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Scratchcards in China were a huge hit before being withdrawn during the 1990s after concerns over fraud.

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

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?

pt, ah - you haven't read the last post which tells you it isn't possible to short stocks in China.    Indeed, that's one of the problems, for if you could do so it would introduce balance into the scheme of things. Just watch what the consequence of that will be once the market starts to fall.
Good luck if you're holding.

Mon May 21, 2007 - By Herbert Lash

China's stock market becomes a proxy for risk


NEW YORK (Reuters) - Investors hunting for a bellwether for risk appetites are increasingly looking to China, whose frothy stock market has become a canary in a coal mine of sorts.

Investors fear a blow-up in Chinese stocks could again roil world markets and cause a global pullback like the one sparked by a plunge on the Shanghai stock market on February 27.

China is "both a proxy for risk appetites, which are relatively robust ..., and as a proxy for global economic growth," said strategist David Joy of RiverSource Investments, a unit of Ameriprise Financial Inc. "And maybe that equity market movement straight upward is a little bit of concern that bares watching."


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That last line just has to be number one contender for the understatement of the year !!!!

My local stockbroker, who is a wily old boy who has seen many boom & bust eras, has recently been to China to see what the fuss is all about.
To summarise, the "Shanghai Shuffle" (the feb '07 9% fall) was bound to happen & will happen again, but the demand for raw matierials, in particular minerals, is continuing & it is nonsense to speak about the end of the chinese boom at present. Their demand for minerals is ongoing & is expected to continue, particularly with the building boom taking place ready for the 2008 olympic games.
He does point out that the communist government (members of which appear regularly in the press concerning fraud & corruption charges) retains large stakes in all quoted companies & that only chinese nationals can deal in domestic stocks, which means that when the crunch comes the chinese themselves are going to take a big hit.
Don't forget the feb drop was exacerbated by the march 9th drop due to the trouble in the sub-prime lending market in the U.S. which made that period look worse due to the double whammy effect.
It is notable though, that there is not one chinese company in his list of stock recommendations, so he obviously considers them too risky for his clients.

Introducing the China IPO indicator

Heres a sober chart tracking the boom in Chinese new issues quite frightening, isnt it?

Tracking mainland Chinese companies that go public on the Shanghai, Shenzhen and Hong Kong stock exchanges, this newly launched China IPO indicator advanced 6.6 points, or 2.7 per cent, in April. Fourteen equities were added to the indicator during the month, including CITIC Bank, which raised $5.4bn. Of 93 stocks included in the March and April indicators, 21 fell during the period, while 72 rose.

Year-on-year, the indicator is up 36.3 per cent.

And the Renminbi Pressure indicator

Another timely chart from Xinhua Finance and The Milken Institute - an indicator showing the upward pressure on Chinas currency.



The Renminbi Pressure Indicator is compiled using the monthly percentage change in Chinas spot exchange rates, the percentage change in foreign exchange reserves and the change in domestic interest rates. A base of 100 was set for January 1, 2000, since when upward pressure has doubled.

In February 2007 (the most recent data), the RPI jumped 1.75 per cent - from 196.6 to 200.1 - the largest month-to-month rise since the renminbi was revalued in July 2005. That mainly reflected a $52.7bn rise in foreign exchange reserves to $1,160bn during the month and also a 0.47 per cent appreciation of the yuan against the dollar.

OSLO (Reuters) - European stocks are overvalued and could fall by at least 10 percent within three to six months, a Morgan Stanley equity strategist said on Thursday. "Tactically, we are neutral equities and overweight cash, seeing a correction of at least 10 percent," Vice President for European Equity Strategy Ronan Carr told an investor conference in Oslo. "We are not calling for the end of the bull market, which typically runs from one recession to the next," Carr said. "We are cautious short term."

Morgan Stanley have preferred cash over equities and have been underweight in bonds since January 22 this year, he added. "Our biggest concern is valuation," Carr said, adding that the investment bank preferred stocks with large capitalisations because of their relatively cheaper valuation and stronger balance sheets compared with small-caps. Morgan Stanley was overweight in banks, pharmaceuticals, oil, materials and technology sectors, and underweight in autos, investment banks, real estate and consumer staples, he said.

Market timing models were also giving Morgan Stanley short-term "sell" signals. "It's a bit mixed at the moment, but the sentiment is increasingly too bullish," Carr said. "The most worrying is the ratio between 'put' and 'call' options. People have given up buying protection on their portfolios." Carr also pointed to an element of froth in credit markets, as shown by the emergence of "covenant light" bonds with less investor protection. A market pullback could be triggered by wobbles in the credit markets or an inflation scare, Carr said. "Bond yields have risen in the U.S. up to a level where you often see market pullbacks. You could also have an inflation scare, although were not worried on a structural basis."

A spill-over from troubled parts of the U.S. housing market and an overheating Chinese economy, were other possible triggers, he said. "The property markets are looking stretched globally. Nobody talks about the U.S. subprimes anymore, but the full repercussions have not played out yet," Carr said. "If the U.S. has a hard landing, the rest of the world is unlikely to survive unscathed."

"heads"   and   "sand"   come all too easily to mind !

FT (Capital markets) - Helen Thomas - May 30th

What are the real risks of a China stock market bust?


There were 385,000 new share trading accounts opened in china on Monday alone, taking the total past the 100m mark. The previous week the number of new accounts was about 1.5m. On Wednesday, Chinas benchmark index took another nosedive, closing down 6.5 per cent, after Beijing took its most decisive step yet to slow its runaway train of a stock market, tripling the stamp duty tax on share transactions. Even after the fall, that still leaves the index up around 50 per cent this year. But after the 9 per cent fall in the Shanghai Composite triggered falls in stock markets around the globe back in late February and early March, received wisdom is now that investor sentiment globally should be more resilient to the machinations of the notoriously volatile, and still relatively undeveloped, Chinese market.

What about the real economy? Would a serious plunge for Chinas toppy stock market have knock-on effects in its economy, with broader global repercussions? Presciently, Qing Wang and Denise Yam on Tuesday considered just that question at the Morgan Stanley Global Economic Forum. On examination of household and corporate exposure to the stock market, we conclude that the negative wealth effect on consumption would be moderate and financing conditions for corporate investments would be unlikely to deteriorate significantly should the A-share market plunge by 30% from current levels, they argue. We believe that the direct economic impact would be manageable in the event of such a burst. Hence, the fear of a complete economic meltdown in China as a result of a potential burst of the stock market bubble is unwarranted at the current juncture, in our view. Nevertheless, a major correction of the A-share market could well result in significant contagion to global markets, as seen during Februarys short-lived correction. However, to the extent that any such global sell-off were driven by concerns about a stock-market-correction-triggered-recession in Chinas real economy, it would likely prove overdone, in our view.

But theres a warning. They think that should the current trends continue the potential severity of the fallout from a stock market bust increases significantly. Should the value of households stock holdings double from current levels to 40-50% of GDP, the potential negative wealth effect on consumption would increase and the negative impact of a major stock market correction on consumption and overall growth would become more significant. More importantly, with potential returns from investing in the stock market substantially and persistently higher than those from traditional investment activity, not only households but also the corporate sector could be tempted to leverage up with money borrowed from the banks to invest in the stock market. That would leave the banks more exposed to the stock market, and the impact of a major correction magnified through the credit channels of the banking system.