The devastating quake shakes the nation, and stock market of China

Quake tremors the market

The earthquake catastrophe happened yesterday in Sichuan province in China shocked the whole world community. The shockwave today rippled to the Chinese stock market.

 

The Shanghai composite index dropped 1.84%, as the sentiment in the market became low due to the hovering uncertainty of the situation in Sichuan. Moreover, 66 Sichuan-based listed companies and companies with business in Sichuan were suspended from trading for the whole-day session.

 

Companies pocket in unexpected windfalls

Not surprisingly, shares of listed pharmaceutical companies all reaped sharp gain today; stocks of four large-scale companies in the industry reached the 10% daily increase cap. The investors are betting on huge input of medical spending on the after math of the quake, which was measured at 7.8 degree on richer scale.

 

As the rescue contingency team is reaching closer to the epicentre, much more casualties will emerge.

 

Not disaster for all

How the market will perform against this anguish background is unpredictable, however the market analysts predict that investors will flock into companies in construction sector and medical sector, the two most directly affiliated industries in the region rebuilding work after the destruction.

Securities and Exchange Commission stitches bleeding scars in market, in a rush

The financial market has been bleeding badly since last summer when the sub-prime led credit crisis struck the investment banking sector, bringing the fifth investment bank Bear Stearns to demise. Among mounting worries that big-name banks are going to post more massive write-downs, the SEC finally comes to the front, playing hero.

 

SEC gets on the move

SEC required all the remaining investment bank behemoths to reveal more company figures in addition to the regular disclosure of company liquidities. SEC raises the threshold for information reveal, forcing all banks to report their borrowing situation, to see if the company’s business relies too much on leverage.

 

Cash is the king

Since the market is in bearish mood at the moment, investors are more concerned than ever before with the capital adequacy, equity and assets of the companies. The current situation looks worrisome. The four big banks all build up their business and growth on heavy borrowings. Lehman Brothers has two-thirds of its debt based on short-term borrowing, which is extremely volatile when the overall credit in the market is strained.

 

Bear Stearns woes 

The sudden topple of Bear Stearns early this year is till haunting the market and investors; the company was the first casualty in Wall Street to be fatally hit by the sudden clamp of liquidity. Since then the SEC have been watching closely on the situation, in case that more banks will follow the trend.

 

‘It is never too late’, as the old saying goes. The rigorous standards set up by SEC are considered a market stabilizer. It might be painful in the beginning, but the banks will find themselves the ultimate beneficiaries of the move, because their future returns will be based on a more solid and safer cash-backed foundation.

Hot money covets China

An estimated US$80 billion hot money flushed into China mainland in the first season, leaving the accumulative sum to a whopping US$800 billion. The speculative money finds China a haven for the following reasons.

 

1, China is somewhat insulated to the credit crunch
As the economy in US and other developed markets are experiencing drastic corrections, China still sustains its double digit economic growth this year.

 

2, High expectation for RMB (Chinese currency) exchange rate hike
RMB is said to be undervalued for at least 20%. The Chinese administration acknowledged the fact and let RMB appreciated by 7% against USD in the first season in 2008, leaving the annual appreciation range to 10-15%. 

 

3, High net investment value of RMB denominated assets
Besides the currency appreciation, the value of RMB denominated assets, such as securities and real estates, has seen continuous double-digit gains in the past few years. The momentum is set to continue because of the undergoing urbanization and market-oriented economic reform in China.  

 

4, High interest rate

In order to prevent Chinese economy from over-heating, the Chinese administration introduced a slate of measures since the end of last year; interest rate has been raised consecutively since then. The current one-year borrowing rate stands at 7.47%; the one-year deposit rate is 4.14%. The rate gap between China and the US is 2.14 percentage points (Fed lowered rate again to 2% last week). The huge gap, which is still widening, stimulates more hot money flow from US and other low interest rate markets to China.

 

 

Fed cuts rate again, but less desperately

US Federal Reserve announced early this morning that the federal funds rate will be cut to 2% from 2.25%. It is fed’s seventh cuts in a row since the credit crunch unfolded last summer. So far the aggregate rate cuts accumulate to 3.25 percentage points.

 

Fed may suspend rate cutting  

Compared with the previous cuts early this year, Fed’s move this time was far less desperate. The previous rate slashes were deemed as hasty contingent efforts. The 0.25 percentage point cut came exactly as the market had expected.

 

However, the moderation of Fed in rate cut does not pull people out of judgement that the Fed was terrified by the current economic downturn, and its consecutive rate cuts showed lack of other macro tools which can alleviate the pessimist sentiment hovering in the market. Rate cut is the only weapon left in Fed’s arsenal.

 

Repeat of vicious cycle  

People doubt that what Fed can do the next if the recession in the States continues to deteriorate. After the massive tax rebate and seven rate cuts, there is almost no room for further economic stimulus that the Fed can utilize to spur the economy. The latest figures substantiated the already well-accepted claim that US is now in recession and the overall situation is going to worsen.

 

Moreover, Bernanke and Fed are actually repeating what Allen Greenspan had done in the aftermath of 911, slashing interest rate in order to boost lending and borrowing in the financial system. However, we should not forget that it is Greenspan’s over-reacted rate cuts led the financial sector into credit frenzy. The ensued credit frenzy and excessive capital volatility spawned sub-prime-led credit crisis that we see now.

 

Is Fed bringing an end to the economic woe or it is generating something more horrible for the next cycle?

CITIgroup customers mourn over worse-than-expected loss in funds

Two hedge funds affiliated to CITIgoup.Inc send their investors in real panic by reporting more than 75% loss in the value of the funds. The two funds involved branded their products as less-risky fixed income ones. However, the two funds, namely Falcon and ASTA/MAT channelled most of their cash into municipal bonds, mortgage-backed securities and other debt instruments, which bear the highest risk.

 

CITI funds fiasco 

Some of the funds’ customers are filing court suits against CITIgroup for fraud. To counteract, CITIgroup executives offer the affected fund investors $250 million as exit compensation, and the precondition to get this money is to drop all legal charges against the company. So far, the investor’s reactions to the offer are still not available.

 

CITI’s case does not come alone since the credit-crunch-led shockwave swept across the world. Banks are anxiously dealing with the situation while huge write-downs are reported from one to another. Last week, one of China’s first QDII (qualified domestic institutional investor) funds of Minsheng Bank was forced to dismantle its portfolio because the fund lost more than half of its capital. Investors of the fund also tried to bring the bank and fund managers to court but ended up in vain, because the fund had informed its investors of the potential risks when the fund was open to retail market.

 

Over confindence kills

There is one similarity for all these failed funds: they are so aggressive that they bet all the money on high-risk securities or derivatives. When they entered the market and built up portfolios, the sentiment of the market was high, however, suddenly the wind changes, huge exodus of capital appeared instantly after the horrible picture of sub-prime mortgage was unveiled last summer.

 

Hide the truth 

Besides overconfidence, low portfolio diversity also resulted in the huge loss of the funds. What’s worse was that the fund managers did not reveal the real picture to their customers, who were initially told that the funds won’t touch any risky sectors. Customers are now told that their money was gone and the situation is irreversible because the gross prospect for the whole economy is still perceived as bleak. What can they do except for accepting the sad truth?

Headcount cut show in financial industry starts

Today two obtrusive numbers come onto headlines of many financial publications: the Royal Bank of Scotland is going to layoff 7,000 its staff, and UPS will put that figure to 8,000. The horrible scene of job loss in financial market now begins to full-fledge. The big names in the industry will be hit the hardest first.

 

More than 40,000 job loss in City

Cut in RBS accounts for one fourth of the bank’s total 28,000 employees, as a formal consultation for position redundancies is already undergoing in the bank. In the beginning of the year, JP Morgan’s London arm expected that there would be as many as 40,000 job cuts for 2008 alone. Many market insiders were mocking at the JP Morgan’s estimate to be over-pessimistic, however, as more and more banks are revealing huge write-downs in their book, the job cut plans are also gaining momentum from bank to bank, people are beginning to paint more gloomy pictures.

 

Business schools reap the windfalls  

Interestingly, many business schools are now busy with putting up commercials and ads in newspaper and websites, in order to attract those who are laid off from financial sector to business schools for MBA or EMBA study. FT revealed in its February business supplement that MBA application cycle actually counters the economic cycle, in other words, the worse of the economy looks like the more people are going to apply for seats in the business schools.

 

MBA VS Recession 

The applicants are hoping that by spending generally two years in business schools, they can fend off the sluggish period of market and economy, and then enter the job market again when the economy pick up pace again. 2008 will be an excellent year to test if this assumption is true or false.

Number of China internet users: 221,000,000

It is reported that, by the weekend, China has seen its registered internet users exceed 200 millions, outnumbering the US. The same as its demographic population, China now has the largest internet population of the world; the figure might surprise many dotcoms because they have not expected the change would come so fast. By the end of last year, the correspondent figure was only150 millions.

 

Government efforts behind the scence 

The Chinese administration has been investing heavily in the recent years, according to the Ministry of Industrialization and Information of China, who released the figure. Huge tranches of money were channeled to internet infrastructure development nationwide. Broadband connection and WIFI spots are sprouting in major Chinese cities. 

 

More internet users = more money

Despite the gloomy overall economic prospect around the world, IT business is China is still expected to sustain rapid annual growth, according to some market insiders. “The unprecedented state input into IT sector spawns multiple business opportunities for IT companies,” said Li Kaifu of Google China, “moreover, the vast internet user base in China also bears huge potential for future development.”

FT’s housing analysis hinges on a vague conclusion

In Finance Times article UK housing slump fears overplayed, FT claims that the housing woe in UK is exaggerated by market and media, and the actual impact by the credit-crisis led economic stagnation won’t damage UK households’ family equity to the extent comparable to that of 1990s.

 

Flaws in the reasoning

The assumption is based on figures from Council of Mortgage Lenders and survey of Bank of England last year, without mentioning if the acquired data was compiled before or after the sub-prime mortgage crisis happened last summer. There was stark difference if the figures were post-subprime ones, because after the sub-prime mortgage problems were uncovered, mortgage policies changed dramatically for most of the banks in both the US and UK.

 

Secondly, FT’s also assumes that the prospect for household negative equity was unlikely because there were less houses purchased and sold at the height of the recent boom than in the 1990s. I don’t see any relation between the two factors; what if those houses were bought and sold at much higher prices than 1990s, a much deeper price correction now will definitely erode into the house owner’s equity, and turn the equity value into negative.

 

Wrong quotes and wrong sources 

Last but by no means the least, FT quotes one Goldman Sachs source to support its finding, without giving his title. Everyone knows that Goldman Sachs was one of the dirty-hands who pushed the global economic to a dire situation nowadays, shouldn’t we keep a precautious ear on what they are saying? They have big problems now and they are trying to whitewash the horrible scenario by telling media that there is nothing much to worry about, isn’t this dangerous enough?

China stock market erupted 9.3% after government stimulus pack

9.3 percent, Shanghai composite index of China erupted on Thursday, achieving its highest single day session gain in six years. Before that, the market plummeted from the peak of 6014 points late last year to less than 3000 points on Tuesday this week.

 

Miracle in the market 

The dramatic scenario happened after the China Security Regulatory Commission, the stock market watch dog of China, and Ministry of Finance announced a plan to slash the stock trading stamp tax from the current level of 0.3% to 0.1%, effective from today. The move had been long anticipated by both investors and market observers, who blamed the market regulators for standing by the excessive market correction since last October.

 

Sentiment in the market was so high today that the trading volume in Shanghai garnered a staggering RMB 195.6 billion yuan (US$ 27.9 billion), almost doubled that of the previous day. Meanwhile, among the overall more than 1400 listed companies, only three saw their stock price dropped. More than 860 stocks topped the 10% daily increase cap set by the market regulators.

 

Can the market boom continue? 

Given the current economic situation in China, such a frenzy increase won’t be sustainable. In order to cool down the potentially overheating economy of China, the government ushered in a series of measures pinpointing at reining in the oversupply of capital in the market. The measures included increasing interest rate and bank deposit reserve ratio, the capital chain of Chinese companies are getting extremely tighter and tighter. 

 

Global trap for China economy 

Moreover, the overall global economic prospect is still perceived to be gloomy, the recession that is sweeping across the US and European countries will in turn hurt the economies of developing countries, those countries rely heavily on trade with the developed ones. China is one example, a lowering demand for products and services from China is set to affect the listed companies’ revenue in 2008, which in turn will lessen the earnings per stock and result in a less-than-expected increase rate for the company.

50 billion pounds won’t solve the problem

Yesterday, Bank of England announced a £50 billion liquidity injection plan, to underpin the UK financial market, and boost confidence of mortgage takers. The move, though slightly different with the Fed’s desperate cash rescue to banks in States, highlights the administration’s resolve to lift the declining economy; however, it is extremely dangerous for the government bank to shoulder all the liabilities and risks.

 

Let’s look at the details of BOE’s plan; banks can transfer their asset-backed securities to cash with BOE, leaving BOE as the ultimate risk bearer for all the possible defaults.

 

NO rosy picture at all

If the economic scenario continues to worsen, the value of assets in BOE’s hand will decline or plunge without any doubt, so will do the value of securities that are backed by these assets.

 

BOE’s bet is that by injecting this huge tranche of money into the market, the overall situation and outlook for the economy will improve soon in the following months, even if not dramatically. This scene reminded us of the time when big investment banks in the US were doing the same thing, buying collateralized debt obligation that triggered the credit crunch last summer. This time, the trick is played on a much larger scale, with BOE as the key player.

 

UK won’t be able to escape the recession 

In contrast to chancellor Alistair Darling’s remarks, Mervyn King, governor of Bank of England defended the Bank’s move as to reinstate market confidence, not to encourage the banks and other mortgage lenders to lend money fervently as they did before. It is without any doubt that the Bank’s move will alleviate the capital strain for some credit-tight banks, but the overall outcome for such a contingent move is still pending to be judged.

 

Since UK’s economy is so closely linked with the performance of the States, now it is well-accepted that US’s economy is in a recession, the days are counted for the bubble effect to sweep across European continent, UK will not be an exception. Mr. King and Mr. Darling have put the central bank into the centre of the tornado.