Barron's: China Stocks Look Ready for a Correction

[HenryTo]

Article courtesy of Barrons:
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China Stocks Look Ready for a Correction
Emerging Markets

IS THE BIG CORRECTION IN CHINA SHARES starting at last? Late Friday, China boosted its bank-reserve requirements for the fourth time since June, and it could raise interest rates by mid-year to rein in its boom.

In trading later in New York, Chinese shares fell sharply. The ishares FTSE/Xinhua (ticker: FXI) exchange-traded fund was down 6%, while big-caps like PetroChina (PTR), China Life (LFC) and China Mobile (CHL) swooned.

Quite a reversal from last year's enormous gains, which took place as China reformed its share markets, economic growth climbed, the currency snapped higher, and Chinese investors began to part with some of their $2 trillion in savings.

These conditions created "a long-term sustainable bull market for China," albeit one with "lots of trading rotational opportunities," maintains Lou Gerken of Gerken Capital, whose GCA Greater China Fund was up 24% last year. As the Hang Seng China Enterprises index rose 14% in November and 21% in December, people grew fearful of selling: "You're seeing very limited shorting because you can't bet against the liquidity flow," says Tim McKenna, managing director at CLSA Asia Pacific Markets. "It's very frothy."

Still, investors took profits on financials and real estate, amid fear that China would clamp down on frothy property markets, and rotated into laggard auto companies like Brilliance China Automotive (CBA), and into power companies like Huaneng Power (HNP), whose tax rate may fall as China moves toward a unified tax system.

Despite that rotation, China's big banks, all Hong Kong-listed, are still expensive -- "like Nasdaq in late 1999," says Rajiv Jain of Vontobel Asset Management.

"At current levels, we expect a significant correction, particularly in financial stocks," says Shu Yin Lee, the manager of Dalton Greater China, a Shanghai-based hedge fund that rose 28% in 2006. "The state-owned banks are now trading at over three times book value in Hong Kong and four times on the A-share market" dominated by local investors, "and by market capitalization, Industrial & Commercial Bank of China is now larger than HSBC!"

Early last week, Merrill Lynch's emerging-markets strategist, Michael Hartnett, said that Chinese stocks had run up late last year on huge inflows into stock funds that coincided with a December pause in the initial public offering calendar. "The liquidity bubbled straight through to equity prices," Hartnett wrote clients.


Asia: Weakness in Tokyo, woes in Bangkok countered good week for most of Asia.
A Bank of Japan rate hike could rein in Japanese enthusiasm for sending capital abroad. China now trades at 17.2 times earnings, with expected earnings growth of 10%, versus 12.5 times for global emerging markets, where profits are expected to rise by 14.4%.

Today's China premium is 38% -- more than four times the average since 1994. How far does Hartnett see stocks falling? About 10% in the next four to six weeks. After all, in 2003, Chinese stocks rose 175%. In 2004, as night follows day, they fell.

PITY POOR SANYO ELECTRIC, the world's largest maker of rechargeable batteries. Its shares (6764.Tokyo) were halved last year and recently traded at 154 yen after a barrage of bad news: a forecast of its third annual loss amid more job cuts (Sanyo shut 10% of its business units in the past year to boost returns), a credit-rating cut, a battery recall and slumping sales of mobile phones and digital cameras. Recently, it also disclosed that it would exit LCD-panel production. The company has already considered numerous restructuring measures, sales, spinoffs, and partial strategic alliances.

Many investors hate the stock, but it may yet fall further. Last march, Sanyo issued 429 million convertible preferred shares. "We do not expect holders of the preferred shares to hold them indefinitely," wrote Merrill analyst Hitoshi Kuriyama.

To Mark Hake of Hake Capital, a small-cap value specialist, the best-case scenario is that Sanyo achieves a return on equity of 4.5% by March 2008. Sanyo's shares now trade at 2.25 times book value, "extremely generous for a company that will, at best, make a 4.5% return on equity," says Hake. Sanyo also trades at 15 times cash flow, nearly twice the industry average.

David Benwell of Clocktower Capital remains short Sanyo shares: "The current price doesn't include the potentially large dilution from the convertible, and the business is likely to get more competitive," warns Benwell. "I think even ¥100 would be a full valuation."

THE NUMBERS ARE IN: The best Japan fund for 2006 was ProFunds UltraJapan (UJPIX), up 14%; the top Pacific ex-Japan fund was iShares MSCI Singapore (EWS), up 46%; and the No. 1 Pacific fund was Eaton Vance Asia Small Company (EVASX), up 47%.

[rffrydr]

The response, of course, rally another 1.2%.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Central bank again tightens by increasing the required reserves ratio:
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China clamps down on credit growth -- again
Sun Apr 29, 2007 2:06 AM ET

By Jason Subler and Zhou Xin

BEIJING, April 29 (Reuters) - China on Sunday ordered banks for the second time this month to hold more of their deposits in reserve in the latest attempt to prevent credit and investment growth from destabilising the world's fourth-largest economy.

The People's Bank of China said on its Web site that big banks would have to hold 11 percent of their deposits in reserve at the central bank as from May 15, up from 10.5 percent now.

The 0.5 percentage point increase ties up an estimated 170 billion yuan ($22 billion), marking the fourth increase in reserve requirements this year and the seventh in all since June 2006.

Over the past year, the central bank has also raised interest rates three times -- most recently on March 17 -- and economists said the decision to hoist required reserves made another increase in borrowing costs unlikely in the short term.

Speculation had swirled that rates could go up before a week-long holiday starting on May 1.

"With the announcement of the deposit reserve ratio increase, it's safe to say that there won't be any benchmark interest rate increase in the near future," said Zhu Jianfang, chief economist with China Securities in Beijing.

Frank Gong, chief China economist at JPMorgan in Hong Kong, agreed a rate rise was off the cards for now. The required reserve ratio could reach 12 percent by the end of 2007, he said.

"It's the most cost-efficient way for the central bank to mop up liquidity," Gong said. "It will not help reduce liquidity much, but it will help to prevent excess liquidity from getting worse."

The central bank has been struggling to mop up, or sterilise, a torrent of cash flowing in from China's record trade surplus, which doubled to $46.4 billion in the first quarter from a year earlier, and from capital inflows betting on a stronger yuan.

MORE TO COME

Chen Xingdong, chief economist with BNP Paribas in Beijing, said if China continued to amass currency reserves at the pace it did in the first quarter -- when its stockpile swelled by $136 billion -- required reserves could have to go beyond 12 percent.

"They don't have better choices. I think this suggests the way sterilisation will continue to be used," Chen said.

Policy makers are also concerned that the ready availability of cheap money is fuelling an unsustainable rally in the domestic stock market <.SSEC>, which has risen 40 percent this year on top of a 130 percent leap in 2006.

Zhao Xiao, a professor with the University of Science and Technology of Beijing, said the central bank decided to increase required reserves instead of interest rates as it is quite happy with the economy right now.

With core consumer prices below 2 percent, the central bank does not want to slam the brakes on the economy, he said.

"However, it also shows that the central bank is very concerned with the excess liquidity problem, and it is worrying about possible asset bubbles," Zhao said.

YUAN GO-SLOW

Because banks hold more money at the PBOC than they need to, the increases in required reserves so far have had little impact on credit growth or on the economy, which grew a blistering 11.1 percent in the first quarter compared with a year earlier.

Hong Liang, an economist at Goldman Sachs in Hong Kong, said periodically raising required reserves by half a percentage point is simply not binding on banks' capabilities to lend.

"In the short run, the reserve requirement hike will likely push up market interest rates and the yield curve modestly in China. However, we do not expect it to have much impact on the real economy or the financial markets," she told clients.

Liang said higher borrowing costs would be more effective in curbing money and credit growth.

To cap the gusher of liquidity at source, Liang and other economists advocate a stronger exchange rate to dent the competitiveness of Chinese exports and so cut the trade surplus.

But policy makers have shown no sign of permitting a faster rise in the yuan <CNY=CFXS>, which has gained just 5 percent since it was unhooked from a dollar peg in July 2005 and allowed to float within managed bands.

Chen at BNP Paribas said the central bank would not let the yuan appreciate significantly faster this year.

He said a small rise would not have much of an impact, while a large appreciation was not politically acceptable: with a five-yearly congress of the ruling Communist Party due in the autumn, authorities might be concerned that any impact on jobs and growth from a stronger yuan could feed into nationalism.

"It will continue to be a slow, gradual appreciation -- that won't be able to change," he said. "It's not an option." ($1=7.71 yuan) (Additional reporting by Alison Leung in Hong Kong)

[rffrydr]

http://economist.com/world/asia/displaystory.cfm?story_id=9084756
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

In the past, People's Bank of China usually tightens monetary policy during certain holidays, including "Golden Week."

Not saying any would happen here. The market may very well choose to ignore it - which would lead to a bigger mess down the road.

[rffrydr]

"Golden Week" could precipitate new views, if only a relief in "buying pressure." Similar long holidays here. In China there will be an impulse to take some cash to make it a celebration. Really it's New Years and this. And you know what happens to the world when Chinese decide to do something together.

Regardless, I don't think it will be a signifcant economic event that begets a more serious fallout. Maybe there will be a trigger, but only insofar as it can harness an accompanying superstition.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

So far this month alone, the Shanghai market is up 11% while the Shenzhen market is up 15%. On a YTD basis, the former is up 32% while the latter is up 72%, respectively.

Meanwhile, in the 1Q, 4.8mm brokerage accounts were opened - high even by Chinese standards. The speculation in the Chinese stock market is now getting red hot...

Henry

[rffrydr]

The chinese definition of "bull" resembles our definition of "bear."

[rffrydr]

MetLife flatlined at a 2yr return of 50%!

http://finance.yahoo.com/charts#chart4:symbol=lfc;range=2y;compare=met;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

You've heard of re-gifting; this is a re-buying opportunity IMO.

FXI stopped out in Wifeykin's IRA; HNP sold open at market today; I will be watching FXI and one or two other China stocks traded in the U.S. for later ...
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.