China Update: $20B Question?
Several China related items over the last few days struck me as worth some attention. One in particular, a very large stock offering by a Chinese Insurance company begged some better explanation.
Chinese Consumer Prices Rose 7.1% Year-to-Year in January: This according to Marketwatch, which pegged the number at the highest rate in 12 years. This was reportedly driven by rising food and energy prices, not new news. The fact that recently released figures show foreign direct investment doubled year-to-year was nothing new either. But that's the problem, the runaway growth train (which we all now know far too well fuels bad underwriting), has not slowed one iota and inflation is rearing its ugly head. This, despite the governments efforts to rein it in through rate hikes, (modest)currency appreciation, bank reserve requirement increases and moral suasion. China's blizzards didn't help matters, as the country's central bank injected funds into the economy to accommodate holiday driven demand, which was stifled, resulting in an 18.9% leap in money supply, to the highest level in 20 months, according to an article in The Standard. "The central bank will probably tighten again in the second quarter" according to Paul Tang Sai-on, chief economist at Bank of East Asia in Hong Kong. Remember interest rate hikes are not good for stock markets, particularly highly valued stock markets.
Stock Index Futures to Debut? According to the Economic Times the Shanghai stock index rose 2% on late buying last night on rumors that China will launch trading of stock index futures in the second quarter. The market was up 1.58%, Monday, on Friday's approval of two new equity funds. According to Rueters, The China Securities Regulatory Commission had halted the approval of new stock funds in an effort to quell the speculative fervor of the markets last spring. The new equity mutual funds are set to raise 14 billion Yuan to be invested in the markets, prompting Rueters to speculate that this is an apparent effort to prop up the sliding market. I would call recent trading a demonstration that despite a 26% drop from the peak and 15% hit year-to-date, some speculative juices still remian, as there was no fundamental news here, just news that more players could join in the game. Worse yet, if the government is pursuing policies meant to help the market, it implies China's government like ours also has a financial heroin addiction. On the one hand trying to kick the habit and on the other capitulating to the withdrawal effects. Note from the chart above that withdrawal pains have been evident in the Shanghai Composite recently.
Monster Stock Offering: On January 18th, Ping An Insurance, China's second largest insurer by premium volume, disclosed plans to raise $20 billion in an IPO, in addition to making a $5.75B bond offering. It never specified what its plans for the proceeds were, although in December the firm received government approval to invest 15% of its assets abroad. Note that several large Chinese companies have done IPOs in recent years and also received the green light to invest overseas. One significant example was the mammoth $19.1 billion IPO of the previously state-owned Industrial & Commercial Bank of China in 2006, which set a record at the time. According to China Knowledge, Ping An recently announced that its premiums grew 49.3% year-to-year in January to $2B. With money that needs to be invested for the long-term flowing in at such high rates, one wonders why the firm needs to do a massive capital raise. The Wall Street Journal reports today that on February 4th the People's Daily, the communist party newspaper carried an article that was highly critical of the large offering and quotes an analyst from a China-based securities firm saying that the announcement has terrified the stock market. The article questions why the government would have a negative article written, when they could easily just block the offering. It speculates that the government is trying to send a signal to Chinese individual investors that it is concerned for their well being. YIKES! The government should be concerned. Pin An has another booster in HSBC, it's largest shareholder with a 16.7% stake, who according to Rueters, backs the firm's capital raising plan. Rumors and speculation have swirled around the Chinese firm taking a stake or stakes in European insurance firms, as it already has a 4.2% stake in Fortis. At this point, there has not been much in the way of speculation regarding a Sovereign Fund-type bailout/investment in a troubled U.S. or European bank, although we might have a muni bond insurance company or two to sell them. In the meantime, the markets are waiting expectantly for details on how the capital might be used, ahead of a March 5 shareholder vote on the issuance. Others are wondering about the Chinese government's conviction in its unstated policy of encouraging large share offerings, to add so much supply to the market as to tamp down the market's speculative urges. If I were a shareholder, I would hope Pin An would raise cheap capital while the market can still digest the issuance. Call me jaded, but I would also be hoping none of the funds from the record size stock issuance (someone correct me if there has been a bigger one) were going to get used to clean-up any sub prime or related toxic waste that might have found its way onto the Chinese giant's balance sheet, or in the premature bailout of an undeserving lender.
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