22 May 2006
by Goh Eng Yeow
Investors should question if such debutants will pay off in thelong run MUCH hand-wringing and doomsaying accompanied last week's plunge in the local stock market, along with other regional bourses, as a series of factors, including Wall Street's sudden nosedive,
unnerved investors.
Still, despite the 6 per cent correction suffered by the Straits Times Index (STI) since it hit a record high of 2,659.65 points on May 3, most long-term blue chip i nvestors are still smiling, though not quite as broadly, as the STI has more than doubled in the past three years.
Sadly, the same cannot be said for those who had made heavy bets on recently listed China penny stocks - and the hand-wringing
and doomsaying may well ring a little more true for these investors.
A check with financial portal, Shareinvestor.com, shows that many suffered double-digit losses in percentage terms last week alone.
Somehow, nervousness over the likelihood of more interest rate hikes in the United States has finally shaken investors here to
their senses to question seriously whether betting on such debutants will pay off in the long run.
It may also be no coincidence that the explosion in interest in China stocks coincided with the biggest commodities boom in the
past 30 years.
Both are fuelled by a massive inflow of 'hot' money from hedge funds, now estimated to have anything between US$1.2 trillion and
US$1.5 trillion (S$1.9 trillion and S$2.4 trillion) at their command worldwide.
But as recently as last November, China stocks here were still languishing in the doldrums in a hangover of oversupply and
lacklustre trading interest, after the near collapse of oil trader China Aviation Oil in late 2004.
But then came a rekindling of the love affair between China plays and fund managers here, starting with the purchase by US
investment group Templeton in December of just over 5 per cent of soya bean-based food and beverage maker Celestial NutriFoods.
Other fund managers, especially those running hedge funds awash with petrodollars, were believed to have followed suit.
Heavy bets were placed on Chinese IPOs, especially those linked to commodities, foodstuff, or bio-fuel, whose major shareholders were barred from selling any shares during the first six months of listing.
Recently, however, while global equity markets dived on interest rates jitters, Templeton slashed its stake in Celestial by a third,
raking in a tidy profit, since the share price has more than quadrupled in the past six months.
This raises a big question as to whether other fund managers will do the same with their holdings of China stocks.
While Templeton fund manager Mark Mobius maintained that the sale of Celestial shares was to give his fund company 'liquidity'
to pursue other investments, billionaire Richard Elman, the boss of global supply chain manager Noble Group, was more candid
on what he described as the 'disconnect' between realities - surging commodity prices and the overheating China economy.
In his usual folksy style, he described the hundreds of 'patently ridiculous apartment blocks, vacant shopping malls, and never to
be occupied factories' he saw in China as a 'fairyland'.
And he recounted riding on a 'massive, super-slick steel hungry Maglev train that is 95 per cent empty and operates only
sporadically' - all classic symptoms of a developing bubble economy.
Herein lies the catch. If China takes steps to tame its grossly overheated economy and cool rampant property development - a key
source of global commodity demand - it will hit the businesses of many Chinese firms very hard.
In many recent Chinese listings, ordinary investors may face a double blow from a possible sale of shares by both hedge funds and
pre-IPO investors who will soon be released from the lock-up period imposed on them when their firms were listed.
Many of these pre-IPO investors secured their shares at a fraction of the IPO issue price. This means that even if the stock prices
of these firms fall, by say, half, they will still reap a handsome profit when they sell off their entire holdings.
That said, investors should ask themselves whether they should value every Chinese IPO here, as though it is in the same league
as a Bank of China (BOC) listing.
BOC, which is tapping the markets for US$10 billion, is a play on China's striking economic growth, with 11,000 branches and
200,000 employees reaching all parts of China, besides controlling 65 per cent of Hong Kong's second-largest banking group.
The froth from BOC's impending IPO may have rubbed off on the China IPO market here.
Just think: As recently as early December, market sentiment on China was so sour that the boss of one Fujian plastic pipe-maker
was willing to list his company at a mere four times price-earnings ratio (PE).
Yet, only five months later, valuations of China IPOs have almost doubled.
Fibreglass products maker, Midsouth Holdings, the 100th Chinese firm to be quoted here, listed recently at about seven times PE,
and currently trades at 8.7 times PE.
The question to ask here is whether there has been such a big fundamental change in the Chinese economy to warrant a sharp
jump in valuations of its small and medium-sized firms.
Sure, there is vast potential for growth among many of these companies. But they do not have the scope of BOC and should not be
valued like one.
Some have also argued that Chinese stocks here may also benefit from China giving the go-ahead to its US$25 billion state-owned
pension fund to invest overseas.
But most of this money is likely to find its way only to the best blue chips among Chinese firms listed abroad, and may skip
Singapore altogether.
So, wise investors should track the China scene with prudence, given the turbulence experienced by global markets. Those hoping
to hitch a ride to riches via China stocks had better be prepared for some very nasty bumps.
China Stocks Here Should Not Be Valued Like BOC - The Straits Times
China To Pace Trade In Carbon Credits Foreign Investors To Pay Mainland Firms To Cut Back On Greenhouse Gases Output
South China Morning Post
23 May 2006
China's faltering efforts to clean up the environment stand to get a big boost from foreign investors eager to pay mainland power
plants and factories to reduce pollution in lieu of spending far more to cut emissions at home.
Over the next six years, China is expected to become world's biggest supplier of greenhouse gas emission rights under the terms of the Kyoto Protocol to the UN treaty on climate change. Since these rights are transferable, traders predict a large market for this unusual kind of security will develop.
According to the United Nations Framework Convention on Climate Change website, China is expected to generate 16.61 million carbon emission reduction units annually up to 2012, or 30.67 per cent of the global total from registered projects. One unit equals one tonne of carbon dioxide emissions.
Since only seven projects have been registered so far, or just 3.83 per cent of the global total, many more are clearly in the pipeline.
Indeed, 46 mainland projects have been approved, involving 50.94 million carbon emission reduction units, according to data from the National Development and Reform Commission which must sign off on the projects before they can be submitted to a third party and registered with the UN.
They include hydro, wind and biomass power generation as well as waste heat and gas recycling projects.
Developers of registered projects that reduce pollution or produce clean energy earn so-called carbon credits that they can then sell
to polluters faced with mandatory emission-reduction targets in other countries. Often it is far cheaper to achieve a given amount of pollution reduction by investing in projects in more polluted emerging market countries such as China than by cutting emissions at facilities in more advanced economies where stricter controls are already in place.
Since the US has refused to accede to the terms of the UN pact, most of the potential buyers of credits are in rich European countries, which have committed themselves to cutting emissions by at least 8 per cent to 10 per cent from 1990 levels by 2012. The goal is to slow down, if not avert, global warming.
Many European power companies have installed scrubbers to filter out easier to control pollutants and the cost of achieving the next level of pollution reduction would be far higher, said Thorsten Ansorg, managing director of Noble Carbon Credits, a unit of energy, agriculture and industrial products trading and logistics firm Noble Group.
Despite China's late entry into the carbon credit market, the government has caught up fast. Beijing has clarified its regulatory regime and is considering imposing a pollution tax in a bid to give polluters more incentive to invest in emission controls.
"The Chinese market could become the main supplier of certified emission rights by 2012 but it still has a long way to go," Mr Ansorg said. "The potential is there, the willingness is there as well as political support and readiness of the companies to [supply]."
However, financing is a key hurdle. "You see many projects being proposed but the majority do not have financing," said Toru Kabo,
the Asia Development Bank's clean development mechanism specialist. "So one may enter into a contract with a [credit] buyer and
the project may never happen."
Last November, the bank provided US$15.8 million for a project in Liaoning province that collects methane from coal mines and channels it to households and industry for use as fuel. It is also seeking credit buyers for other projects.
Good Company Buy Back Their Own Stock?
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