Shanghai may jolt Asia even harder than Wall Street
Runaway inflation in China poses risks investors are just waking up to
By Goh Eng Yeow - March 10, 2008
IT HAS been a year of living dangerously, but pinning the blame on Wall Street might be a case of missing the point.
Investors don’t really need reminding of how their world has changed over the past 12 months, but here goes anyway.
Certainly, few could have predicted a year ago that global bourses would be rocked by one shock after another.
Then, it seemed that markets were in a golden age. Share prices were soaring, private equity funds were snapping up listed companies and taking them private - a sea of calm as far as the eye could see.
But a hint of what was to come surfaced on Feb 27 last year, when the Shanghai stock market crashed, falling 9 per cent in a single day.
The shock waves, sharp as they were, receded quickly, once the bulls recovered their footing and investors regained confidence.
However, the Shanghai crash turned out to be an important turning point for global equities markets - then into their fifth year of the bull run.
It woke many investors up - to a none-too-appetising prospect of risk - and introduced into the market something that has become fearfully frequent since - wild price swings.
Investor confidence, needless to say, has been badly shaken, and the notion of a global stock market rally that could stretch into eternity has been shattered.
The irony is that investors have not been fretting over why Shanghai crashed. They seem to have turned a blind eye to the risk that China’s overheating economy poses to the rest of the world.
True, they have had other things to worry about - the weakening greenback, the mortgage crisis in the United States and the credit crunch it has spawned.
These problems emerged during the selldown sparked by the Shanghai crash and have diverted attention away from other issues.
For almost a year, China’s runaway inflation has slipped under the radar screen and has been ignored by all but the most astute investors.
After the Feb 27 sell-off, Shanghai soared by more than 120 per cent - an exuberance that rubbed off on Hong Kong and Singapore in September and October, after China proposed allowing its citizens to buy shares overseas directly.
Some might say this is an excellent illustration of how Chinese growth can keep the rest of Asia in the pink even with the mighty US economy slowing to a standstill.
But realists have countered that this is just wishful thinking and, now, it seems they might be right.
First came Chinese Premier Wen Jiabao’s move in November to effectively put the overseas investment proposal on the backburner.
He cited a tough set of conditions that would need to be satisfied before such a scheme would be given the go- ahead.
Now, fast forward to last week. The Shanghai index has plunged by nearly 30 per cent since November, while mainland plays in Singapore have nosedived by more than 50 per cent, as inflation in China hit its highest levels in 11 years.
In contrast, US stocks - racked by all manner of scares, swings and spectres - have fallen by only 15 per cent.
As Mr Wen sounded warnings about the dire threat that inflation posed to China’s double-digit economic growth, investors finally started to recognise the perils that price distortions were posing for the many small and medium-sized mainland firms listed in Singapore.
China darlings from sectors as diverse as food industries and building materials are falling by the wayside, as their tattered full-year profit and loss accounts reflect the heavy blows they have taken from rising costs.
Mr Wen’s threat to use powerful measures to combat rising inflation is exacerbating fears that price controls will be imposed, curbing manufacturers’ ability to pass on soaring raw material costs to consumers.
Inflationary pressures in China can only get worse in the months ahead, given the way prices of soft commodities like wheat and hard commodities like iron ore have soared in world markets.
This will have grim implications for the large number of retail investors who loaded up on mainland stocks last year, seduced by their sexy growth stories.
Asian decoupling from Wall Street might simply mean that markets across the region will come under double jeopardy - having to cope with a US recession and runaway inflation in China at the same time.
This might not be the desired outcome that investors are hoping for as the Beijing Summer Olympics approaches.
Beijing’s strict rules on bank lending are stalling the mainland system, but no one is feeling the impact more than city commercial banks and small businesses, which rely on them for credit.
The People’s Bank of China in January raised the reserve requirement ratio for banks for the 11th time since January last year, putting it at its highest level since 1984 in an attempt to fight inflation. Small city commercial banks, already struggling to boost deposit levels, have been hit the hardest, prompting them to look for partnerships or consolidation while their customers are left scrambling for financing.
“Like many mid-sized lenders, we are under a severe credit squeeze. This should be the catalyst for more regional consolidation in the industry,” said Chen Hang, head of international business at Bank of Beijing, one of the country’s 113 city banks that were created to fund local business. “There’s no way but to turn down or refer some of our corporate clients to others.”
The central bank has also instructed banks to keep loan volume this year steady from last year and to limit first-quarter lending at 35 per cent of the full-year quota. January’s loans accounted for 62 per cent of the first-quarter quota as borrowers were starved for financing after a clampdown late last year.
“We have already exceeded the stated loan growth target by the end of January,” Mr Chen said, echoing the situation at many large and small banks around the country.
While the new quota system has hindered loan activity at all banks, demands for higher deposit ratios have hurt smaller banks in particular because they struggle to gain deposits even in normal circumstances.
Yang Zhenkun has been a regular borrower at Bank of Beijing for years to finance his Beijing interior decorating company. Last year, he could easily get short-term loans of 500,000 yuan (HK$548,000) to one million yuan using an apartment building he owns as collateral, but now the game has changed. “They don’t even bother talking to you because even bigger companies could not borrow anything there,” Mr Yang said.
“I tell them clearly it’s not about how good you are, but because we really don’t have the money to lend,” a loan official at a Bank of China’s Beijing branch said. “We have to turn down loan applications from so many customers that we a year ago would fight to attract at any cost.”
China started creating city commercial banks from the former urban credit co-operatives in 1995 to boost small businesses. Their assets, forming only 5.9 per cent of the banking system, have a narrow geographic and sectoral focus and are heavily weighted towards former co-operative businesses. “They have a very high geographic concentration and one of them can be experiencing problems while others are fine, depending on the local market,” said Fitch Ratings analyst Charlene Chu.
Jerry Lou, an economist at Morgan Stanley said: “These banks have been having funding problems for 10 years. Banks like ICBC never have a problem getting deposits because they have the state behind them, and people feel that depositing money with a big state-owned bank is almost risk-free.”
The central bank said rural co-operatives would only need to maintain a 12.5 per cent deposit-loan ratio, below the 15 per cent required of other banks. Some analysts have suggested this be extended to city banks.
“My suggestion is that they have different policies, different reserve ratios. If they have big clients, if the deposit accounts are large, maybe they can have a higher reserve ratio requirement,” said Sun Mingchun, the chief China economist at Lehman Brothers.
The feverish pursuit of shares in new listings has helped push small banks into a corner. Due to huge oversubscription for most offerings, investors must bid for far more shares than they actually want to buy. This means transferring the cash to buy the larger number from their accounts - which may be with smaller banks - to the broker’s account, which is normally with a larger national bank. Small banks short on deposits must then turn to the interbank system, where lending rates rise due to higher demand.
“The net effect is that money moves from small banks to big banks, quite a lot of it,” said Michael Pettis, finance professor at Peking University’s Guanghua School of Management. “Then they have to replace that money from the interbank market, and sometimes the interbank market is 7 or 8 per cent, whereas the deposit is maybe 3 per cent.”
Some banks have merged to create a regional rather than city presence. While few banks have struck merger deals, many are pooling resources in other ways through referrals and partnerships. City banks could also look for help from foreign banks looking for mainland partners.
(SHANGHAI) Foreign financial institutions will again be allowed to invest in China's equity markets after the government ended a year-long suspension aimed at cooling the market, state media reported yesterday.
China's regulators have given the green light to an unnamed sovereign wealth fund to invest under China's especially designated foreign investor plan, the official Shanghai Securities News said.
'To encourage qualified overseas funds to invest in China's capital market for the long term, a foreign government fund has recently been granted the QFII qualification,' said China's foreign exchange chief Hu Xiaolian.
China's Qualified Foreign Institutional Investor (QFII) scheme was suspended last year as regulators tried to deflate a market that was soaring, wildly, pushing many companies' valuations at 60 times earnings.
China flagged yesterday's reported move when it said in December that it planned to triple the amount of money foreign financial institutions could collectively place in the local stock market to US$30 billion.
China's stock market was already falling in December and it has slumped nearly 20 per cent this year, battered like most overseas markets by a host of fears that centre on a global economic slowdown led by the US.
In Shanghai, the key index closed at a seven-month low last week, amid concerns over huge refinancing plans of listed companies and end of lock-up periods of existing shares.
Investors worry struggling prices could be further hurt by massive new equity supplies, including one planned by the country's second largest life insurer Ping An that could raise up to US$17 billion. -- AFP
4 comments:
Shanghai may jolt Asia even harder than Wall Street
Runaway inflation in China poses risks investors are just waking up to
By Goh Eng Yeow - March 10, 2008
IT HAS been a year of living dangerously, but pinning the blame on Wall Street might be a case of missing the point.
Investors don’t really need reminding of how their world has changed over the past 12 months, but here goes anyway.
Certainly, few could have predicted a year ago that global bourses would be rocked by one shock after another.
Then, it seemed that markets were in a golden age. Share prices were soaring, private equity funds were snapping up listed companies and taking them private - a sea of calm as far as the eye could see.
But a hint of what was to come surfaced on Feb 27 last year, when the Shanghai stock market crashed, falling 9 per cent in a single day.
The shock waves, sharp as they were, receded quickly, once the bulls recovered their footing and investors regained confidence.
However, the Shanghai crash turned out to be an important turning point for global equities markets - then into their fifth year of the bull run.
It woke many investors up - to a none-too-appetising prospect of risk - and introduced into the market something that has become fearfully frequent since - wild price swings.
Investor confidence, needless to say, has been badly shaken, and the notion of a global stock market rally that could stretch into eternity has been shattered.
The irony is that investors have not been fretting over why Shanghai crashed. They seem to have turned a blind eye to the risk that China’s overheating economy poses to the rest of the world.
True, they have had other things to worry about - the weakening greenback, the mortgage crisis in the United States and the credit crunch it has spawned.
These problems emerged during the selldown sparked by the Shanghai crash and have diverted attention away from other issues.
For almost a year, China’s runaway inflation has slipped under the radar screen and has been ignored by all but the most astute investors.
After the Feb 27 sell-off, Shanghai soared by more than 120 per cent - an exuberance that rubbed off on Hong Kong and Singapore in September and October, after China proposed allowing its citizens to buy shares overseas directly.
Some might say this is an excellent illustration of how Chinese growth can keep the rest of Asia in the pink even with the mighty US economy slowing to a standstill.
But realists have countered that this is just wishful thinking and, now, it seems they might be right.
First came Chinese Premier Wen Jiabao’s move in November to effectively put the overseas investment proposal on the backburner.
He cited a tough set of conditions that would need to be satisfied before such a scheme would be given the go- ahead.
Now, fast forward to last week. The Shanghai index has plunged by nearly 30 per cent since November, while mainland plays in Singapore have nosedived by more than 50 per cent, as inflation in China hit its highest levels in 11 years.
In contrast, US stocks - racked by all manner of scares, swings and spectres - have fallen by only 15 per cent.
As Mr Wen sounded warnings about the dire threat that inflation posed to China’s double-digit economic growth, investors finally started to recognise the perils that price distortions were posing for the many small and medium-sized mainland firms listed in Singapore.
China darlings from sectors as diverse as food industries and building materials are falling by the wayside, as their tattered full-year profit and loss accounts reflect the heavy blows they have taken from rising costs.
Mr Wen’s threat to use powerful measures to combat rising inflation is exacerbating fears that price controls will be imposed, curbing manufacturers’ ability to pass on soaring raw material costs to consumers.
Inflationary pressures in China can only get worse in the months ahead, given the way prices of soft commodities like wheat and hard commodities like iron ore have soared in world markets.
This will have grim implications for the large number of retail investors who loaded up on mainland stocks last year, seduced by their sexy growth stories.
Asian decoupling from Wall Street might simply mean that markets across the region will come under double jeopardy - having to cope with a US recession and runaway inflation in China at the same time.
This might not be the desired outcome that investors are hoping for as the Beijing Summer Olympics approaches.
This is not a good sign:
Shares in China Railway Construction rose by a smaller-than-expected 28% on their debut in Shanghai.
City lenders hardest hit by credit squeeze
Cameron Dueck, Natalie Chiu and Al Guo in Beijing
March 10, 2008
Beijing’s strict rules on bank lending are stalling the mainland system, but no one is feeling the impact more than city commercial banks and small businesses, which rely on them for credit.
The People’s Bank of China in January raised the reserve requirement ratio for banks for the 11th time since January last year, putting it at its highest level since 1984 in an attempt to fight inflation. Small city commercial banks, already struggling to boost deposit levels, have been hit the hardest, prompting them to look for partnerships or consolidation while their customers are left scrambling for financing.
“Like many mid-sized lenders, we are under a severe credit squeeze. This should be the catalyst for more regional consolidation in the industry,” said Chen Hang, head of international business at Bank of Beijing, one of the country’s 113 city banks that were created to fund local business. “There’s no way but to turn down or refer some of our corporate clients to others.”
The central bank has also instructed banks to keep loan volume this year steady from last year and to limit first-quarter lending at 35 per cent of the full-year quota. January’s loans accounted for 62 per cent of the first-quarter quota as borrowers were starved for financing after a clampdown late last year.
“We have already exceeded the stated loan growth target by the end of January,” Mr Chen said, echoing the situation at many large and small banks around the country.
While the new quota system has hindered loan activity at all banks, demands for higher deposit ratios have hurt smaller banks in particular because they struggle to gain deposits even in normal circumstances.
Yang Zhenkun has been a regular borrower at Bank of Beijing for years to finance his Beijing interior decorating company. Last year, he could easily get short-term loans of 500,000 yuan (HK$548,000) to one million yuan using an apartment building he owns as collateral, but now the game has changed. “They don’t even bother talking to you because even bigger companies could not borrow anything there,” Mr Yang said.
“I tell them clearly it’s not about how good you are, but because we really don’t have the money to lend,” a loan official at a Bank of China’s Beijing branch said. “We have to turn down loan applications from so many customers that we a year ago would fight to attract at any cost.”
China started creating city commercial banks from the former urban credit co-operatives in 1995 to boost small businesses. Their assets, forming only 5.9 per cent of the banking system, have a narrow geographic and sectoral focus and are heavily weighted towards former co-operative businesses. “They have a very high geographic concentration and one of them can be experiencing problems while others are fine, depending on the local market,” said Fitch Ratings analyst Charlene Chu.
Jerry Lou, an economist at Morgan Stanley said: “These banks have been having funding problems for 10 years. Banks like ICBC never have a problem getting deposits because they have the state behind them, and people feel that depositing money with a big state-owned bank is almost risk-free.”
The central bank said rural co-operatives would only need to maintain a 12.5 per cent deposit-loan ratio, below the 15 per cent required of other banks. Some analysts have suggested this be extended to city banks.
“My suggestion is that they have different policies, different reserve ratios. If they have big clients, if the deposit accounts are large, maybe they can have a higher reserve ratio requirement,” said Sun Mingchun, the chief China economist at Lehman Brothers.
The feverish pursuit of shares in new listings has helped push small banks into a corner. Due to huge oversubscription for most offerings, investors must bid for far more shares than they actually want to buy. This means transferring the cash to buy the larger number from their accounts - which may be with smaller banks - to the broker’s account, which is normally with a larger national bank. Small banks short on deposits must then turn to the interbank system, where lending rates rise due to higher demand.
“The net effect is that money moves from small banks to big banks, quite a lot of it,” said Michael Pettis, finance professor at Peking University’s Guanghua School of Management. “Then they have to replace that money from the interbank market, and sometimes the interbank market is 7 or 8 per cent, whereas the deposit is maybe 3 per cent.”
Some banks have merged to create a regional rather than city presence. While few banks have struck merger deals, many are pooling resources in other ways through referrals and partnerships. City banks could also look for help from foreign banks looking for mainland partners.
China reopens stock market to foreign players
March 8, 2008
(SHANGHAI) Foreign financial institutions will again be allowed to invest in China's equity markets after the government ended a year-long suspension aimed at cooling the market, state media reported yesterday.
China's regulators have given the green light to an unnamed sovereign wealth fund to invest under China's especially designated foreign investor plan, the official Shanghai Securities News said.
'To encourage qualified overseas funds to invest in China's capital market for the long term, a foreign government fund has recently been granted the QFII qualification,' said China's foreign exchange chief Hu Xiaolian.
China's Qualified Foreign Institutional Investor (QFII) scheme was suspended last year as regulators tried to deflate a market that was soaring, wildly, pushing many companies' valuations at 60 times earnings.
China flagged yesterday's reported move when it said in December that it planned to triple the amount of money foreign financial institutions could collectively place in the local stock market to US$30 billion.
China's stock market was already falling in December and it has slumped nearly 20 per cent this year, battered like most overseas markets by a host of fears that centre on a global economic slowdown led by the US.
In Shanghai, the key index closed at a seven-month low last week, amid concerns over huge refinancing plans of listed companies and end of lock-up periods of existing shares.
Investors worry struggling prices could be further hurt by massive new equity supplies, including one planned by the country's second largest life insurer Ping An that could raise up to US$17 billion. -- AFP
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