A stock market analyst I know recently left his job at a Shanghai-based brokerage to take up a new position running the trading team for a private investment company. (See the May cover story for details of how these private investment companies are widening their interests from purely stock trading to incorporating private equity as well.)

This analyst is in the process of recruiting staff and he told me the other day that he hopes to be up and running in June. Had he started in mid-April, he could have taken advantage of the market’s descent to around the 3,000-point mark and its subsequent rebound to 3,656.84 (as of May 8).

“Don’t you wish you could have opened for business a bit earlier?” I asked him.

“Maybe the SCI will nosedive to 2,500 in the future, who knows?” was his response. “The market is full of opportunities.”

Don’t you just love volatile stock markets?

Highlights from the last week of China business news.

Eat your heart out, Adam Smith
What was that famous metaphor about the markets, something about an invisible hand? Beijing has a thing or two to say about that. Today the CSRC slashed China’s stamp duty, bringing it down to 0.1% - the same rate it was at last year before it was hiked. If you recall, when they raised the stamp duty last year, it was because the market was too high; the regulator’s move caused a dip. Now, the market is too low - the Shanghai Composite Index on Tuesday was down 50% from its October high - so the regulator reached in and lowered the duty. It works. The SCI jumped nearly 10% in early trading and was around the 3,500 mark at mid-day, AP reported. Early in the week, the regulator also implemented another rule, limiting block trades to prevent a possible flood of shares into an already low market.

China Mobile keeps raking it in
Another nice reporting season for China Mobile, which posted first-quarter profits that were 37% higher than the same period last year. By contrast, China Telecom posted a 0.5% rise in net profits, due to a shrinking fixed-line subscriber base (all those customers are getting mobile phone accounts) although its earnings were shored up by its broadband internet business, which has a growing user base. Look a little closer at China Mobile’s numbers, however, and there is one negative indicator. The cute-sounding ARPU (average revenue per user) number fell by about US$0.40. It’s a key metric for carriers, and it could indicate that China Mobile isn’t working hard enough to get cash out of its users. Oh, one more thing - that long-rumored telecom restructuring (see the current issue of CER) has been lent credence by a CDMA joint venture that could happen between Korea’s SK Telecom and China Telecom. The latter is supposed to run a CDMA network after the restructuring.

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On March 28, some of us at CER attended a promotional event for this year’s China International Private Equity Forum in Tianjin. It’s a big do with thousands of private equity and venture types hobnobbing with government officials, potential investment targets, lawyers, accountants and so on. The first event, held last June, was attended by 223 investment companies, who together control US$471.2 billion in assets, at least according to a brochure they gave us. Now that must be a tough crowd to please.

Tianjin is where the central government wants to develop a domestic VC and PE base. They’ve started some big funds there that are state-linked, like the Bohai Industrial Investment Fund (Our next cover story is about the private equity scene in China).

Anyway, this promotional event was held at the Shanghai International Convention Center, which overlooks the river and has great views of the Bund. Several government officials were in attendance to talk up the Forum, and were joined by a bunch of media people (all Chinese-language media, from what I could tell) and possible attendees.

The event itself was rather dull – four speeches by officials including the vice mayor of Tianjin in charge of finance, Cui Jindu. Slightly more interesting was the question and answer session that followed. We had a chance to ask about the seemingly evaporated through-train scheme, which was supposed to start in Tianjin banks (You may remember CER-editorial-top-dog Tim Burroughs’s post about disused equipment meant for the scheme piling up in a Bank of China office in Hong Kong). The vice mayor equivocated, saying that it’s a well-designed project and that the technology to execute it is well-developed. But about the actual launch date, he said only that they would launch it at the right time, under appropriate conditions. Ah well, it was worth a shot.

Related
A recent post about a through-train casualty
A brief about the delay from Nov 2007
Great FT article on why Tianjin is getting so much special treatment

According to an analyst at Bank of China International (BOCI), a corner of the bank’s Hong Kong office is piled high with unused equipment. This equipment was brought in to cope with the surge in trading business expected to come as mainland individuals started investing directly in Hong Kong stocks under the H-share through-train scheme. Premier Wen Jiabao put the brakes on the through-train in November and, based on current progress, BOCI’s equipment might be obsolete by the time the wagons start rolling.

Highlights from the last week of China business news.

Wild ride for markets continues
Keep those seat belts fastened. Stocks in Shanghai and Shenzhen posted their fourth straight day of gains on Tuesday, led by brokerages such as Haitong Securities and Guoyuan Securities, and with a little help thrown in from rice companies who were boosted by gains in rice futures on the Chicago Board of Trade. But the very next day the benchmark Shanghai Stock Exchange fell 5.5%, with the Shanghai Composite Index posting its largest single-day drop in over two months to end at 3,413.907 points. Meanwhile consumers and entrepreneurs were at odds. The National Bureau of Statistics (NBS) said that its entrepreneur confidence index in the first quarter rose one point over the previous quarter to 140.6. Consumers, however, weren’t feeling as chipper. The NBS consumer confidence index dropped by 1.7 points in the first quarter to 94.8 points at the end of March, which represented a slight increase from an 18-month low of 94.3 recorded in February.

Car nuts, nutty pilots
Someone in China wants to sell you a car. Auto sales in China were up 21% in the first quarter from the same period last year to reach about 2.58 million. Both Ford and Volkswagen posted record sales in the period, and China’s booming auto market is doing its part to offset slowing sales in the US. But one company doesn’t have as much to cheer about. South Korea’s Hyundai, in response to slowing China sales in 2007, is revamping its Elantra line of sedans with an upscale model made exclusively for the China market. And for the time being, it might be better to drive than fly, given what’s been happening with China Eastern Airlines. The carrier suspended pilots for intentionally disrupting 21 flights late last month to express grievances over labor policies. Pilots either turned their flights around mid-way, or landed and took off again without allowing passengers to disembark. No one could confirm whether the 1,000 inconvenienced passengers were given an extra bag of peanuts for their troubles.

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China Economic Review’s February cover story looked at how and why assets in the care of China’s fund management companies soared to US$451.8 billion last year, up from US$118.2 billion in 2006.

Now we have some fat management fee statistics to match. Fund consultancy Z-Ben Advisors was expecting to see a substantial increase in the cut taken by fund managers for sinking people’s hard-earned cash into what was then a buoyant A-share market. But Z-Ben declared itself “shocked” as 2007 management fees came in at a whopping US$4.03 billion, up from US$813.9 million last year.

Let’s put it in context: The Shanghai Composite Index (SCI) more or less doubled in value last year; fund management assets nearly trebled; fund management fees grew by close to five times.

Of course, since then things haven’t been quite so rosy. The SCI fell 29% in the first quarter and it is thought assets under management decline by 24%. This doesn’t bode well for fund managers who dream about a new Ferrari for Christmas.

So does this mean the million-dollar bonus - reportedly first handed out (FT.com, subscription needed) to several Chinese fund managers last year - will be short-lived? Almost certainly not. Pay is tied to performance and there are few people who would bet against the market to rebound (eventually).

In addition, there is still a shortage of fund managers in China who can really perform. And when times get tough you really need a guy who can pick his stocks.

Highlights from the last week of China business news.

A-share IPOs: No longer shooting for the stars
While 2008 may be a good year for sports, it’s apparently a bad year to go public in China. The total value of initial public offerings in China shrank to US$7.85 billion in the first quarter, down from US$9.06 billion in the same period last year. The quarter’s largest offering, in which China Coal Energy raised US3.65 billion, was also the quarter’s worst performing IPO. Sliding stock prices were partly blamed for dampening investor enthusiasm. But who can fault skittish investors in times like these? The Shanghai Composite Index fell by just over 4% on Tuesday to a one-year low, while the Shenzhen Composite Index closed down 7.3% amidst fears that the government would tighten monetary policy to rein in inflation. While the markets in Shanghai staged a small comeback the next day on the back of a Wall Street rally, the Shenzhen Composite Index fell another 4.4%.

Pundits cut back on their China growth forecasts
The World Bank scaled back its forecast for China’s economic growth this year to 9.4% from 9.6% (not to mention the 10.8% they’d predicted earlier). Shortly afterwards, the Asian Development Bank said it expected the economy to grow by 10% this year, though it also outlined a worst-case scenario that might see growth decline to 7%. Both banks cited rising prices as cause for concern. But have no fear. Wen Jiabao said that while rising prices for rice are having an effect on food prices here, China’s supply of rice remains “abundant.” The NDRC had previously announced it would increase payments to farmers for rice and wheat in order to boost supplies and fight inflation. And it’s not just farmers who’ll find a little extra cash in their pockets. The National Bureau of Statistics found the average salary of employees in China’s urban areas rose by 18.7% in 2007 to US$3,561.

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Not a happy time for China equities investors - but could the government step in and do something about it? The first quarter of 2008 saw the Shanghai Composite Index put in its worst performance on record, plunging 29%. Price-to-earnings ratios, at an average of 52 last October, now stand at an average of 27.6.

Aside from these lower valuations possibly re-igniting investor interest in the market (against the fact that bank deposits are earning negative real interest thanks to soaring inflation), there is also talk of potential government intervention. Is this a good thing? Depends who you talk to. Some argue that the government boosting the market means investors expect a similar course of action every time things turn pear-shaped - not the best way of creating a mature market. Others argue that government intervention (in some way, shape or form) is standard practice the world over.

Anyway, according to a research note issued by Jing Ulrich, chairman of China equities at JPMorgan, Beijing could do any one or a combination of the following:

- Approve more new mutual funds (see CER Feb 08) (this is already happening with more than 20 new funds so far this year following an informal suspension of new issues)
- Stricter rules on share sales (to ensure that only the best in new equity comes to the market)
- Tax cuts (in March, the Ministry of Finance suspended corporate income tax for mutual fund income)
- Reduce the stamp duty on stock market transactions (investors got a shock on May 30, 2007 when stamp duty was raised from 0.1% to 0.3%, prompting the SCI, which had risen by 62% over the course of May, slumped by about 20% in the space of a week)
- Increase the Qualified Foreign Institutional Investor quota (it’s already gone up from US$10 billion to US$30 billion and further hikes are expected)
- More verbal support for the market from the authorities

The last one is most exciting. Could it signal the return of Cheng Siwei, a man never afraid to voice his opinion on equities? Now untroubled by the burden of vice chairmanship of the National People’s Congress, Cheng might feel able to talk up stocks rather than talk them down. Let us not forget that this was the man who put “bubble”, “stock” and “market” into the same sentence in January of last year and sent the SCI tumbling 5% the following day. He followed this up a few days later by saying that 70% of listed Chinese companies are not worth investing in.

A stock market professional once told me that he worried whenever Cheng showed his face at a conference. With the SCI still bobbing around the 3,300-point mark, maybe it’s time Cheng generated some upward momentum.

Highlights from the last week of China business news.

CITIC: moving on
CITIC Securities narrowly avoided a potentially disastrous relationship with (the new JPMorgan unit) Bear Stearns in what would have been a US$1 billion share swap. As Bear Stearns was forced to accept a US government bailout in the wake of the sub-prime mortgage meltdown, CITIC Group’s chairman Kong Dan was coy about the fate of the future tie-up, saying that it was not guaranteed, and that CITIC had yet to complete due diligence on Bear. JPMorgan Chase took over the beleagured Bear for a song, and CITIC, like a bridegroom discovering his bride’s criminal record, announced that it would abandon Bear. But CITIC is moving on. CITIC Securities said it still wants to invest in foreign banks, most likely through its Hong Kong unit. Meanwhile, CITIC Pacific set aside US$2.6 billion for capital spending this year, much of which will be spent on an iron ore project in Western Australia.

Not your average Zhou
Rumors of central bank governor Zhou Xiaochuan’s professional demise have been greatly exaggerated. Many believed that Zhou would be replaced during this year’s National People’s Congress (NPC). But China’s desire for stability and a seasoned hand at the helm won out and Zhou was reappointed to his post. He didn’t waste any time getting to business, either. During the NPC he announced that he saw “no need” to use the appreciation of the yuan to fight inflation, while hinting that further interest rate increases might be one of the weapons the PBOC uses fend off rising prices. Shortly after the NPC concluded, the PBOC announced that China would stop checking the sources of foreign exchange for Chinese outbound investments, a move likely to encourage capital outflows and curb excess liquidity. It also raised the reserve requirement ratio 50 basis points to a record 15.5%. The central bank added that it would consider ways to open its domestic financial markets to foreign investments, though no details were provided.

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China Railway Construction has raised a total of US$5.4 billion through its dual initial public offering in Hong Kong and Shanghai, according to numbers sent out this afternoon by Thomson Financial. This sends China back to the top of the global IPO pile, with US$6.8 billion raised from 23 offerings so far this year.

India is now in second place, US$2.9 billion of its cumulative US$3.6 billion having come from Reliance Power’s listing in late January. The US, which had raised US$6.1 billion from 20 offerings this time last year, is trailing on US$808 million (from six offerings) - a sign of the times if ever there was one.

In Hong Kong alone, China Railway Construction’s shares have gone for US$2.3 billion and it was reported that the retail portion of the offering was at least 250 times oversubscribed. We will have to wait until March 13 to see whether this strong retail interest could signal the start of a turnaround in the Hong Kong market, which has fallen more than 25% from its October peak.

Jonathan Anderson, emerging markets economist at investment bank UBS, offered some sobering thoughts on this topic in a research note sent out today: “Of course both domestic A-shares and Hong Kong-listed H-shares have seen the largest net decline of any market in Asia since late 2007, but according to our Asian equity strategy team’s valuation metrics, this has simply brought China down from the most expensive market in the region to the fourth-most expensive.”

As it happens, China Railway Construction may not hold the IPO of the year crown for very long. Credit card processor Visa is said to be planning to raise as much as US$18.8 billion in a listing that, if successful, would be the second largest in history and defy the current climate of tight credit.

It is the banks that use Visa, rather than the company itself, that carry the burden when people default on credit card payments. These same banks also have stakes in Visa so they will hope to profit from the IPO and use the proceeds to, you’ve guessed it, offset losses resulting from people defaulting on subprime mortgage payments.