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Sell China Before the Games
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Farmer
Master |
05-Nov-2007 15:51
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Wen warns China will do what it takes to rein in stock market |
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joshconsultancy
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05-Nov-2007 14:36
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oh my, Pinnacle will it translate to a lost on confidence on chinastocks like Hongxing n Cosco soon? |
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Pinnacle
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05-Nov-2007 13:08
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China cutting QDII funds' HK stock exposure-sources Nov 5 (Reuters) - Beijing has told asset managers preparing to launch overseas stock investment funds to cut their exposure to Hong Kong because of fears that share prices in the territory may overheat, sources close to the matter said on Monday. The China Securities Regulatory Commission (CSRC) has instructed several local fund houses to revise the structure of their overseas stock investment products and resubmit proposals with a lower exposure to Hong Kong stocks, they said on Monday. Chinese fund houses and banks are jostling to launch overseas stock funds under the country's Qualified Domestic Institutional Investor (QDII) scheme, aimed at giving domestic residents more investment opportunities and promoting a better balance in China's international payments. "Several QDII applicants have been told to change their products. This is apparently aimed at avoiding a shock to the Hong Kong stock market," a fund industry source familiar with the matter told Reuters on Monday. Nov 5 (Reuters) - Beijing has told asset managers preparing to launch overseas stock investment funds to cut their exposure to Hong Kong because of fears share prices in the territory may overheat, sources close to the matter said on Monday. The China Securities Regulatory Commission (CSRC) has instructed several local fund houses to revise the structure of their overseas stock investment products and resubmit proposals with a lower exposure to Hong Kong stocks, they said on Monday. Chinese fund houses and banks are jostling to launch overseas stock funds under the country's Qualified Domestic Institutional Investor (QDII) scheme, aimed at giving domestic residents more investment opportunities and to promote a better balance in its international payments. "Several QDII applicants have been told to change their products. This is apparently aimed at avoiding a shock to the Hong Kong stock market," a fund industry source familiar with the matter told Reuters on Monday. Hong Kong-listed stocks, particularly shares issued by mainland Chinese firms, have soared this year, mainly on expectations of a flood of fund inflows from mainland China. Separately from the QDII scheme, which targets institutions, Beijing has also proposed a "through train" programme that would allow mainland residents to invest directly in Hong Kong stocks. APPLICATION REJECTED In another sign of Beijing's concern that a sudden influx of mainland money could cause turmoil in Hong Kong's stock market, Chinese Premier Wen Jiabao said over the weekend that Beijing was still studying the "through train" proposal. The remarks triggered a slide in Hong Kong stocks on Monday, with the blue-chip Hang Seng Index <.HSI> falling more than 2.6 percent. "The CSRC is requiring all QDII fund issuers, no matter whether they are banks or mutual funds, to keep their investment ratio of Hong Kong stocks under control," another of the sources told Reuters. Authorities have just rejected an application by a Shanghai-based mutual fund company to launch a QDII fund designed to invest more than 80 percent of its proceeds in Hong Kong stocks, the sources said. A foreign bank in China has also been told by the CSRC to revise a QDII product previously designed to target only Hong Kong stocks, they said. This year, four Chinese fund houses, including JPMorgan's A large portion of the proceeds has been pumped into Hong Kong-listed Chinese stocks, most of which are trading at a hefty discount to their mainland-listed counterparts. Another six fund firms, including a venture co-owned by Belgian-Dutch financial services group Fortis A number of major domestic brokerages have also obtained QDII licences over the past few months. |
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Pinnacle
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04-Nov-2007 13:00
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Sharing an interesting article from FSM Will China Weather The Sharp Slowdown In The US? Chinese equities, represented by the Hang Seng Mainland Composite Index (HSMLCI), were among the world?s best performing markets, returning 69.6% (in SGD terms year-to-date as of 23 October 2007). The market rebounded extremely well by 58.4% on 23 October 2007, from the low of 17 August 2007. In addition to robust economic fundamentals, there are also pro-market policies that have been very positive to the market. Nevertheless, valuations have become more expensive and inflation is picking up. Investors may wonder if it is still a good time to invest or hold on to their China equity funds. Let us first review the economic fundamentals, recent policies and outlook, earnings growth and valuations. Economic Fundamentals Remain Strong China ?s GDP grew year-on-year by 11.9% in the second quarter of 2007. It has experienced double-digit economic growth for five years already. The International Monetary Fund (IMF) forecasted in October 2007 that China will grow at 11.5% for the whole year of 2007 and 10% for 2008. The buoyant economy is driven largely by fixed asset investments as well as net exports. There are also signs of a gradual pick-up in domestic consumption. The central government has been shaping its policies to reduce the reliance of the Chinese economy on fixed asset investments and on low value-added exports. Although consumption is still low by the standards of the developed economies, consumption is likely to support economic growth, with disposable income in both urban and rural areas growing at double digits. Fixed asset investment growth has been hovering around 26% year-on-year for the past 4 months as at end August 2007. With inflation picking up at 6.5% year-on-year in August 2007, the real fixed asset investment is actually decreasing. Another important economic driver has been net exports. With the recent US subprime turmoil and weakening US unemployment data, the key issue would be what would happen if the US experiences a substantial slowdown and there is a corresponding slowdown in exports from China to the US. Based on the export data as of August 2007, North America currently takes up only 13% of total exports ? a decline from 19% in 1996. Asia excluding Japan is currently the largest importer of Chinese goods. With Asian economies being generally robust and with increases in domestic demand, the strong export volumes to Asian countries would help China to weather the storm of a sharp slowdown in the US. South Korea, Singapore and even smaller players such as Vietnam are delivering robust economic growth. Therefore, a sharp slowdown in the US is unlikely to have a severe effect on the China market. A large proportion of the weighting of the HSMLCI focuses on sectors that rely on domestic demand and investments with low weightings in export-oriented sectors. That helps to cushion the downside risk related to the possible slow down in external demand which export-oriented sectors are sensitive to. Is Rising Inflation A Worry? The issue of whether inflation is recurring has sparked global concern, especially by the central banks in various countries. Although inflation in China as measured by the CPI was at 6.5% year-on-year growth, the highest in 11 years, a closer look at the numbers makes this less worrying. The high inflation figure was due to the surge in food prices, and the prices of pork and other meat went up by 49% during the same period. The non-food inflation was not spreading broadly as it was only at a growth of 0.9% year-on-year in August 2007. Compared with the peaks of previous economic cycles where inflation levels were over 15% and 20% in the early 90?s and late 80?s respectively, the current inflation rate is tame. Investors, however, need to watch if inflation starts to affect broad sectors such as transportation, energy and rental, as more drastic tightening could hinder investors? sentiment. Such risks, however, are offset by an increase in consumption or domestic demand, which helps in sustaining the economic growth of the country. Qualified Domestic Institutional Investors Scheme (QDII) In addition to robust economic growth, the China market has been supported by pro-market policies. The recent expansion of the QDII scheme and announcement of the personal direct investment pilot scheme provides strong support to Chinese equities. Before the recent expansion to include authorized mutual funds and stocks, the investment universe of the QDII (Qualified Domestic Institutional Investors) scheme only included low-yielding assets like fixed income securities and structured products. The QDII has been well-received within Mainland China, with one of the QDII funds, the Harvest Fund, attaining US$4 billion subscription during the first day of its launch. It is estimated that the total fund flow from the QDII scheme will be US$90billion by the end of 2008. The majority of these funds are expected to flow to Hong Kong, supporting the share prices of Chinese stocks listed in Hong Kong. Singapore, which hosts a number of Chinese companies have also seen its Chinese stock prices surge by 28.3% in SGD terms within 1 week (after 25 September 2007) as represented by the PrimePartners Chinese Index, which tracks Singapore-listed Chinese companies. On 12 October 2007, the minimum investment of QDII products through banks in China has been reduced from RMB300,000 to RMB 50,000. Domestic Individual Investors (DII) Scheme The announcement of the pilot program which allows citizens in China to invest directly in Hong Kong stocks gave a strong boost to the Chinese equity markets. In fact, after the announcement of this DII scheme from the period of 20 August 2007 to the end of 23 October 2007, the HSMLCI has soared by 46.1% in SGD terms. It is believed that the Central Government?s policy aims to divert excessive liquidity from the heated A-shares market, and the actual launch of the scheme and the fund outflows would provide downside risks to the Chinese equity markets. Policy Outlook The outlook for domestic policies is likely to remain favorable in the medium-term, although macro controls may cause some short-term volatility. For instance, there have been a series of policies implemented to cool down the property market, especially in large cities, over the past one to two years. The recent policy implemented had been an increase in down payment requirement from 20% to 40% for the second home on mortgage. The interest rate for the second home on mortgage was raised to 110% of the benchmark rate of 7.83%. The effect of such macro-economic controls is expected to be temporary as cash rich investors may not be sensitive to the increase in down payment requirement. In the short-term, this would lead to selling pressure on the sector. The property prices for Shanghai have been growing much more moderately this year at 3.2% year-on-year for the first 7 months in 2007, compared with a strong surge of 29.8% year-on-year in 2005. The average sales prices in Beijing and Guangzhou grew by 40.7% and 45.2% year-on-year respectively for the first 7 months in 2007. Real interest rates have fallen to negative territory ? which bodes well for property investment ? due to inflation edging higher. The 17 th National Congress took place from 15 to 21 October 2007 in Beijing. President Hu Jintao highlighted enhance economic development and further opening of financial markets in his speech. Chinese market regulators have also announced that the arbitrage mechanism between H-shares and A-shares were being studied. Although it would take time to materialise given that the Chinese yuan is still not freely convertible in the international market, the news has boosted the trend of the narrowing of the price differential between A-shares and H-shares. Robust Earnings Growth Corporate earnings growth in China in the first half of 2007 has beaten analysts? forecasts and major sectors have benefited from strong earnings. China Mobile, the world largest mobile phone operator by number of subscribers, saw its 1H07 earnings grow by 25% year-on-year. The number of subscribers grew 21.4% year-on-year. Its sales growth in the rural areas has also been respectable and rural area sales are expected to be a longer-term driver for its overall growth. The Insurance and Banking sectors also posted exceptional results which are related to their investments in the domestic A-shares markets. Looking ahead, the buoyant economy is expected to provide good support to company earnings. However, we are cautious on sectors that rely heavily on exports to the US, such as textile exporters. Looking ahead, we expect earnings growth for the full year of 2007 to remain strong. The estimated earnings growth for 2007 and 2008 are at 21% and 17.4% respectively. Valuations Expensive On Historical Basis but Upside Remains Valuations for the HSMLCI have increased to a relatively expensive level compared with the 5-year historical average of around 14X. The estimated P/E ratios are 26.1X and 18.9X for 2007 and 2008 as of end September 2007. Thus, with the strong surge from mid-August, the valuations of the China market have become expensive. However, there are positive factors that make the market attractive, in spite of the expensive valuations. The main factor supporting the higher valuation of the Chinese equity market is that it is still trading at attractive valuations compared with the domestic A-shares market, which had an estimated P/E of 44.6X for 2007 as of 18 October 2007. The weighted average discount of H-shares to their A-shares counterparts are at a discount of around 50% in October 2007. The expensive valuations of the A-shares market render the Mainland market very sensitive to earnings announcement down the road. Looking ahead, the Chinese equity market would also be very sensitive to any policy changes. Nevertheless, the strong surge of the market in the past two months has pushed the market to new heights and valuations are no longer as attractive. We expect there to be volatility in the short term. Changes in government policies that could be unfavorable to the market would also be one of the short-term risks. We think that China?s economic growth would still remain strong despite weaker economic growth from the US. We believe that China is now less dependent on US as an import destination and there has been increasing dependence on the Asian and European economies. The outlook over a 3-year horizon for Chinese equity funds remains attractive. Investors may consider investing into Greater China equity funds that also invest in Taiwan and Hong Kong, to further diversify their holdings while at the same time having an exposure to the robust Chinese market. |
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Pinnacle
Master |
02-Nov-2007 22:46
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Sharing here an interesting and insightful article. From its lows just below 1,000 in June 2005, the Shanghai Composite Index has risen 500% to above 6,000--perhaps the most parabolic rise of any major stock market in modern times. Let's compare it with the great Japanese boom of the 1980s. Slideshow: 12 Top Chinese Gainers Slideshow: 10 Portfolio Dragons Slideshow: Eight Big New Buybacks Slideshow: 10 All-Weather Money Market Funds Slideshow: Top 10 African Stocks The Nikkei 225 rose almost 300% from its July 1984 lows to its bubble peak. It then began a 13-year slide and now trades at less than half its all-time high near 39,000. Finally here's our own NASDAQ Composite index during the great Internet mania. From its August 1998 low to its record highs above 5,000 in March 2000, the NASDAQ registered a 240% gain--less than half what Shanghai has posted in the last couple of years. Which Chinese stocks can survive a severe correction in Chinese equities? Click here for four Chinese blue chips with fat yields in Forbes International Investment Report. Even the great bull market of the Roaring Twenties advanced less than 300% in the five years before September 1929. And although India and Brazil rallied more over a longer time, China appears to have registered a bigger advance in a shorter time than any major stock market I can think of in recent years. So, it's no surprise that we've seen the classic signs of a great investment bubble. Recently, The Wall Street Journal reported that the average first-day return for Chinese initial public offerings (IPOs) in 2007 has been 192%. UBS Securities recently noted that the Shanghai Composite index's price-to-earnings ratio of 68-times-trailing-12-month earnings is virtually identical to the NASDAQ's bubble high and slightly below the Nikkei's 73-times P/E at its peak. PetroChina recently passed General Electric as the second-largest company in the world in stock market capitalization (with over $440 billion), trailing only Exxon Mobil. And we've read for months about the hundreds of thousands of ordinary Chinese clamoring to open brokerage accounts, often with borrowed money, to make their fortunes in the stock market. Like all manias of this kind, the Great China Stock Bubble is rooted in economic realities--the rise of China as a great economic power. And indeed, Chinese economic growth has been astonishing--11.9% annually in the second quarter, with no sign of a slowdown. China may surpass Germany as the world's third-largest economy this year. It has enjoyed a record $185 billion trade surplus so far in 2007, and its foreign currency reserves have reached a massive $1.4 trillion. And Chinese companies appear to be wildly profitable, with rapidly growing earnings. But like all bubbles, this one comes with a large dose of artificiality and imbalances. First, as an export-driven economy, much of China's growth is based on an artificially depressed currency. The Chinese government has kept a firm grip on the Renminbi, so that it's appreciated a mere 9% against the U.S. dollar over the last two years--while the Euro has risen about twice as much against the greenback. Second, to keep the growth machine humming, the government has kept a lid on interest rates. Despite five recent hikes, bank deposits in China pay less than 4%. With annual inflation near 6.5%, that guarantees savers will lose purchasing power every year. So, why not take a flyer on stocks? Third, the Shanghai and Shenzhen exchanges are tightly controlled affairs, dominated by state-owned companies. And experienced global institutional investors can invest there only to a limited degree. That means too many novices are engaging in what looks much more like gambling and speculation than long-term investing, making the exchanges much more vulnerable to manias and panics. Trust me, this can't last--it never has. The only question is when it will end. Many investors hope it will continue until the Beijing Olympics next summer, as the government pulls out all the stops to present the glorious new China to the world. That may be why President Hu Jintao, at the recent party National Congress, pledged to keep the growth engine humming and even soft-pedaled any potential conflict with Taiwan. Clearly, nothing will be allowed to stop this show. But markets have a funny way of not following the wishes of investors, politicians or pundits (and I predicted a crash in the Chinese market in February, which duly happened--before the Shanghai index went on to double). "They'll defy gravity and all of a sudden they'll collapse," says Professor Eugene N. White of Rutgers University, an expert on market manias. The Chinese market could be hit by a serious slowdown in the U.S. and Europe; by another global financial crisis like we saw this past summer, or by unexpected earnings blowups or accounting problems at major Chinese companies, among other things. That's why I'd recommend that no investor put another dime into high-flying China-based mutual funds, ADRs or ETFs at this time. And if you were smart or lucky enough to invest in China before, you should promptly lock in at least half of your hefty gains. In fact, I'd cut exposure to emerging markets in general to no more than 5% of your portfolio. "It can go up another 100%, 200%, but the higher it goes, the riskier the bet it becomes," cautions Professor White. Forewarned is forearmed, as they say. |
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