May 24, 2011
Chinese Stocks in U.S. Plunge on
Accounting
.
By Nikolaj Gammeltoft and Whitney Kisling
Hedge-fund manager Jim Chanos said in March that a property bubble in China is “as big or bigger than what we saw in the West” when compared with the size of the economy. Photographer: Nelson Ching/Bloomberg
Jim Chanos, the hedge-fund manager known for predicting Enron Corp.’s 2001 collapse, says he’d short sell Chinese companies listed in the U.S. if it were feasible to borrow shares to open the bearish positions.
The Bloomberg Chinese Reverse Mergers Index has plunged 41 percent since Nov. 8 amid speculation financial statements from companies such as China MediaExpress Holdings Inc. (CCME) can’t be trusted. The concern intensified this week after Longtop Financial Technologies Ltd. (LFT), whose initial public offering was underwritten by Goldman Sachs Group Inc. and Deutsche Bank AG, said its auditor quit because of false records.
“Almost all of them have odd looking financial statements,” Chanos, the president and founder of New York- based Kynikos Associates LP, said on Bloomberg Television yesterday. “We wish we could borrow almost all of them.”
The Securities and Exchange Commission began an investigation last year into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. The cost to bet against the stocks is keeping Chanos away.
Renren Inc., a Beijing-based social-networking company that went public in the U.S. earlier this month, is among the most expensive U.S. equities to short. The stock is difficult to borrow with 72 percent of the lendable supply out on loan, according to Data Explorers, a New York-based research firm.
Lendable Supply
Short sellers have borrowed 96 percent of Beijing-based China Shen Zhou Mining & Resources Inc. (SHZ)’s lendable supply, meaning there is almost no equity available for short sellers to bet against. Its shares are also among the most expensive for short-sellers to borrow according to Data Explorers.
China MediaExpress, which began trading in the U.S. following a 2009 reverse takeover, has sunk 92 percent since Jan. 27. It’s being delisted from the Nasdaq Stock Market after auditor Deloitte Touche Tohmatsu said that it was “no longer able to rely on the representations of management.” China Shen Zhou has declined 59 percent since its Jan. 5 high after its chief financial officer resigned.
Longtop retreated 43 percent between April 4 and May 16, the last time it changed hands before trading was halted.
During yesterday’s interview, Chanos said investors concerned that U.S. technology stocks such as LinkedIn Corp. are overvalued should turn their attention to China.
The 53-year-old investor said his “dramatic” bet against Chinese real estate may not be sufficient. While LinkedIn, the first social-media company to go public in the U.S., traded as high as 31 times sales last week, overvaluation is more widespread in China, he said.
A Bubble
“The bubble is really on the other side of the world,” he said in New York. “What my team found, they actually came back saying we’re not bearish enough,” he said. “The signs of overcapacity were even much greater than their last visit, which was late last year, and increasingly the executives that they met with were sounding a little bit more uncomfortable about the current situation.”
Chanos said Chinese developers have too much land on their balance sheets, similar to the U.S. before its housing market tumbled. He has been forecasting a Chinese housing crash since last year. China’s economy expanded 10.3 percent in 2010 and the country has been aiming to curb climbing house prices.
“If you look at the balance sheets of the developers, you’d be hard-pressed to see how healthy they are because they’re all loaded up with land just as our developers were at the top of our market,” he said. “We’ve maintained our pretty much dramatic overweight in our Chinese shorts.”
Prices Rise
China’s home prices rose in 67 of 70 cities monitored by the government last month. While housing prices slowed in major cities, they increased at a faster pace in smaller ones, according to data on the statistics bureau’s website. The Chinese government said this month it will maintain property curbs after it raised the minimum down payment for second-home purchases this year and introduced residential taxes in Shanghai and Chongqing.
China has lifted reserve-ratio requirements for major banks 11 times since January 2010 and raised interest rates four times since October to restrain increases in asset prices, including real estate.
Chanos said in March that a property bubble in China is “as big or bigger than what we saw in the West” when compared with the size of the economy.
Bloomberg
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May 24, 2011
China, where the economy has expanded 10.1pc a year on average since 1978, is reminiscent of the housing market before credit default swaps allowed hedge funds to make bets against the entire market, according to Mr Zuckerman.
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China seen as the candidate for ‘next
catastrophe’
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Beware the China bubble because until hedge funds have found a way of directly shorting the soaring economy it will remain unchecked, says Greg Zuckerman, author of The Greatest Trade Ever.
By Helia Ebrahimi, Senior City Correspondent
Mr Zuckerman’s book was one of the first to reveal the billions in profits which hedge funds and banks from taking bets against the sub-prime market just before the housing bubble burst.
China, where the economy has expanded 10.1pc a year on average since 1978, is reminiscent of the housing market before credit default swaps allowed hedge funds to make bets against the entire market, according to Mr Zuckerman.
When China’s growth will decelerate or come to an abrupt stop is probably the most critical question facing the world economy. But predictions of a hard landing on everything from bad loans to investment-led overheating or inflation has yet to derail the country’s expansion.
This is because the government-controlled economy is insulated from speculators testing the true voracity of the market, claims Mr Zuckerman. “We need short sellers,” he said.
“The problem with the housing bubble was that for a long time people couldn’t bet against it. Credit default swaps gave hedge funds specific tools to short the entire market. That pricked the housing bubble.
“It is very difficult to make a direct bet against China. You can short property companies in Hong Kong but it is not the same thing. It is a candidate for the next catastrophe.”
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May 24, 2011
.
China’s Stocks Decline for Fifth Day,
Led by Financial Shares
.
China’s stocks fell for a fifth day, driving the benchmark index to the lowest level in four months, on concerns the government will intensify curbs on the property market and tighter monetary policies may hurt bank earnings. [bn:WBTKR=601398:CH]
Industrial & Commercial Bank of China Ltd. [] and China Construction Bank Corp. led declines among lenders after Standard & Poor’s said policy tightening may spur a jump in credit losses and weaken profitability. China Vanke Co., the biggest developer, slid to the lowest in six months after Shanghai Securities News reported China will curb speculative demand for homes. China Shenhua Energy Co., the nation’s largest coal producer, gained 0.8 percent as oil prices rallied.
“Monetary policies and property tightening will be in place in the foreseeable future,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Though the external environment is improving, there’s not much room for stocks to move because of domestic tightening policies.”
The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 7.90 points, or 0.3 percent, to 2,759.16 as of 10:49 a.m. local time, the lowest since Jan. 28. It fell as much as 10 percent yesterday from this year’s high set on April 18, a sign analysts say that the market has entered a correction. The CSI 300 Index (SHSZ300) fell 0.3 percent to 3,017.79.
The Shanghai gauge erased this year’s advance of as much as 8.9 percent on May 23 after a preliminary report showed manufacturing may slow this month. The central bank has raised the reserve-requirement ratio for banks 11 times and boosted rates four times since the start of 2010 to cool inflation, which has exceeded the government target each month this year.
Banks Outlook
ICBC, the nation’s biggest listed lender, lost 0.7 percent to 4.41 yuan. Construction Bank, the second biggest, slid 0.8 percent to 4.93 yuan. Bank of China Ltd. (601988), the third largest, fell 0.3 percent to 3.30 yuan.
Non-performing loans by Chinese banks could reach 5 percent to 10 percent of total advances in three years if “lending rates rise significantly and the government support for project loans turns out to be negligible,” S&P said in a report today.
“Inflation and possible economic slowdown stemming from tightening measures could lead to a spike in credit losses over the next two to three years,” said Qiang Liao, an S&P analyst.
China will curb speculative demand for homes and maintain basically stable real estate prices to control the property market, Shanghai Securities News reported today, citing Ni Hong, director of the housing reform and development department of the Ministry of Housing and Urban-Rural Development.
Vanke slid 1.3 percent to 7.93 yuan. Gemdale Corp. lost 0.2 percent to 5.98 yuan.
China ‘Bubble’
Jim Chanos, the hedge-fund manager known for predicting Enron Corp.’s 2001 collapse, said investors concerned that U.S. technology stocks such as LinkedIn Corp. are overvalued should turn their attention to China.
The investor said his “dramatic” bet against Chinese real estate may not be sufficient. While LinkedIn, the first social- media company to go public in the U.S., traded as high as 31 times sales last week, overvaluation is more widespread in China, he said. “The bubble is really on the other side of the world,” he said in New York. “What my team found, they actually came back saying we’re not bearish enough,” he said.
The Shanghai Composite may fall a further 4 percent from yesterday’s close before finding “solid support” at the 2,655 level, according to Nomura Holdings Inc.
Support will hold at that level as it’s close to this year’s intraday low of 2,661.45 set on Jan. 25, Kenneth Chan, a quantitative analyst at Nomura, said in e-mailed comments.
The gauge may slide to 2,100 if it breaks out of the next “key” support level of 2,680, according to Chart Partners Group Ltd. “There will be bear bounces along the way but I have held a bearish short-sell view,” said Thomas Schroeder, Bangkok-based managing director at Chart Partners.
Shenhua added 0.8 percent to 27.78 yuan. Yanzhou Coal Mining Co., China’s fourth-biggest coal miner, rose 1.8 percent to 32.68 yuan. Tongling Nonferrous Metals Group Co., China’s second-biggest copper producer, gained 0.6 percent to 23.48 yuan.
Crude oil for July delivery jumped 1.9 percent to $99.59 a barrel in New York yesterday, the highest settlement since May 18. The London Metal Exchange Index of prices for six industrial metals including copper and aluminum increased 1.2 percent yesterday. Goldman Sachs Group Inc. said it’s turning “more bullish” on raw materials.
–Zhang Shidong. Editor: Allen Wan, Reinie Booysen
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May. 24, 2011
The Global Economy as Slow Motion Train Wreck
— By Kevin Drum
The Wall Street Journal reports that investors have turned distinctly bearish on the global economy:
The negative news began late Friday, after the outlook on Italy’s $1.9 trillion of government debt was lowered to negative by credit-ratings firm Standard & Poor’s, which cited weak growth prospects and a slipping economic reform agenda. Then on Sunday, Spain’s ruling party suffered a crushing defeat in weekend elections. The heavier-than-expected losses for the Socialist Party of Spanish Prime Minister José Luis Rodríguez Zapatero raise questions about his government’s ability to pursue plans to overhaul the euro zone’s fourth-largest economy and thereby ward off an international bailout.
This follows a growing political backlash elsewhere in Europe over the bailouts of Greece, Ireland and Portugal that is seen as making any additional support for those countries even harder to galvanize than in the past.
….By late Sunday in New York, the focus had shifted to the other side of the globe as fresh economic data raised concerns about the pace of economic growth in China, with whom the fortunes of other Asian economies are closely linked.
Once the housing bubble collapsed, a recession was inevitable. But the severity and length of the ensuing slump wasn’t inevitable, and a second slump certainly isn’t either. And yet, either a second recession or its near equivalent now seems more likely than not thanks to our increasingly 18th century approach to economic management over the past year. It’s as if we’ve deliberately gone back to leeches and bleeding as cures for what ails us, and now we’re surprised that the patient is getting worse instead of better.
This didn’t have to happen. It still doesn’t have to happen. It’s a manmade catastrophe born of reactionary stupidity and political cowardice. We might still get out of this with our skins barely intact, but if we do it will be thanks only to dumb luck. Buckle up.
http://motherjones.com/kevin-drum/2011/05/global-economy-slow-motion-train-wreck
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