........especially for those putting their faith in unknown companies of unknown value and unknown management in far-off unknown lands;


Times Online . April 18, 2007

Betex shares suspended after two senior staff arrested

Chinese lottery firm suspends sales of its software nationwide following police action
Robert Lindsay

Shares in Betex, the Aim-listed Chinese lottery scratchcard and gaming software operator founded by former banker Peter Greenhill, were suspended this afternoon after two of its senior staff were arrested by Chinese police and a third appeared to be on the run.

In a statement, Mr Greenhill said the company had suspended sales of the software product across China: "The Company has received information that two of the senior staff at its Beijing operation have been detained and that a further senior staff member is being sought by the Chinese police authorities in the province of Jilin."

He said the company was working with its legal advisers to try to obtain more information and was assisting the authorities wherever possible.

Betex said it believed the alleged illegal activity "relates to conduct by these individuals and does not call into question the legality of the Company's software product, or the conduct of the Company."

It added: "Owing to the uncertainty surrounding the situation, and the significance of these operations to the financial performance of the Company, the Company has requested a temporary suspension of trading in its shares on AIM pending clarification of the situation."

Betex's business is almost entirely dependent on the Chinese market. Its shares have collapsed from a high of 80p shortly after flotation a year ago, hit by fears over a clampdown on online gambling. They were suspended at 32.5p.

At the end of last year it unveiled a plan to begin selling lottery scratchcards in partnership with lottery authorities in Hebei province.

Scratchcards in China were a huge hit before being withdrawn during the 1990s after concerns over fraud.

------------------------------------



Be warned - for this will not be the last such company to disappear down the pan with your hard-earned loot!

Telegraph - 12/05/2007 -By Mark Kleinman in Hong Kong and Richard Spencer in Beijing

Shanghai 'stir-fry' frenzy could be recipe for disaster


Buddhist monks, pensioners, and housewives are flocking to take part in China's biggest stir-fry - local slang for the new national sport of speculating in the stock market. An investment frenzy triggered by China's economic growth and eccentricities in its unique communist-capitalist financial system have led to an explosion in share prices. This week, the Shanghai stock exchange index hit the 4,000 mark - just three weeks after passing 3,000 and up more than three times from a low of 1,200 less than two years ago. Frantic government warnings that it is a bubble waiting to burst have not scared off small investors. "All the other chefs at my restaurant have put money in," said Yang Dachao, 32, a cook who has just "stir-fried" his 5,000 savings into an account at one of Beijing's high street securities shops. "I sat on the fence when the market hit 3,000. When it hit 4,000 I had to get in."

Yesterday, the shop was overflowing with scores of customers from students to pensioners. Elderly men played chess on the floor in the lobby, while a party of housewives, all from the same street, drank flasks of tea as they examined the share screen for signs of red - the colour of profit is communism's only visible relic: a share that is in the red is going up, while those going down are shown in green. Already this year, more than 10 million Chinese small investors have opened broking accounts allowing them to trade shares on the Shanghai stock exchange, compared to 3million during the whole of 2006. Many initial public offerings in Hong Kong and Shanghai, including the world's largest, Industrial & Commercial Bank of China's $21.9bn dual listing last autumn, are several times oversubscribed. Since February, when a sharp one-day correction saw the Shanghai Composite Index plunge 9pc, the march of Chinese share prices has been upwards.

The A-share index is up 50pc in the year to date, on top of a 130pc increase in 2006. The volume of shares being traded has jumped. On one day this week, $49bn of shares changed hands, a figure larger than all other Asian stock exchanges combined. "This is an incipient bubble: it is beginning to resemble something of a mania," said Jim Rogers, the investment guru. Currency controls and low interest rates, designed to keep China's currency, industry and exports competitive, mean there are few ways to invest money at a profit other than in property and the markets. Hence both are subject to regular "bubbles". Gao Xuichen, 36, an insurance broker from Shanghai, recently joined the rush to open a broking account - and promptly invested much of his savings in Chinese shares. "When interest rates on savings are so low, it is more sensible to invest like this," he said.

With demand apparently outstripping supply and Chinese corporate earnings on the rise, it is little surprise that shares prices are being forced upwards so quickly. However, because almost all the shares on the Shanghai exchange are minority holdings in state-controlled companies whose internal workings are often opaque, government intervention can hit prices. "It's actually riskier than a casino," said Zhang Zhongshu, 55, who saw his life savings from his grocery store disappear in a previous bubble. "At least on a gaming table you can take your stakes away immediately." He was overjoyed when his stake of 7,000 rose to 35,000, but he lost almost all of it when the government triggered a collapse seven years ago with tighter regulations. Chinese newspapers are full of dire tales of people who have mortgaged their properties on the markets, while Shi Changxing, 60, a Buddhist monk from Xi'an, told a local newspaper he had been investing his living allowance.

Few think the boom can last much longer, with or without government intervention to correct it. That, in the view of most economists, may pose a serious headache. Hung Liong, an economist at Goldman Sachs, said: "We believe an overly-stretched A-share valuation and its eventual correction could severely impair households' balance sheets, exacerbate income and wealth distribution, and set back years of progress made on capital market reform." Stephen Green, an economist with Standard Chartered Bank in Shanghai, said the market was clearly overvalued. "You have seen this dramatic acceleration and that's usually a sign that something's about to go wrong." His fears are echoed by Shang Hequan, a retired government official who has seen his 14,000 investment gallop to 200,000 by careful playing of the markets. "I've just taken all my money out," he said. "The market's too high - it'll crash any time." Such is the level of concern among policymakers that even the head of China's central pension "safety net", Gao Xiqing, recently admitted he was reducing the fund's exposure to mainland equities. Mr Gao followed a path now becoming well-worn by the country's central bank governor, who warned this month that the markets were "defying gravity".

The key question is what the government plans to do. Previous interest rate rises have failed to stem the flow of money and officials in Beijing are said to be reluctant to take far-reaching measures before the quinquennial Communist Party Congress - when many top government jobs will change hands - in October. "If they [the government] make the currency [the yuan] convertible, that would help to mop up some of the money sloshing around," said Mr Rogers. But there is no sign of that yet. Jerry Lou, a China specialist at Morgan Stanley, suggested other measures in a research note this month, including a capital gains tax on stock investment, a move by market regulators to allow stock shorting, or the accelerated disposal of part of the government's estimated 50pc stake in the Chinese stock markets. Most agree that Beijing must act quickly. In his note to clients, Mr Lou said his mother's neighbours were no longer talking to him after he advised them in January to steer clear of shares.

To many other ordinary Chinese, making money has never been simpler.

Independent - By Danny Fortson - 13 May 2007

Takeovers: Is it the late 90s all over again?


Fuelled by cheap credit, money is pouring into takeover deals. The question now is whether 'we are at the top of a hill' or 'looking over the edge of a cliff' The signs are getting difficult to ignore. Nearly every day, it seems, news breaks of another mega-takeover that will in a stroke change the face of an industry. Bankers talk of a "new paradigm" to explain company valuations out of line with any historical point of reference. Stock markets are rapidly approaching all-time highs and in some places, such as America, surpassing them.
Insider trading is rampant, with one in four deals in the UK preceded by suspicious activity. Remuneration for executives and hotshot investors has reached ludicrous proportions, leading to increasingly loud questions about just how much longer this can go on.

Sound familiar? "There was a real feeding frenzy in the late Nineties," says Piers de Montfort, head of UK investment banking at Credit Suisse. "If you weren't growing, buying, consolidating, you were vulnerable. That market was as close to out of control as I have ever seen. I don't see that this time. It's more controlled now, and the markets continue to reward sensible, strategic transactions." Last month was the busiest ever for mergers and acquisitions, with nearly $650bn (330bn) in deals announced. That pushed the total value to $1.9 trillion so far this year. "M&A is dominating my life," says one exasperated banker. The 71bn (48bn) takeover battle between Barclays and a group led by Royal Bank of Scotland for ABN Amro, the Dutch bank, is the largest ever in the global sector. Alliance Boots, which agreed to be purchased for 11.1bn by private equity giant Kohlberg Kravis Roberts (KKR) last month, is Europe's largest leveraged buyout. Other big deals include the 12.1bn proposal for tobacco group Altadis by buyout groups CVC and PAI, Thomson's 8.7bn media deal for Reuters, and AstraZeneca's recent $15.2bn pharmaceuticals purchase of MedImmune in America. Takeovers this year amount to more than half of all of those announced in the record year of 2000, when $3.3 trillion worth of acquisitions took place. It's an unsettling comparison. To be fair, there were different factors at work then. The frenzy of the late 1990s and 2000 was fed by the overwhelming urge felt by companies to get in on the new internet economy. Establishing a beachhead on the web and securing "traffic" took precedence over stodgy old concerns like turnover and profits. The result was a wave of logic-defying deals on a scale not seen before or since.

When investors finally stopped to consider what Alan Greenspan, the former head of the US Federal Reserve, described as the "irrational exuberance" of the time, the fallout was horrendous. A rash of bankruptcies followed. Companies spent the next several years unwinding the deals they had done and paying back billions. Jobs were lost. In the US, the centre of the action, a mild recession ensued. But fear not: this time, we are told, it is different. "We are at the top of the hill rather than a mountain, and the hill isn't particularly steep or strenuous," says one banker. "In the late 90s, when it got near the end, we knew we were looking over the edge of a cliff." Such statements are made, of course, with the benefit of hindsight. But most observers agree that the majority of the deals being struck today make much more sense strategically, even if the final price paid is questionable. After all, if Warren Buffett, the world's second-richest man, is ready to get it on the act, it can't be all bad. At his annual shareholder meeting earlier this month, the ukelele-playing Oracle of Omaha said he would "love" to splash out $40bn to $60bn on a company. He explained: "The entire world is definitely on our radar screen and we hope to be on its... The cash is coming in faster than the ideas."

So why the rash of deals now? Perhaps more important than any other factor is the benign credit environment. Despite four hikes in less than a year, UK interest rates remain near historic lows and the chance of a return to the double-digit levels of the early 1990s is virtually nil. That has fomented nearly a decade of strong economic growth. It also means that debt used to fund takeovers is cheap and plentiful. "Interest rates now vary within a very small band. Fifteen years ago, everybody - the UK, the US, Europe - had their own monetary policy. The market had not yet come to terms with global monetary policy," says Mr Montfort. "The environment today is much more stable and we are not seeing anything that is likely to change that. With greater predictability, buyers are getting more comfortable with medium-term trends, and are doing deals that are braver." In other words, when corporate chieftains look out to the horizon, they see smooth seas. Globalisation is credited with increasing the predictability and growth of industries, such as mining, that in the past were subject to the cyclical nature of more limited markets. That sense of security, combined with balance sheets brimming with cash and the willingness of lenders to grant unheard- of amounts of debt, has given executives the confidence to make bold moves. So deals that have been simmering for years - Rupert Murdoch's $5bn pass at Dow Jones in America, and Thomson's bid for Reuters -- are finally coming to fruition. "There's a bit of uncertainty about how long this will last, so a lot of things that were meant to happen in the autumn, people have put forward. It's bird-in-the-hand type stuff," explains another banker. There are also more buyers. Private equity firms - investment groups that raise pools of money to buy companies, restructure them and then sell on - raised a record $210bn last year and are slated to capture another $250bn this year, according to research firm Private Equity Intelligence. That's nearly four times the amount they had at their disposal just five years ago. These groups accounted for one-fifth of all the deals done in 2006.

Yet worrying signs are cropping up, especially the debt packages used by private equity to buy companies. Traditionally, loans were studded with conditions that acted as an early-warning system. This would be triggered when a business tripped up. In the worst case, banks could take control of a business that fell foul of its covenants. Fierce competition among banks for these deals, however, has made them increasingly supine. So-called "covenant-lite" agreements that do away with many of the old conditions are now common. Such is the level of demand that some buyout firms have begun to demand big interest rate reductions even after the financing terms have been signed off. KKR and Goldman Sachs did this recently in a $3bn refinancing of Kion, a forklift company they had purchased. The reduction on one loan of 50 basis points and of 75 basis points on another meant tens of millions less in annual payments. The firms won the decreases even though they had already agreed to higher rates. Despite the much harsher terms for the banks, both loans were vastly oversubscribed. "Private equity firms are taking advantage of ferocious demand to push through pricing reductions and structural changes unimaginable 12 months ago," explains Fenton Burgin, head of the debt advisory group at Close Brothers. "Conventional principles of credit analysis appear to have been suspended in some instances."

Consider the purchase of Alliance Boots. If KKR and Stefano Pessina, deputy chairman of the chemist, pull it off, the 11.1bn takeover will be the largest yet by private equity in Europe. KKR and Mr Pessina have said they will pay 2.6bn between them out of the total 12bn they need to finance the deal and leave some money left over for investment. The remaining 9.4bn will be sold to institutional investors, which will be offered no voting rights for taking on more than 80 per cent of the risk. Few foresee any problems in attracting enough investors. There's also the case of Gartmore. Hellman & Friedman, the US buyout firm, acquired the fund manager for 522m - 180m of its own cash, plus 342m of debt - last year. That deal closed in September, and now, just eight months later, it has put the finishing touches on a refinancing of the entire 522m price tag. This has allowed Hellman & Friedman to recoup all of the 180m it paid to take over the business, in effect reducing its risk to zero while maintaining its ownership. Such large debt loads leave little room for manoeuvre if a company runs into trouble, raising fears that some acquired firms are being set up for failure. "We'll see a lot of these deals go south if the markets slip away and a recession bites. All that debt around [companies'] necks will become a noose," warns one banker.

However, the pervading sense in the market is that Rumsfeldian "known unknowns" which could throw the current run off course, such as global interest rate changes and hiccups in economic growth, have been minimised. Investors are more worried about "unknown unknowns" - macro-economic shocks, a war or natural disasters. This was the concern that came up repeatedly over cocktails at a gathering last week of London hedge fund managers at Claridge's Hotel in Mayfair. Perhaps no other sector has benefited more from the market's performance, or would be better placed to opine about its future. The world's top 25 managers, for example, made an average of $570m each last year - more than double the figure for the year before. As an industry, they now control more than $1.5 trillion around the world. Increasingly, they are also jumping on the M&A bandwagon by taking much larger stakes in companies or buying them outright. Last month Dresdner Kleinwort formed a new group to begin selling M&A ideas direct to hedge funds. Six months ago, such deals would only have been brought to private equity firms or corporate clients.

Yet at the reception last week, there seemed an implicit acknowledgement in the money men's conversation that these indeed are the good times, and the days are numbered. "This can't go on for ever. It's got crazy," said one. "The prices people are paying now will mean a lot of pain later. That's just the cyclicality of business. I would be surprised if it didn't end up that way."

China's April Inflation Adds Fuel to Stock Bubble - By Nipa Piboontanasawat

May 14 (Bloomberg) -- Inflation in China, the world's fastest-growing major economy, held above the benchmark deposit rate for a third month, adding fuel to a growing stock market bubble as households hunt for higher returns. Consumer prices gained 3 percent in April from a year earlier after rising 3.3 percent in March, the National Bureau of Statistics said today. The central bank's target ceiling for inflation in 2007 is 3 percent. Central bank Governor Zhou Xiaochuan is concerned about a stock market bust, after the benchmark CSI 300 Index rose more than 80 percent this year. Chinese households have flooded to the share market, partly because inflation outpaces the returns on bank deposits. The one-year benchmark rate is 2.79 percent.

``The central bank is increasingly concerned about asset bubbles,'' said Ma Jun, an economist at Deutsche Bank AG in Hong Kong. ``The social implications could be huge if there is a major correction -- most of the new investors in China are poor, low-income people and they will be hit the most.''

The yuan held near its highest close since the end of a fixed-exchange rate in July 2005, trading at 7.6785 against the dollar.

China should raise interest rates further to soak up excess cash and prevent the economy from overheating, the official China Securities Journal said today, citing research by the National Development and Reform Commission.


Switching to Stocks

Investors in China opened 8.58 million new accounts at brokerages in the first quarter, up from 5.38 million for the whole of 2006, according to the China Securities Depository and Clearing Corp. China's banking regulator last week announced lenders will be able to buy stocks abroad, a measure that may help to cool the local share market. ``The central bank is concerned about negative interest rates boosting the flow of funds to the stock market,'' said Michael Dai, an economist at Bank of China (Hong Kong) Ltd. ``Money supply and lending are still strong.''


Food Prices

Food prices climbed 7.1 percent in April from a year earlier after jumping 7.7 percent in March, the statistics bureau said. Prices of consumer goods increased 3.4 percent after gaining 3.7 percent. Food costs, which account for a third of the consumer price index, are rising as farmland shrinks and a growing and richer population pushes demand higher. The government has sold grains in auctions and subsidized farmers to boost the supply of food for 1.3 billion people. For the first four months, consumer prices rose 2.8 percent on the same period last year. April's inflation rate was the second-highest of the past two years. March had the highest rate.


Excessive Manufacturing

In India, the world's second-fastest growing major economy, inflation was 5.7 percent last month, nearly double China's rate. In China, overcapacity of manufactured goods is helping to hold down prices, along with government controls on electricity and fuel. About 70 percent of 600 consumer goods were in oversupply, the Ministry of Commerce said last year. China's economy, the world's fourth largest, grew 11.1 percent in the first quarter from a year earlier. The People's Bank of China on April 29 ordered lenders to set aside more money as reserves for the seventh time in 11 months to freeze money pumped into the economy by the export boom. It has raised interest rates three times since April last year and sold bills to drain cash from the financial system. Economists surveyed by Bloomberg News last month expect the central bank to raise the lending and deposit two more times this year. The one-year benchmark lending rate is at 6.39 percent.

FT (letters)- May 15 2007

The coming crash in Chinese stocks - By William Gamble


Sir, Six years ago, according to an article in the FT, Wu Jinlian, an economist with the State Council Development and Research Centre, described the Chinese market as worse than a casino. Not much has changed. The lack of transparency, corporate governance, free press and property rights has divorced the Chinese market from any economic reality. As Cheng Siwei, a senior member of the National People's Congress, pointed out, only 30 per cent of the more than 1,300 listed companies had investment value. In relationship-based systems such as China's, "truthiness" has been mistaken for the truth of a rule-based market.

What has changed are the effects. In the past six years the Chinese economy has become a major factor in the world economy. When a bubble bursts in China, it will not stay in China. If the government decides to support the market, it fortunately has the cash. Unfortunately, it is in US Treasury bills. If there is no intervention, the debris from a crash will unsettle a rising Chinese middle class and their political apathy.

Where Shanghai goes, Hong Kong is sure to follow. It is doubtful that investors will make a distinction between China and the rest of the emerging markets, so undoubtedly several more will fall. The problem in China is that the stock market is not the only bubble. Speculative bubbles also exist in property markets upon which much of Shanghai's economy depends. China's irrational exuberance has also been driving commodity prices around the world. These markets will be tested along with much of the financial engineering involved in private equity, hedge funds and credit derivatives. And pensioners in the US may wake up to discover that their interests are being determined in a Beijing court presided over by a retired Peoples Liberation Army major.

The collapse of the Chinese stock market is not a question of if, only when. The real question will be how many dominoes it will take with it.

William Gamble
Emerging Market Strategies
East Providence, RI 02914, US

Yahoo - Comment & Analysis - Friday May 18

Can China Defuse Its Stock Market? - By Frederik Balfour


Here's a surefire recipe for a stock bubble: Take blistering economic growth, throw in strong corporate earnings, add artificially low interest rates, and stir in a dash of inflation. Then rule out any viable investment opportunities besides equities, and you'll quickly find yourself moving past "pop" and into "kaboom" territory. That pretty much sums up the situation in China, where 250,000 new retail investors are crowding into the market every day. Together, the mainland's 70 million traders have pushed Shanghai's benchmark index up nearly 50% since the beginning of the year, following a 130% gain in 2006.

Beijing is terrified of what might happen when that bubble bursts. Many investors are pensioners and other jobless people who have plowed their savings--and sometimes even funds raised by mortgaging their homes--into stocks. If the market tanks, Beijing fears, it could dent consumer confidence and send disgruntled investors out into the streets. The rest of the world, meanwhile, is worried that any collapse would quickly spread to exchanges across the globe.

Financial experts say there's a way China could create greater stability: stock index futures. Sophisticated traders in developed markets use these wagers on the direction of shares to cushion themselves against massive losses if the market falls. Futures also theoretically dampen volatility as more pricing information is factored into investment decisions. China currently has no equity derivatives such as stock options and futures, and short-selling stocks--betting that the price will go down--is banned. That means people can make money only in a bull market, and have no choice but to cut their losses when prices tumble. And if everyone rushes for the exits, shares go into a tailspin.


DELAYS AND DOUBTS

Beijing understands this and had originally hoped to introduce index futures this spring. Now the launch has been delayed until at least September. The reason: While futures might eventually create more stability, in the short term investors who don't fully understand the concept might get spooked and start selling their shares. "There is a commonly held belief, which is wrong, that the introduction of futures causes underlying stocks to fall," says Fraser Howie, who manages the China portfolio for CLSA Asia-Pacific Markets. "The authorities are concerned about anything that could pop the bubble."

There's a second fear. To work well, futures markets require transparency, ample safeguards against insider trading, and a sophisticated investor base, all of which are glaringly absent in China. While futures can smooth out the bumps in the market, they also let traders leverage their bets, increasing their potential profits--but also the risk of bigger losses if they get it wrong. "Futures won't achieve what the government is trying to do," says Carl Walter, managing director at JPMorgan in Beijing. "They may even cause more volatility."

Previous Chinese experiments with financial futures haven't been particularly auspicious. In the early 1990s, China introduced bond futures but abruptly halted trading in 1995 after a securities company, acting on bogus insider information, lost billions of dollars on futures, driving itself into bankruptcy and landing its CEO in jail. Since then, trading in most derivatives has been banned, though futures contracts for commodities such as copper, soybeans, and corn are traded on three exchanges.

Daily Mail - 18 May 2007 - Sam Fleming

China could be heading for a crash


Asia's richest man warned China's stock market has turned into a 'bubble' that may be on the brink of collapse. Li Ka- shing, whose empire stretches from ports and bridges to mobile phone firm 3, said he was increasingly worried about dazzling valuations on the Shanghai exchange. 'There is a bubble in the China stock market,' he said. 'I don't want to see the bubble bursting, but investors should be careful about that.'

The warning came as US Federal Reserve chairman Ben Bernanke added his voice to fears about the debt-fuelled private equity takeover boom. He said the Fed is looking into 'significant risks' associated with takeover financing. Li's words will cast a shadow over world markets, as equities set new records every day. A brief setback in Shanghai in February prompted declines across the globe. Many analysts fear that was just a dress rehearsal for the real thing. China's main index is up 86% this year alone. Analysts have calculated the main Shanghai market trades at around 50 times earnings, compared with only 13 in London. The boom has come as Chinese citizens open hundreds of thousands of share accounts every day, yanking their cash out of banks and plunging it into equities. While the Chinese government has pledged to slow the pace of growth and damp down asset prices, its efforts have done little to dent savers' 'irrational exuberance', said Gerard Lyons, of Standard Chartered.

'There's no doubt that it's overheating. I would-n't be surprised if there is a near-term setback,' he said. 'What we are seeing is a reflection of a booming economy. People are looking for an avenue for their savings. Recently it was in housing, now it's in the stock markets.'

Last week the Chinese government eased its restrictions on overseas investments to divert savings from domestic equities, but Li said the amounts involved were too small.

So there seems to be a lot of negative sentiment on Cina, how best to play it? Put option on the Hang Seng? Set up a CFD account with a finger on the button to short ? Can you short the Chinese index?

IG do a Chinese 25 Tracker CFD which you could short quite happily; the danger being of course that everyone says the bubble will burst and it probably will, but when? In the mean time the a shorter could lose an awful lot of money.

The Observer - Sunday May 20, 2007 - Ruth Sunderland

Slump? Don't say they didn't warn you


It has been the Week of the Warning. The alarm bells are not being rung by the usual gloomy suspects, but by figures whose views command worldwide respect because they have generally read the runes right. First, Anthony Bolton, arguably Britain's most respected fund manager, stepped down from his throne at Fidelity saying he fears a stock market slump and worries about the banks' eagerness to finance private equity deals with risky 'covenant-lite' loans. The banks have embraced cov-lites, a US import, in their sheer desperation to mop up a slice of the private equity business, even though these relaxed contracts reduce their ability to intervene if a borrower shows signs of distress. The Bank of England shares Bolton's concern, as does Ben Bernanke, the chairman of the US Federal Reserve, who issued a warning of his own. Then yesterday G7's financial stability forum issued a report calling for greater protection against possible risks to the financial system from hedge funds.

Tycoon Li Ka-shing, Asia's richest man, voiced his belief that China's stock market is now a bubble that could burst painfully.

Even top-end art dealers are bemused by the exuberance in the markets. Prices for post-war works, fuelled by demand from Russian and Chinese buyers, hit a record this week when a 1950 Rothko sold in New York for $73m. That prompted seasoned Manhattan dealer Richard Feigen to liken the modern art frenzy to tulip mania. There are concerns over the mergers and acquisitions boom, not least the eyewatering 85 per cent premium Microsoft is paying to take over online advertising business aQuantive. Closer to home, the chief executive of Land Securities said the 710bn commercial property market had peaked and was already showing signs of a slowdown. Plenty of City folk have been bearish for some time about the domestic housing market, though they dare not say so publicly as prices continue to defy gravity, despite clear hints in the Bank of England's inflation report that interest rates will have to rise again. Whether a further increase will be enough to dampen the appetite for debt remains to be seen. Debt is no longer seen as a financial tool to be treated with caution, but as the magic lever that will unlock huge gains, whether in housing or in private equity deals.

Amnesia is part of the problem. Negative equity is about as real a concept to today's housebuyers as ration books. People have also forgotten that 1980s conglomerates like Hanson were the forerunners of the private equity players. They fell apart because they had to chase bigger and bigger deals to maintain momentum. The remnant of the group that still bears the Hanson name last week fell to a German predator. The mood in corporate Britain is uncertain. Profit warnings among quoted companies in the first quarter of this year leapt 17 per cent, according to accountant Ernst and Young, taking the number above 100. Companies are worried about interest rates and the strong pound, but another cause for concern is the cutback in public spending that will happen early in Brown's premiership. Bank of England governor Mervyn King said last week that women were already dropping out of the workforce because of a falling-off in public sector employment growth. With about 30 per cent of the working population employed either by the government directly or by firms heavily dependent on government contracts, firms are right to be jittery.

The Observer - Sunday May 20, 2007 - Heather Stewart

Is China's trick cycle on the turn?


China's stock market boom has all the classic signs of a bubble: taxi drivers poring over the markets pages, homeowners remortgaging to pile into equities, 30 million share-trading accounts opened in the last 12 months. The burgeoning middle classes have caught the trading bug, and their enthusiastic buying spree has sent prices rocketing. China-watchers are already asking how soon the boom will turn to bust; and how damaging the fallout could be for the rest of the world. 'The Chinese stock market is just a gambling pit,' says John Calverley of American Express, author of Bubbles and How to Survive Them. He says the anecdotal tales of ordinary investors rushing to stake their savings on shares are clear evidence of 'irrational exuberance', as former Federal Reserve chairman Alan Greenspan once called it. The authorities in Beijing are keen to bring share prices under control, and have already raised interest rates and bank reserve requirements several times, most recently last Friday; but as Greenspan himself discovered, bringing about a soft landing in these circumstances is never an exact science. 'The challenge confronting the Beijing authorities is to find the happy medium between doing too much and too little,' explains Stephen Lewis of Insinger de Beaufort. 'If they are heavy-handed, the danger is they will precipitate a financial crisis as the bubble bursts. If, however, their response is too gentle, the bubble could well go on inflating. This would reduce the chances of a soft landing for China's asset markets.'

When prices dropped 9 per cent in February it triggered sell-offs from Tokyo to New York, as anxious investors fretted that China could be the first domino to fall in an emerging-markets shake-out. Since then, Shanghai has bounced back - prices are now 45 per cent higher than they were in February - but another wobble could shake global confidence. 'It's just the perception that it's the first bubble to burst,' says Julian Jessop of Capital Economics. 'The next correction, when it happens, will probably be a bit bigger than the last, so I think it will be a shock.'

A frothy stock market is not China's only problem. In fact, some economists believe it is just one symptom of a much broader issue: with a cheap currency, a vast trade surplus and low interest rates, they argue that China's long-running growth spurt is unsustainable. 'It's clearly the case that the Chinese economy is overheating at the moment, and this is resulting not only in accelerating wage inflation, and China exporting inflation, but also in these bubbles; you have ample liquidity sloshing around,' says Diana Choyleva, a director at Lombard Street Research. She fears that the government has waited too long to act, and will have to clamp down hard to bring the stock market, and wider inflation, under control.

I heard (or possibly read) last week that we aren't at a market top yet, because that normally happens when all the retail investors pile in. Ironic given the activity in China at present. The statement rather made me wonder if the institutions are actually hoping the retail investor will pile in, to carry the can when it all goes pear shaped. I remember an article in January 06 though saying the retail investor was leaving the markets enmass, presumably learning the lessons of the tech market bubble.

Interesting times ahead I feel, and it could make for a good show if the doom sayers are correct.

Personally I've never been happier to have my cash in the bank.

Strawbs.

Chinese people are putting all their savings and worldly possessions into a very quickly overheating stock market. This, coupled with the inability of the Chinese (communist) government to adequately organise its financial structure, is going to lead to a massive economic crash which, in turn, could lead to nationwide rioting. This could quite easily overturn the present communist regime and bring about the installation of a new capitalist regime. For sure, the market is a bubble which just surely has to burst and the longer it balloons the greater the crash.

Markets will never spot the black swan

Interesting article (and book to which it refers).

I wonder what the global markets black swan will turn out to be......and the wonders of hindsight that'll explain how we should've seen it coming.

Strawbs.

It can only be a matter of time before the bubble bursts.

Very good thread. People will do well to take note.

Sunday Telegraph - 21/05/2007 - By Liam Halligan, Economics Editor

When China falls ill, it's acupuncture all round


For much of the past decade, fast-growing China has been the world's economic juggernaut. More recently, the People's Republic has accelerated anew and is now a run-away train. Is China's boom becoming dangerous? Figures released last week show the economy grew by an astonishing 11.1 per cent during the first quarter of this year. Consumption was up 13 per cent, investment 25 per cent. China's breakneck development - the biggest and most rapid industrial revolution the world has ever seen - is ringing alarm bells in the West. For instance, the country's rampant expansion has generated a near-insatiable demand for commodities. The resulting price rises, particularly for oil and gas, have changed the world economy for ever. The West has benefited from imports of cheap Chinese goods - yes. But is the emergence of this new economic superpower really good news for the rest of us? The answer - in the short-term at least - depends largely on what happens to China's stock market bubble. If shares fall sharply, there could be shock waves across the globe.

Earlier this month, the Shanghai Composite Index roared through the 4,000-mark, having passed 3,000 less than two months before. China's combined markets have just posted daily trading volumes greater than the rest of Asia combined - including Japan - and exceeding London too. The Shanghai and smaller Shenzhen exchange recorded trades of 24.6bn in a single day. And on Wednesday, the closely aligned Hong Kong market generated record volumes too. Having climbed more than 300 per cent in less than two years, there are now fears Chinese shares could crash. Given the widening inequalities in the People's Republic, and lack of political representation, tumbling shares could cause genuine social unrest. This is an issue of global significance too. Western investors - and pension funds - have gorged themselves on Chinese stocks. And, only a couple of months ago, we saw how a wobble in Shanghai could cause angst on markets elsewhere.

So, what can be done to bring the market back under control? Well, the main reason for the recent surge has been the flood of retail money now entering the market. Incredibly, small investors are opening more than 300,000 share dealing accounts every day. This share-buying frenzy is being driven by the restrictions imposed on Chinese savers. Having built up billions of dollars worth of savings, they earn very low interest rates from state-controlled banks, and are unable to invest abroad due to capital controls. With the average Chinese bank deposit yielding less than 3 per cent, and inflation now at 3.4 per cent, savers are struggling to maintain the real value of their money. That's why, when shares in Shanghai are buoyant, the money piles in. The authorities have reacted not so much by trying to talk the market down, as to shout it down. State-controlled newspapers and television channels regularly warn investors that "many of you will lose your money". And last week, Beijing raised interest rates and bank's reserve requirements in its latest bid to reduce liquidity and curb asset price growth.

All this is being watched with pursed lips in Western capitals. There is a common view that the Chinese have no hope of taming their stock market - and reducing the risks it poses to share prices elsewhere - unless they rein in their trade surplus first. Data published last week beggars belief. China's overall trade surplus reached $250bn on an annualised basis during the first three months of this year - more than double last year's total. This aggressive export performance, bolstered by an undervalued currency, contributes mightily to what Lombard Street Research has dubbed China's "savings glut". All that liquidity has to go somewhere. And one of the places it is showing up in spades is China's dangerously overheated stock market.

When Chinese vice premier Wu Yi meets Hank Paulson in Washington later this week, the US Treasury Secretary will no doubt enquire when China will let the yuan appreciate, so making its exports less competitive. That would take some pressure off US manufacturers, saving American jobs, and helping to stem the slide in President Bush's popularity. Beijing has just widened the band in which its currency is allowed to trade. But no one really believes China will abandon its mercantilist stance. Until quite recently, it has been easy to dismiss US demands for a higher yuan as nothing more than parochial, American carping. But given the role of China's over-inflated trade surplus in pushing up its over-inflated stock market, maybe the US has a point. Economists used to say that when the US sneezes, the rest of the world catches a cold. China, too, is now so important to the global economy, perhaps it needs an aphorism all of its own.

In 20 years or so, or even less, China will usurp the States and become the world's biggest economy. But even now, if China's stock market comes off the rails, the rest of the world will get caught in the wreckage.

China currently has no equity derivatives such as stock options and futures.
Short-selling stocks - betting that the price will go down - is also banned.

This means people can only make money in a bull market - by buying shares which they hope will keep on rising.
They will have no choice but to sell off and try to cut their losses when prices tumble.

When everyone rushes for the exits, shares will go into a frenzied tailspin.

e t

Why do you keep cutting, pasting and highlighting the downside? You shorting the whole Chinese stock market?