Have I got a China indicator for you.
Like a lot of investors I think the selloff in Chinese stocks marks a buying opportunity—sometime in 2010. The Shanghai Composite Index is down 22% in 2010 and the market is deep into bear market territory. But that doesn’t mean it can’t get cheaper still. So when should you buy?
I’ve got a suggestion for one indicator to watch, the IPO (initial public offering) for Agricultural Bank of China.
Worries about this issue, scheduled to raise $30 billion in the Hong Kong and Shanghai markets in July in what would be the largest IPO ever, are dogging China’s banking stocks and Chinese stocks in general.
The fear is that the offering will have to be delayed because financial markets won’t be able to come up with the capital for this IPO and to meet the demands of other Chinese banks for new capital. Estimates are that China’s already publicly traded banks will have to raise 200 billion to 300 billion yuan (or $24 billion to $44 billion) in 2010. That, as I noted in my post “Move over Charles Ponzi and Bernie Madoff –China is running history’s largest financial scam” https://jubakpicks.com/2010/06/01/4106/ equals nearly half of all the capital raised in the Shanghai and Shenzhen stock markets in 2009.
Add in the $30 billion for the Agricultural Bank of China and you can see why markets might be nervous.
But that also sets up a great indicator for investors looking to time an entry into China’s stock markets. If regulators in Beijing can orchestrate a successful IPO by the Agricultural Bank of China, I think that will signal that it’s time to put some money to risk in the world’s fastest growing economy.
So by the end of July we’ll know. Not everything. But enough, in my opinion.
I think officials in Beijing will pull it off.
They’re certainly putting a huge amount of their considerable power to work making sure that the offering goes.
One of China’s already publicly traded banks, Bank of China, launched a $6 billion issue of convertible bonds yesterday, June 2, but China Construction Bank, China’s second largest bank by market capitalization, has indicated that it may delay plans to raise $11 billion until 2011. That would remove some competition for capital ahead of the Agricultural Bank’s IPO.
In the last few weeks regulators have approved a slew of new mutual funds—just in time for the funds to be big subscribers to the IPO.
State-controlled companies such as Baosteel and China Life Insurance have joined with the Ministry of Finance, China’s sovereign wealth fund, and the national pension fund in saying they’ll buy into the IPO.
China’s regulators are also putting pressure on foreign banks and investors to support the Agricultural Bank of China IPO. The sovereign wealth funds of Kuwait and the United Arab Emirates have expressed interest in investing up to $1 billion each in the IPO.
But perhaps the biggest reason to believe that the Agricultural Bank of China IPO will go on schedule is the government’s record in making sure that investors in Chinese IPOs make money—even in a bear market. Even as China’s Shanghai stock market has suffered through a bear market, so far in 2010 Chinese IPOs have gained an average of 32%.
Don’t you just love Chinese capitalism?
Interesting view. I have personally put China on hold:
– there has been some strikes going on and salaries are increasing
– china is export country and subcontract manufacturing companies are planning to increase prices -> manufacturing elsewhere
yx-what markets are not?
Jim- thanks much: news we can use. I’ll be watching- am also interested in DGW [and other water infrastructure, as recommended] and also CHXX- China infrastructure fund.
DGW is a good play. Risk to profitability is rising commodity prices.
ABC’s IPO is clearly not going as planned at all and investors are scarce; good hunch there. Will follow how this ends eventually.
Jim – concur in your estimation and in the causal links (it’s imminently probable that declining Chinese equities are related to a need by banks to raise capital). I see opportunities already in non-financials and in non-saturated fields (DGW, a long-term water play, and GSH, a long-term railroad play; both strike me as better choices than the various solar and similar plays).
This just shows that the Chinese stock market is quite fixed.
Thanks Jim. I am looking to get back into China and Brazil. This is helpful.
Have you compared Chinese reforms to The Soviets’ under Yeltsin? I’d love to hear you compare/contrast.
Yeltsin’s walked a fine line that failed and lead to the rise of oligarchs. But China seems to understand monetary policy a little bit better. Yeltsin went all Thatcher-Reagan on interest rates and created a depression, but hyperinflation followed. The Chinese seem to be skipping the high rate step. Plus, I assume the wealthy elite are already well entrenched in China.
My only point is westernization seems very hard in the East and Africa, and tends to end badly. So yes, I just love Chinese capitalism as tongue in cheek as you seem to.