In August 2005, China Economic Review decided to invest RMB10,000 in the A-share market. This was the beginning of the Red Dragon Fund, which continues to appear in the magazine every month. During the course of its existence, the fund - currently under the care of fund manager Zhang Zheng - has tripled in value. (Rest assured, it is nothing more than an editorial exercise.)

Now our paymasters have allocated a new pool of cash to invest in the Shanghai market. The new RMB10,000 fund will be known as the Capitalist Roader Fund. Investment decisions will be made by the CER editorial team and our activities can be followed on this blog.

With that out of the way, we’re pleased to announce we’ve jumped right in with 100 shares of Anhui Conch Cement, China’s largest cement-maker, at RMB55.97 a share. We have been looking at solid, basic, infrastructure plays, since there’s still plenty of China to build. Conch was chosen partly thanks to a Citi Investment Research report by Thomas P. Wrigglesworth and Scarlett Y. Chen, which had good things to say about the cement-maker (albeit focusing on the company’s H-shares).

For starters, the report has a HK$87 target price for the stock with a Buy/Medium Risk rating. It ended trading yesterday at HK$66.85. Why so bullish? In the short term, there’s the massive reconstruction effort required as a result of the Sichuan earthquake.

It costs RMB80 to transport a ton of cement to Chongqing and another RMB100 per ton to get it to the quake area. Mr. Guo [Conch executive director] believes Conch could earn a decent margin given the high pricing in Sichuan. He said Conch would still make money even if the transportation cost amounted to RMB300 per ton.

According to Guo, the National Development and Reform Commission is likely to impose price controls on cement – he estimates that cement would cost RMB1,000 a ton if prices are allowed to rise freely. However, Guo believes the controls will be temporary, since cement-makers need to make money to continue to supplying their end product.

But this isn’t just an opportunistic quake play. The company was already moving its supply chain to the western provinces before the quake struck because prices in Sichuan were among the highest in the country, at RMB600 a ton.

The A-shares are trading at around a RMB10 discount to the H-shares, which is the opposite of what usually happens with dual-listed companies. The price-to-earnings ratio on the A-share is around 32, which is rather high for a cement company, but then Conch is in an unusually strong position to exploit China’s ongoing construction boom. As Wrigglesworth and Chen note, its production capacity is equal to the next-four biggest companies’ capacities combined. They also say that Conch hit a gross margin of 42% in 2003, which was the peak of the last industry cycle. By their estimates, the industry hit bottom last year and is on its way up to a 2011 peak.

Related
Reuters updates on Anhui Conch Cement’s H-shares and A-shares
Anhui Conch Cement’s website
Seeking Alpha: JP Morgan on infrastructure plays

About five minutes before today’s three minutes of silence, my colleague Tom and I ventured across Jinling Lu to the park surrounding the Shanghai Concert Hall. From there, we were able to see the giant screen on the side of the Lansheng Theater building, which usually broadcasts ads for BMWs and the 2010 Expo, but which today was given over completely to earthquake coverage. A small crowd had gathered in the area leading up to the concert hall and we quietly joined them.

At 2:28, traffic came to a stop at the usually bustling corner of Jinling Lu and Xizang Lu. The crowd fell silent as car horns, and police, fire and air raid sirens across the city sounded. I admit that as I stood there, I wondered whether drivers would drain their batteries by leaning on their horns for three minutes – but the overall effect was astonishing. A few skateboarders who had been practicing tricks on the steps up to the concert hall in the minutes before 2:28 sat silently on their boards as the wailing began.

On the big screen, CCTV broadcast scenes from around the country where similar crowds had gathered outside for the three minutes, interspersed with scenes from the earthquake zone.

It was hard not to be moved by the display. I had doubted that cars in Shanghai would actually heed the call to stop for three minutes, but aside from a few errant motor scooters, traffic was completely still.

On the China Vortex blog (h/t to Imagethief), Paul Delinger has written an excellent post on the three-day mourning period, in which he notes that for the first time in history, China has had a national mourning period for ordinary civilians. If the three minutes of silence was not impressive, then that fact certainly is.

First saw this news from Shanghaiist, which has kept up with excellent, timely news updates on the situation in Sichuan:

It’s early Monday morning and the China twitterati are abuzz with the news that all major Chinese web sites have been ordered to shutdown for the three days of national mourning which begins today. Here is an announcement sent out by the government in Hefei, Anhui, followed by Shanghaiist’s translation. Good reason to believe similar announcements have been sent in other provinces and municipalities:

The news has also popped up on the newswires. From AP:

Chinese news portal sina.com said the government had ordered all visitors to online entertainment and game pages to be redirected to Web sites dedicated to commemorating earthquake victims.

Reuters:

The national flag in Tiananmen Square in central Beijing flew at half mast after a ceremony at dawn. The Olympic torch relay, currently on its domestic leg ahead of the August 8 opening in Beijing, will likewise be suspended for three days.

But there was an interesting quote from that Reuters story.

“It’s a good idea but maybe it’s a bit early,” said Zhou Wanli of the national state of mourning, sitting in the back of a truck heading into Beichuan.

“All we can care about for the time being is finding our relatives. We don’t want to memorialize them if we don’t even know if they’re alive or dead,” he said

Indeed - why so soon? Rescue efforts are still underway, after all. Video-sharing sites will be affected by this directive. One could imagine that it’s an attempt to rein in videos and pictures of the quake taken by bystanders, which are spreading virally across the net. If so, it’s a really clever move by the government - folding a propaganda directive into an unassailable moment of national bonding.

Update: Just checked out Tudou and Youku, the top video sites. They’re only showing quake videos on their front pages, including user-generated, non-CCTV vids. Other videos are all still online, you need only search for them. Guess that puts paid to my little theory.

The idea that people are able to cause earthquakes seems inherently wrong. Yet, in the wake of what has happened in Sichuan, there are reports that perhaps the Three Gorges Dam (TGD) – some 660 km (we wrongly said 200 km earlier) from Wenchuan – is partly responsible for increased seismic action in the area.

The TGD reservoir sits on two major fault lines and the rising water level is straining these fault lines. Probe International (proxy needed) has more:

For seven months after the reservoir-level increase in 2006, Chinese Academy of Engineering scholar Li Wangping says the Three Gorges area registered 822 tremors. So far, none have been severe enough to cause serious damage. But, later this year when the dam’s water level is set to rise to its full 175-meter capacity, the increase in water pressure, in water fluctuation and in land covered by the reservoir, Fan says, makes for a “very large possibility” that the tremors will worsen.

And the TGD is not alone:

Engineers in China blame dams for at least 19 earthquakes over the past five decades, ranging from small tremors to one near Guangdong province’s Xinfengjiang dam in 1962 that registered magnitude 6.1 on the Richter scale – severe enough to topple houses.

I should say here that this is not to suggest any direct link between the dam and the Wenchuan earthquake on Monday afternoon. But it is interesting that when it comes to dams and earthquakes, pro-dammers spend an awful lot of their time assuaging fears that the world’s biggest dam can withstand earthquakes (although it is designed to handle a 7.0 quake, and Monday’s was 7.8 at the epicenter). Xinhua was quick to announce that Monday’s earthquake did not damage the TGD.

However, instead of asking how dams are affected by earthquakes, it seems it may be useful to flip that question around.

As a former resident of Chengdu*, the sustained coverage of my ex-home in English-language media (which I suspect has only just begun) has caught my attention. For those looking for good on-the-ground coverage of what is going on in Chengdu, Dujiangyan, Wenchuan and the surrounding area, might I suggest the following links:

This report and this audio slideshow on the effects of the earthquake by FT correspondent (and China Economic Review alumnus) Jamil Anderlini:

In Dujiangyan, two rows of soldiers and police held distraught parents back from the site of the collapse, where scores of soldiers sifted through rubble looking for more of the estimated 900 children buried in the rubble.

Each time a child’s body emerged, four soldiers covered the face with cloth and carried it on broken doors or other makeshift stretchers down a human corridor of panicking relatives and deposited it in the mud for the family to claim.

“I can’t take this,” said one soldier as he hurried away from a corpse and back to the rubble.

National Public Radio’s Chengdu Diary blog. By sheer coincidence, the NPR crew have been in Chengdu since the start of the month, joined recently by Robert Siegel (”Support for NPR is provided by the Ford Foundation …”), in preparation for a full week of broadcasts from the city scheduled for next week. Needless to say, what started out as a run-of-the-mill show on daily life in China (complete with snippets on traditional Chinese instruments) took a dramatic turn for them on Monday (here’s a recording of one of Melissa Block’s interviews being interrupted by the actual quake. I couldn’t hear the clip myself, though I mainly blame that on the woeful RealPlayer software).

I’ll be listening next week.

Photo by Art Silverman, NPR

Other posts from Chengdu Diary:
Caught in the Earthquake
A Horrific Scene at a Middle School in Dujiangyan
Meeting Survivors on the Road

*I admittedly have a soft spot for the area, and heartily encourage everyone to contribute what they can to the Chinese Red Cross (info here on how to donate) to help in relief efforts.
UPDATE: With thanks to the China Law Blog, Cn Reviews has a comprehensive list of ways to donate (36 and counting) here.

First views on the quake from economists and analysts we follow regularly. Here’s Deutsche Bank’s Jun Ma, greater China chief economist, and Moody’s Economy.com’s Sherman Chan, an economist who covers China for the research firm:

Macro view

Deutsche Bank: “At the macroeconomic level, our current view is that the impact is limited … The equity market may be hurt by the rising uncertainties related to earnings impact and liquidity flows.”

Moody’s Economy: “Although the earthquake has caused major disruption only to the Sichuan province, which represents a relatively modest share of the country’s GDP, the economic impact of the earthquake to China as a whole is likely less severe compared to the snowstorm. Nevertheless, the earthquake has shaken market confidence.”

Sector and company view

DB: Sichuan Expressway (107.HK) will see slower traffic growth, Dongfang Electric (1072.HK) has major production bases in Sichuan. China Telecom (728.HK) is the worst hit of the telcos, the affected area represents about 10% of its fixed line network. The quake will also affect 7% of China Mobile’s relay network. Sinopec (386.HK) has a Sichuan gas project under development that will account for about 7% of FY10 revenue. Insurance firms, property companies with Sichuan and Chongqing in their portfolios. Cement makers like Shui On Cement (983.HK) and Anhui Conch (914.HK) could benefit.

ME: “The most direct impact is the disruption to economic activity due to problems with transport, communications and power supplies. In relation to business operations, the most affected by the disaster will be the manufacturing, retail, transport and tourism sectors. However, China’s construction and engineering industries will be able to take advantage of the massive reconstruction of buildings and infrastructure in coming months.

Quick updates on the quake’s economic and financial impact from the news so far:

66 companies listed in Shanghai and Shenzhen were suspended from trading today, says financial wire XFN Asia.

45 of the companies are listed in Shanghai and the rest in Shenzhen. The Shanghai exchange said it could not contact the suspended companies in Sichuan and Chongqing, while the Shenzhen exchange said some of the companies, based in Sichuan province, couldn’t yet disclose the quake’s impact on their business.

Dow Jones’ MarketWatch reported that the Shanghai Composite Index was down nearly 3% this afternoon with China Life and China Southern Airlines dropping around 5%. China Life’s H-shares fell slightly, by nearly 1%.

Bloomberg reports that Petrochina’s A-shares fell 3.4%, despite the company stating that there hasn’t been a “huge impact” on business because of the quake. The government has ordered oil wells shut in quake-hit areas. Another story reports that aluminum smelters in the province are doing alright, the Central China railway line remains closed, and a 5.5GW drop in power demand (1% of national generating capacity) because of downed transmission lines and damaged power plants.

The death toll from the quake is around 10,000, according to Xinhua

See Shanghaiist for continuous updates on the quake, including speedy translations from Chinese-language media, and information on donating to the Red Cross.