38 - 0.49%
Taiwan Weighted 8913.85 - 0.10%

*Intraday trading

Waiting for August

Hong Kong was dragged down by profit-taking and investors awaited the release of key U.S. economic data for August.

Market Indices
Hong Kong Hang Seng 23886.07 - 0.08%
Japan Nikkei 16420.47 - 0.63%
Shanghai Composite 5294.04 - 0.51%
Singapore STI 3376.06 - 0.30%
South Korea Composite 1874.74 - 0.38%
Taiwan Weighted 8922.98 - 0.63%

*Intraday trading

No follow through on Friday's Rise

Market Indices
Hong Kong Hang Seng 23904.09 - 0.33%
Japan Nikkei 16524.93 - 0.27%
Shanghai Composite 5321.05 + 1.96%
Singapore STI 3386.22 - 0.20%
South Korea Composite 1881.81 + 0.46%
Taiwan Weighted 8979.96 - 0.02%

Jackson Hole to the Rescue

The Hang Seng Index was up 499 to close at 23,984.14, yet another new high.

And to what do we owe this? Anticipation that, in his speech in Jackson Hole today, the Fed Chairman will tip his hand about the coming cut to the Fed Funds rate (most are expecting 0.25% and some are even looking for 0.5%) at the next meeting on 18 September 2007. As if that wasn't enough, the Washington Post has published leaks of the President's plan to rescue home owners who are unable to refinance their 0% down, no interest teaser loans. It's a wonder that the market did not finish up 1,000!!!

It seems that political expediency has taken precedence to financial responsibility. Mortgage brokers earned fat fees to help unqualified buyers buy over priced homes they could not afford. Now the US government is proposing to bail them out! And the Hong Kong government was accused of intervening in the HK stock market in 1998 by fighting off the hedge funds who were intent on bringing down our financial system like they did in the rest of Asia. "Let the market adjust to the correct level", they said.

Any way, I am real glad I am not a US taxpayer now being asked to finance some dumb borrower who got himself into trouble. Hmm, maybe they were not so dumb after all.

Locally, the Securities and Futures Commission "SFC" issued a restriction notice on Man Lung Hong Securities Ltd (broker numbers: 3490 and 3499) today (Friday 31 Aug 2007) under sections 204 and 205 of the Securities and Futures Ordinance.

The HKEx, has suspended Man Lung Hong's right to access the trading system, and declared Man Lung Hong a defaulter under Rule 3702 of the Rules of CCASS, the Central Clearing and Settlement System. HKEx will closeout the unsettled stock positions of Man Lung Hong Securities.

Last year 3 brokerages were put under restriction orders (2 subsequently folded and 1 was rescued) when the SFC found that they had mis-appropriated clients' assets. The current case is different in that apparently an employee misappropriated his clients' assets. The firm was put under a restriction order because apparently senior management had been aware of the mis-appropriation for some time and had allowed the employee to try to trade out of the position. Under the Securities and Futures Ordinance, the firm is required to notify the SFC as soon as practicable on discovering the problem.

Clients can seek compensation from the Investors Compensation Fund which would pay out a maximum of HK$150,000 per account. Many have questioned whether the sum reflects current market conditions as it was set during the collapse of CA Pacific (a brokerage) in 1998 and have not been adjusted since (the market have almost tripled in that time). The maximum payout was set at HK$150,000 as this was sufficient to pay off 80% of the clients in full. Clients with bigger balances were deemed to have been sufficiently sophisticated to assess the risk and did not need to be rescued.

The Fund has approximately HK$1.5 billion and was funded by a 0.002% levy on stock trading transactions. The levy was discontinued at the end of 2005 but can be re-instated should the balance fall below HK$1.0 billion.

Market Indices
Hong Kong Hang Seng: 23,984.14 +2.13%
Japan Nikkei: 16,569.09 +2.57%
Shanghai Composite: 5,218.82 +0.99%
Singapore STI*: 3,373.73 +1.58%
South Korea Composite: 1,873.24 +1.71%
Taiwan Weighted: 8982.16 +2.02%

*Intraday trading

Where the US Goes ... We Follow!

The Dow Jones Industrial Average closed last night up 247 as investors re-evaluated the Fed's position. A letter to Sen. Charles Schumer from Federal Reserve Chairman Ben Bernanke pledging to "act as needed" to help the economy (read cutting Fed Funds Rate) should the problems in the credit market start to affect the wider economy.

The Hang Seng Index rose 463 to close at 23,483 with turnover of HK$95.87 billion. China Construction Bank was outstanding and rose to an all-time high of HK$6.30 before closing off the day's high. All in all, it appears that investors have got their nerve back and started bargain hunting.

Market Indices
Hong Kong Hang Seng: 23,484.54 +2.02%
Japan Nikkei: 16,153.82 +0.88%
Shanghai Composite: 5,167.88 +1.14%
Singapore STI*: 3,342.28 +0.23%
South Korea Composite: 1,841.70 +0.85%
Taiwan Weighted: 8,771.21 +1.48%
*Intraday trading

Where is the Fed Cavalry?

The US market was down 280, and the HK market followed suit. At one stage the market was down 700 but managed to close at 23,020 down 343. Turnover was HK$104.2 billion.

There was disappointment that the Fed is still targeting inflation as "public enemy no. 1". This is read as meaning that there will not be a cut in Fed Funds rate in the short term.

The Fed was in a bind. Clearly, what is happening on Wall Street is affecting Main Street. The housing slowdown is worrying as it will spill over into other areas e.g. household goods, etc. Consider that the acquisition price of Home depot was cut substantially to reflect not only the availability of funds, but also future prospects. However, just 2 weeks before the sub prime mess hit the fan, the Fed had been saying that inflation was still worrying. Perhaps it was naive to expect the Fed to admitting it was wrong so soon.

I expect that there will be a cut in the Fed Funds rate in the not too distant future as the economy starts to show signs of slowing down. The next FOMC meeting will be on 18 September 2007. At that time, the Fed will data from which to draw conclusions on the state of the economy.

Market Indices

• Bombay Sensex*: 14,977.96 + 0.39%
• Hong Kong Hang Seng: 23,020.60 -1.47%
• Japan Nikkei: 16,012.83 -1.69%
• Shanghai Composite: 5,109.42 -1.64%
• Singapore STI*: 3,304.99 -1.14%
• South Korea Composite: 1,826.19 -0.17%
• Taiwan Weighted: 8,643.32 -0.97%

*Intraday trading

A Much Needed Correction

Finally, a meaningful consolidation! The market was down today on profit taking, closing at 23,363 down 213.97 with turnover HK$122.94 billion (second only to yesterday's HK$126.35 billion record high). Most mainland shares were down on the open and closed off the day's highs. China Life continued to surge on good 1st half results. There was also buying in issues where the A-share were trading at a big premium to the H-share.

Of course, Shanghai continued its upwards trend oblivious to what is happening to the rest of the world.

Market Indices

• Hong Kong Hang Seng: 23,363.76 -0.91%
• Japan Nikkei: 16,287.49 -0.09%
• Shanghai Composite: 5,194.68 +0.87%
• Singapore STI: 3,343.00 -1.34%
• South Korea Composite: 1,829.31 +1.46%
• Taiwan Weighted: 8,727.55 +0.11%

HK Shares Rose on Expected Funds from Mainland

The Hang Seng Index rose sharply on the opening and continued strongly to close up 655 at 23,577.

Today is the first day that the Bank of China Tianjin Branch can officially open accounts for Mainland clients to invest directly in HK shares. Investors believe that valuations of H-shares (Mainland issues) will rise to close the gap with their A-share prices.

Construction Bank of China "CCB" (#939) performed strongly on good results and disclosure that it had only minor exposure to the sub prime mess. The Mainland's 3rd largest bank closed at $6.15, the highest level since listing in October 2005.

Shanghai hit its sixth consecutive record closing high. The Mainland market is now 60% more expensive than HK on average.

Market Indices

• Hong Kong Hang Seng: 23,577.73 +2.86%
• Japan Nikkei: 16,301.39 +0.32%
• Shanghai Composite: 5,150.11 +0.83%
• Singapore STI*: 3,388.44 +0.56%
• South Korea Composite: 1,803.03 +0.65%
• Taiwan Weighted: 8,718.31 +0.32%

*Intraday trading

A Correction!

A correction in HK, that is. The Mainland market continued on the upswing gaining 1.49% to yet another new high of 5,107 having just broken through 5,000 for the first time yesterday.

Mainland investors feel insulated against the problems of the sub prime debacle in the US.

Market Indices

• Hong Kong Hang Seng: 22,921.89 -0.20%
• Japan Nikkei: 16,248.97 -0.41%
• Shanghai Composite: 5,107.66 +1.49%
• Singapore STI*: 3,362.94 -0.24%
• South Korea Composite: 1,791.33 -0.47%
• Taiwan Weighted: 8,690.09 -0.49%

*Intraday trading

The Shanghai Shuffle

It looks likely that the Tianjin pilot project to allow Mainland individaul investors to invest directly in HK shares will be extended to Shanghai which will team up with ICBC. Although many had expected Shanghai to object to the Tianjin scheme, Shanghai apparently decided to "get with the programme" and cut themselves in.

It is also interesting that they have chosen to go with ICBC one of the 3 Mainland banks listed in HK. China Construction bank "CCB" is the only one left without a partner. I would assume that one of the other major cities, such as Chongqing, may be next. The Chinese way is to share the goodies.

HK is becoming more and more a Mainland market with over 50% of the market capitalisation, 60% of the dialy trading, and 90% of IPO's being Mainland companies. As we become more integrated with the Mainland, we will become more like the mainland market i.e. "policy" driven.

The Shanghai market set a new high today above 5,000 points on the index, and we went along for the ride closing up 620 to 22,966 on the HSI. Another day like today and we will be hitting new highs. Personally, I won't be betting against it.

Market Indices

• Hong Kong Hang Seng: 22,966.97 +2.77%
• Japan Nikkei: 16,316.32 +2.61%
• Shanghai Composite: 5,032.49 +1.05%
• Singapore STI*: 3,380.05 +1.76%
• South Korea Composite: 1,799.72 +2.29%
• Taiwan Weighted: 8,732.84 +2.82%

Day 3

The third day of trading after the announcement allowing individaul Mainland citizens to trade HK stocks saw the HSI close up 617 at 22,346 with turnover of HK$80.07 billion. Buying was concentrated in H-shares i.e. shares of companies incorporated in the Mainlnad as these are expected to be the main beneficiaries of the relaxation.

There was some question as to the role of QDII now that individuals will be allowed to trade HK shares. QDII is aimed at the institutional market players with upwards of RMB 300,000 while individuals will be required to open accounts with at least RMB 100,000.

Effective today, interest rates on loans will rise by 0.18 percentage point (one-year) to 7.02% from 6.84%. Interest on deposits will go up 0.27 percentage point to 3.60% from 3.33%. The interest rate increase announced yesterday after market close by the Mainland authorities appears to have had little or no effect.

With the expiry of futures and options next week, there will be some interesting trading situations. Buy on weakness and sell into strength.

Note: As a matter of interest (pun strictly intended) interest rates and corresponding changes are divisible by 9. Mainland banks work on 360 days basis and using this makes it easier to calculate the interest.

Market Indices

• Hong Kong Hang Seng: 22,346.88 +2.84%
• Japan Nikkei: 15,900.64 -0.00%
• Shanghai Composite: 4,980.07 +0.50%
• Singapore STI*: 3,301.75 +2.26%
• South Korea Composite: 1,759.50 +1.34%
• Taiwan Weighted: 8,493.46 +0.17%

*Intraday trading

Up 1,020 then Pullback

As expected the market opened up, about 600, then it gapped up by 1,020 points on short covering. However, the momentumwas not sustainable and we finally closed up 200. Rather disappointing given the good news from the Mainland.

Actually, it is only natural that some investors will sell into rallies. I will be more worried if the market was up 1,020 today on top of yesterday. We finally closed up 133 at 21,729.

Consensus is that the Fed will cut Fed Funds rate soon. I believe that this will be the beginning of a string of cuts, and that eventually the turmoil will quieten down. At that time, the HK market will be driven by internal factors.

The Tianjin Factor

Yesterday, the Mainland Chinese State Administration of Foreign Exchange "SAFE" announced a pilot scheme that allows Mainland individual investors to invest directly in the HK market through the Tianjin special zone. This is the result of lobbying by the former Governor of the Central Bank Dia Xianglong who is now the mayor of Tianjin.

See http://www.gov.cn/english/2005-10/09/content_75318.htm

The scheme will allow Mainland investors to open foreign currency accounts with the Tianjin branch of Bank of China (or, any branch of BOC acting as agent for BOC for the Tianjin branch) and trade HK stocks. This was met with enthusiasm by Mainland investors who see HK as a more rational and "cheaper" market compared to Shanghai and Shenzhen. SAFE announced earlier this year that individual Mainland citizens may exchange up to US$50,000 per annumin foreign currencies. The Mainland has over US$1.33 trillion in foreign currency reserves.

The expected increase in investments and turnover will boost the HK market, and will act as an effective arbitrage mechanism for the Mainland and HK markets and close the gap in valuations of dual listed companies. The next step is to allow HK investors to trade in the Mainland markets through another "pilot" scheme?

The Bernanke Rally

The Federal Reserve cut the discount rate from 6.25% to 5.75% and encouraged banks to borrow at the discount window. The effect was stunning!

The HK market opend up 700 points and closed the day up 1,208 with turnover HK$105.3 Billion. The question is "Is this the end of the correction, or a dead cat bounce"?

The Fed has shown that it is ready to step in to correct market imbalances by providing much needed liquidity. Borrowings at the discount window can now be repaid after 3o days instead of the more usual 1 day. There is no question that the Fed will continue to inject liquidity until the storm blows over. That does not mean that it will rescue players from their own folly. By not cutting the Fed Funds rate at this time the Fed is treating this as a liquidity crunch only.

The worry is that this will spill over into the larger economy impacting the man in the street. It will certainly make it more difficult for unqualified buyers to get a mortgage which may not be such a bad thing. However, the homes market drives an increasingly large part of the economy, and a slowdown there will have an effect. This will affect US consumers and ultimately US imports of goods and services.

Right now, the Mainland is insulated from the worst of the battering. In fact, the correction comes at an opportune time for Mainland funds to start acquiring quality assets in HK at much lower valuations than 2 weeks ago. The market basically took off on the announcement of QDII relaxations even before Mainland funds were able to put in their applications to invest overseas.

The current problems in the US is also good news for the HK stock market because Mainland investors will prefer t5o stay closer to home and to invest in companies that they are more familiar with rather than exotic instruments. When QDII was first conceived, it was supposed to invest only in fixed income products on the assumption that they are "safer" than stocks. How time changes!

A "perfect storm"? How about 1,300 points down?

The market opened weak and was down 200-300 points. Tokyo was down over 900 in the morning and in the afternoon the Hang Seng Index followed Tokyo's lead and was down almost 1,300 points to under 20,000. It recovered with short covering and was down some 280 points at the close.

On Thursday, the trading pattern was very similar and there were rumours that futres brokers were receiving margin calls in mid trading as market volatility was outside expected norms, "a perfect storm". We saw many quant funds taking huge hits because the volatility was outside their parameters. When will we learn? This happened in 1997 with the Asian Financial crisis, the LTCM debacle, and the Russian meltdown. It's always the tail end of the bell curve that gets you.

Just as in the LTCM debacle, and the Russian meltdown fiasco (and in South America before that) we can expect the US Cavalry to ride to the recus. By that, I mean the US Federal Reserve. And right on cue, the Fed cuts the Fed Funds rate by 50 basis points. The "Greenspan put" is again in effect. There is really not much choice. Either you save US financial institutions from their own follies, or you watch the market implode from lack of liquidity and credit concerns. Unfortunately what happens on Wall Street will after Main Street. George Bush and the Republicans have enough to worry about in the Middle East. With an election year coming up, the last thing they need is is an economy that tanks.

So where does that leave us? Rumours have been flying around that Chinese money is poised to come in. The market got ahead of itself on the announcement of QDII and went straight up to almost 24,000. We are now back at the pre-QDII announcement levels at the beginning of the year. QDII applications are being approved. The current levels will let QDII money buy in a favourable levels now that hedge funds speculators have been shaken out.

HK Shares End Roller Coaster

Yesterday, HK shares ended almost flat after 5 days of volatile trading. The Hang Seng Index closed down 12 points at 22,443.

Last Thursday saw the HS Index down over 200 followed by down over 400 on Friday. When the US market closed down on Friday, everyone expected Monday to be a bloodbath. Monday was up over 200 followed by over 400 up on Tuesday on the back of good results from HSBC and Hang Seng Bank (which against all expectations reported net profits up lover 50%).

But this was not to last. Wednesday followed with over 700 points down giving back the gains over the last 2 days.

The worries were of course related to the sub prime loan fiasco in the US. Major concerns were that hedge funds will need to liquidate in order to meet margin calls in the US, or at least taking profits. Since, most major funds are also exposed to hedge funds, this can turn into a snowball.

Over the longer term, with the liquidity in Chiona, HK will weather this through as more funds are diverted our way via the QDII. But over the shorter term, we should expect to see more volatility.

The China Syndrome

How to Profit from the Chinese Boom
Over the past few 2 weeks the Chinese Government has taken several steps to cool the economy.

Last week, the China Banking Regulatory Commission (“CBRC”) announced that the Qualified Domestic Institutional Investors (“QDII”) quota can be invested in HKG stocks last week (previously only in fixed income products).
This week, the CBRC raised interest rates and banks reserves at the same time.
Does this mean the end to the “Rise of the Dragon”? The answer, as always, is yes and no.

Yes
The CBRC is showing that it is taking the surge in the stock market seriously. It understands that it would take very little to tip the market over the edge and the result is mass market hysterical boom which can only end in a very painful bust.
We can expect that the CBRC will continue to try to calm the market. However, the tools available are limited.

No
The Chinese market is in the beginning stage of a boom. Forget about the years before 2005. The Chinese Government was experimenting with the stock market in the early days. A lot of rubbish were listed and this lead to several major busts and scandals resulting in loss of confidence in the market.

Starting in 2005, under the guidance of the State-owned Assets Supervision and Administration Commission (SASAC), several major state-owned enterprises (“SOE’s”) were restructured and listed in HK. The process started with the banks and insurance companies ending in 2006 with the listing of Industrial and Commercial Bank of China (ICBC #1398) which became the largest IPO in the world ever. Only the Agricultural Bank of China is left to be listed but the restructuring is expected to take until late 2008, and even then we expect that this may be the first all A-share bank IPO.

During 2006, we have seen A-shares and H-shares listed in both HK and Shanghai. This will continue as the Chinese Government is under pressure to ensure that Chinese citizens share in the “bounty”. All privatizations overseas have ensured that local citizens benefited from the rise in stock prices after the IPO, and China should not be expected to be any different.

In the 2 years, we will see more SOE’s listed on both HK and Shanghai.
Where Do We Go From Here?

The Taiwan went up 5 times in 9 months in 1986/7. It then proceeded to defy all predictions of a crash rising another 4 times before finally plunging. Will the Chinese market be a repeat of this?

The conditions are very similar indeed. Except for a very small Qualified Foreign Institutional Investors (“QFII”) quota of USD10 billion and a failed experiment with B-shares (foreign owned and denominated in foreign currency), there is no foreign participation in the market. With daily turnover exceeding USD40 billion, it is clear that the bulk of the funds invested in the market are local.

Since until recently, banks and insurance companies were banned from investing in the stock market, the bulk of the investing is retail oriented. There are over 100 million stock trading accounts with over 200,000 new accounts opening daily.
Some companies are reported to be giving staff “trading breaks” to allow them to place their orders with brokers.

Are We Set For A Bust?
By Western standards, the Chinese market is way overheated trading in excess of 40 times forward price-earning ratio (“P/E”). However, it was explained to me last week in Beijing by a local investor that Chinese citizens have no where to put their money. A rate of return of 2.5% implicit in a P/E of 40 times is still better than bank deposits, and there is no need to explain to the tax man where it came from.
China has a huge trade surplus, foreign direct investments (“FDI”) is growing rapidly, and the RMB is appreciating against the USD. The end result is a booming property and stock market.

An Arbitrage Strategy
For the same company listed in both HK and Shanghai, the A-shares in Shanghai attract a higher P/E because of the lack of supply. With the lifting of restrictions on QDII, we are already seeing more Chinese money moving into the H-shares on HK market. We expect this to continue as the QDII quota is expanded.
The Chinese Government appears to have decided that the combination of QFII and QDII can serve as an appropriate arbitrage platform between the currently highly valued A-shares and their H-shares counterparts. Thus, we will see the valuations converging with the H-shares catching up.

The Chinese banks are a relatively safe bet as they are under the supervision of the CBRC in their banking operations i.e. an additional layer of supervision. The state-owned banks are trading at a lower valuation: CCB (#939), Bank of China (#3988), and ICBC (#1398).

Return of the Red Chips
There are a number of “red chips” i.e. companies which have re-domiciled outside of China and listed in HK. The China Securities Regulatory Commission (“CSRC”) announced last week that “red chips” with more than RMB1 billion in annual earnings will be allowed to list A-shares in China.
Several names have been mentioned as possible candidates: China Mobile (#941), China National Overseas Oil Co. “CNOOC” (#883), China Netcom (#906), Citic Pacific (#267).

Companies which were listed in HK in the 3 years are exempted from the RMB1 billion profits requirement e.g. Tianjin Port (#3382) is an example.
Restructuring

We expect that there will be massive restructuring in the non-bank SOE’s over the next 4 years.

The Chinese Government is looking to build some of these companies into world class competitors through injections of assets. We have seen in the past that assets injected into SOE’s have been beneficial in terms of shares prices and do not see any reason for this not to continue.

The following should be considered prime candidates for asset injections: China Coal (#1898), China Shenhua (#1088), and China National Building Materials “CNBM” #3323.

Conclusion
You cannot afford not to be invested in Chinese shares. Take advantage of market pull-backs to accumulate and trim your portfolio when valuations appear to be getting out of hand. But invest, you must.

National Council for Social Security Fund (NSSF)

The NSSF has opened an account with the CCASS to hold their allocation of H shares in the future. The NSSF receives 10% of the funds raised by floating state owned shares. In the past, this had been paid out in cash. By starting now, the NSSF is entitled to receive shares. The first company to fall under this is Hunan Non Ferrous Metals (#2626) which will be listed on Friday 31 March 2006.

This is a good thing for the HKG stock market because we have always lacked a big local long term investor. Now with the MPF and the NSSF, we should start to see steadier markets. Also, pensioners, current and future, will be able to benefit from dividends and capital gains on the HKG market.

The NSSF bought RMB 10 billion of Bank of Communications in July 2004 at $1.80. This is now trading AT $4.65 and the stake is now worth $25.8 billion. The NSSF has RMB 191.7 billion under management mostly in cash earning 3% interest. Some of it will find its way into the HKG market.

HK Services Mission to Dubai

I represented the HK Stockbrokers Association on the Mission to Dubai organised by the HK Trade Development Council. The Mission was led by Mr. Frederick Ma Si-hang Secretary for Financial services and the Treasury.

We left HKG on Saturday 25 March 2006 in the afternoon and arrived at Dubai (via Bahrain) after mid night. After checking in, we finally got to bed around 3am Sunday.

Sunday is a working day in Arabic countries and so we had a seminar on doing business in HKG in the morning. In the afternoon, we met with the Dubai Investment Group which owns most of the major projects in Dubai including the world famous hotel. Cocktails was hosted by the Chinese Consul General at the Shangri-La Hotel. In between we were shown some of the projects. Real Estate is cheap by HK standards.

On Monday morning, we met with the Chamber of Commerce, the Municipality Government and the Minister of Finance.

Mr. Paul Chow and I then left the group and met with the Dubai Financial Market (DFM) which is the domestic exchange. We then rejoined the group for a visit to the Dubai Financial Services Authority (DFSA) which is equivalent to our SFC. Paul and I then stayed behind while the group went off to Jeddah for the second leg of the Mission.

We visited the Dubai International Exchange (DIFX) which intends to be the international exchange for the middle east. The DIFX is situated in the Dubai International Center (DIFC) which is almost an autonomous part of Dubai with its own legal system (for commercial, properties, and securities) and courts. Settlement is in USD in contrast with the DFM. Apparently, they have a "remote membership" category and I am exploring this to see if our members can trade Dubai stocks.

Philippine Stock Exchange Chairman's Cup

On 4 March 2006, Edward Kwan and I were invited by the PSE to play in their Annual Chairman's Cup. It was held on the Midlands Course of Tagaytay Golf Course which, by the way, is bulit on the edge of a volcano.

We did not win any prizes (Filipinos play golf almost everyday) but we made a lot of friends. Edward even managed an "eagle" on a par 5 hole.

We were on the 1st tee with Francis Lim the CEO of PSE and Omar Cruz treasury Secretary of the Philippines.

#939 China Construction Bank

After touching a high of $3.875, CCB has settled into a very narrow trading range of $3.450 thru $3.500. Waiting for a breakthru here. Daily turnover is high.

HK Stockbrokers Association Golf Day

Our Golf tournament this year was held on 12 March 2006 at the Mission Hills on the very challenging Vijay Singh Course. The course was in great condition and the staff at Mission Hills were very attentive. Thanks to Mr Tenniel Chu and his staff for the arrangements.

A total of 49 golfers took part in the tournament including our special guests Mr Frederick Ma Si-hang Secretary for the Financial Sercives and the Treasury, Mr Martin Wheatley Chairman of the Securities and Futures Commission, Mr Peter Au-Yang Executive Director of Securities and Futures Commission, Mr Fong Hup Director of the Hong Kong Exchanges and Clearing Limited, and Mr Gary Cheung CEO of the Hong Kong Securities Institute.

The HKSBA Cup (decided on the New New Peoria Handicap Method) was won by our Vice-Chairman Mr Edward Kwan, while the Best Gross Winner was won by Mr. Stephen Wong. The ladies winner was none other than Ms Yao Sze Ling who has won this so many times in the past. The individual winners were:

The Second New New Peoria - Mr. Alec Tsui
The Third New New Peoria - Mr. Gary Cheung

The Second Best Gross - Mr. Gilbert Leung
The Third Best Gross - Mr. Andrew Tsui

The Nearest to the Pin - Mr. Edward Kwan
The Longest Drive - Mr. Chris Li

The Second Best Lady - Ms. Rosanna Lee
The Third Best Lady - Ms. Alice Chan
The Fourth Best Lady - Ms. Kitty Lee

One of our members, Mr Kent Tong arranged for each participant to receive a copy of “Pearl River Delta Golf Course Guide”. Thanks Kent.

Finally, we must thank Mr Jimmy Fong and Mr Wilfred Wong for making all the arrangements. Without their help, we would not have been able to have such a great outing.