Thursday, June 01, 2006

China A-Shares / Banks / Bad Debts
The Bigger Picture

Shenzhen and Shanghai exchanges have their A-shares, and for the 26 companies who also list their shares in Hong Kong, the shares are known as H-shares in Hong Kong. It used to be that A-shares trade at a big premium to H-shares, and that has been the case for the past few years. Something funny happened on my way to the Communist Great Hall, now the H-shares trade at a premium to the A-shares!!! It appears that the Chinese stocks have been having a torrid 4-year slump. This also meant that Chinese citizens in China have been hit badly and are beginning to shun investing in local stocks. It could also mean that fund managers are more comfortable now to buy H-shares, or that Hong Kongers are more liquid now and are beginning to buy H-shares in a big way. This could also means that the overall share valuation for Chinese companies listed on China exchanges are no longer frothy.

The bigger picture is that, Chinese companies listed on HKSE and Singapore have performed remarkably well over the last 2 years. The valuation was boosted by the strong liquidity driven rallies in both markets over the last 12 months. The bigger and better known Chinese companies head for HKSE while the lesser known and smaller companies opt for Singapore - but both types did well. It is not just a matter of liquidity prevalent in HK and Singapore, but rather an improving perception that China companies listed in HK and Singapore (including those with a dual listing) that they have a more stringent check and balance on these companies' financials. Better corporate governance and transparency requirements from the more established exchanges seem to have yielded more confidence among institutional and retail investors in HK and Singapore. Despite the high-profile bust for China Aviation Oil or CAO (Singapore) Corporation, which lost US$550 million in speculative trading, making it one of the biggest business scandals in Asia since Nick Leeson lost US$1.4 billion at Barings Bank in 1995, Chinese companies listed in Singapore were largely unaffected.

Today saw the trading for the massive Bank of China's IPO - which was a great success. This follows on the heels of the highly successful listing for China Construction Bank last October in HK. This brings us to the grave problems that I have with China's economy. A recent study by Ernst & Young estimated that China's total bad debt liabilities stood at US$911 billion, and not the official figure of US$400 billion touted by the government. Even at US$911 billion, while huge, it is surmountable provided Chinese banks continue to improve on their risk and credit management practices. It would have been a time bomb waiting to explode if the authorities did not open up the bigger banks to foreign shareholdings. The last 3 years have seen numerous foreign banks / government investing agencies / private equity firms buying minority stakes in the bigger Chinese banks - the bigger implication is that by opening up to these new shareholders, Chinese banks would have a much greater chance to manage and whittle down the overall bad debts and eliminate the doomsday scenario. Global investors should be glad that this has basically averted a massive crunch or correction badly needed within China's financial system.

Now, let's just try and get a handle on the excessive property bubble.

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