The Screaming Pen

Providing Global Insight, Context, and Perspective

Chicken the China, the Chinese Chicken

A Changing Tide, the Spigot is Tightened

Since hitting an all time high on May 8, the MSCI Emerging Markets Index has fallen over 20%, as inflation fears and global monetary tightening begin to mop up the loose liquidity that has helped emerging market exchanges, along with other riskier assets, achieve strong annualized gains over the past few years.

With China experiencing staggering economic growth, one would think that the Chinese Stock Markets would have been on the winning end of a several year long emerging markets run. In fact, on June 6, 2005, while many Asian markets were continuously breaking multi-year highs, the Shenzen Compositie hit a six year low, puzzling amateur investors across the globe. Possible answers to China’s equity market conundrum can be found by taking a closer look.

The Times, they are a Shenzen

The Late Bird Gets the Sub Par Market Returns

China, a late bloomer in the Capital Markets game, did not have a stock market until 1990, and not a single Chinese company was listed abroad until 1993. As of 2003 -the latest information thescreamingpen.com could muster- over 66 million Chinese citizens participate in the domestic equity markets, with only 35 companies listed as private. It is estimated that at least two thirds of the shares listed on the Shanghai and the Shenzen, China’s two largest stock markets, are owned by the government. It is apparent that investors, especially those abroad, are hesitant to invest in companies whose balance sheets, among other things, could be compromised because of government involvement.

The Reforms of 2005

Realizing that capital inflows are essential to sustainable growth, the powers that be in China undertook some important reforms in 2005, including:

  • Public listing of the “Big Four” Chinese banks on overseas exchanges
  • Selling large stakes of domestic banks to international investors, which will result in increased capital inflows and much needed international banking expertise.
  • Reform of China’s A share market, which has resulted in 1/3 of China’s A shares being tradable.
  • The removal of capital gains taxes on securities held by foreign investors
  • The issuance of sovereign “Panda Bonds”, issued in Chinese currency.

Outlook and Conclusions

With the initiation of a global tightening cycle, it is possible that China may have missed out on the latest emerging markets rally. The good news is that China’s Eleventh Five Year Plan, which began on January 1, 2006, contains many provisions that aim to reform China’s financial sector even further. Hopefully these provisions are enacted.  This would allow China to efficiently handle foreign inflows of Capital, as well as wealth created at home.  If China continues down the road of financial sector reform, it will be a much needed step on the path to possible market maturity.

*Look for an overview of the Indian Financial sector reform in the coming days.

-JPL

Links of Interest

http://www.washingtonpost.com/wp-dyn/content/article/2006/06/08/AR2006060801493.html

thescreamingpen.com is not liable for any loss resulting from any action taken or reliance made by you on any information or material posted by it. You should make your own inquiries and seek independent advice from relevant industry professionals before acting or relying on any information or material which is made available to you pursuant to thescreaminpen.com’s information service, as it may not prove accurate. You rely on this information at your own risk. thscreamingpen.com is not for profit.

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June 9, 2006 Posted by | Asia, Author: JPL, China, Chinese Stocks, Corruption, Emerging Markets, Globalisation, Investing, Politics, World Markets | 1 Comment

The Stampede of the Global Herd

Yesterday marked the eleventh day in a row that the MSCI Emerging Markets Index fell, an event that has not occurred since August 13, 1998, the very same day that Russia defaulted on her foreign debt. Russia’s debt default marked the spread of the Asian Contagion, a financial crisis that swept across Asia after the devaluation of the Thai Baht. This time it appears that things are much different, as the fundamentals of many emerging market economies appear quite strong. And although Indian Brokers, who witnessed shares drop more than ten percent before the government intervened yesterday, will probably not find solace in solid fundamentals, it appears that the current drop in the emerging markets is due to investors fleeing risky assets in the face of a global tightening cycle, possible inflation, and cooling global growth. And although some investors are losing their shirts, it appears that this may be a price correction, not a crisis.

Seeing Red

Come On, Let Me See Ya Grill

Wait and See

While yesterday’s returns marked the end of an eleven day downturn in the emerging markets, it still did not end the doomsayers from predicting that today’s economic conditions are similar to either 1) the conditions preceding the October 19, 1987 crash or 2) the conditions that led to the Asian contagion. This could not be further from the truth, as there are crucial differences between now and 1987. In 1987, stocks were pricey, and treasuries were quite cheap. Today, equities are historically cheap, with investors paying a premium for treasuries. This is important because if investors flee equities all together, which would be required for a crash, they would have to pay a premium for treasuries as housing is showing signs of cooling, and the dollar is relatively weak. The spread of the EMBI+ to the Ten Year U.S. Treasury note still remains at close to record tights, signalling debt investor’s continued confidence in the fundamentals of the emerging markets. In 1998, the spread widened sharply, signalling falling confidence in the emerging market economies.

Conclusions

Although this is probably not a crisis, it could signal a change in investor sentiment, especially as monetary policy tightens worldwide. The managers of Large Cap mutual funds, some of whom have been predicting a return to their asset class for the past several years, may finally get their wish as investors may continue to flee assets that love loose liquidity such as emerging market stocks, commodities, housing, and small capitalization stocks. It will be important to keep an eye on the international markets, along with less risky asset classes that may benefit from the global herd fleeing risky assets in favor of traditionally safer bets. If there is not a change in sentiment, however, this may be a great buying opportunity.

-JPL
thescreamingpen.com is not liable for any loss resulting from any action taken or reliance made by you on any information or material posted by it. You should make your own inquiries and seek independent advice from relevant industry professionals before acting or relying on any information or material which is made available to you pursuant to thescreaminpen.com’s information service, as it may not prove accurate. You rely on this information at your own risk. thscreamingpen.com is not for profit.

May 23, 2006 Posted by | Asia, Author: JPL, Emerging Markets, Financial Markets, Investing, World Markets | Leave a comment