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Tags: Market, China, Stock, Rash.

While the Chinese stock market, as measured by the China Securities Index 300, is down 18% since October 16, that follows a period of almost two years, since January 1, 2006, during which the CSI 300 soared 535%. Chinese economic growth is currently running at more than 11% and the big money is convinced that it will continue. At the same time, the country’s foreign exchange reserves have grown to US$1.4 trillion, the largest in the world.

A crash would appear to be imminent!

Bears on China have been common for the last decade, and their track record has not been good. To take just one unfair example, Henry Blodget, the former Internet genius, wrote in Slate in April 2005: "You've probably been daydreaming about the fortune to be made in Chinese stocks. Well, keep dreaming ... you'll eventually conclude that you could have done better selling insurance in Toledo." That was about six months before the Chinese market took off, and if anybody has made 500% on their investment by selling insurance in Toledo during that period, I haven't met him.

To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the US$200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today's prices, ExxonMobil, General Electric, Microsoft – there are four or five others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment's moves into the market were awaited with bated breath.

Well, so much for that. A third of China Investment's portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. About $3 billion of the fund was invested in the private equity manager Blackstone in May - that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities - which are also losing money steadily in yuan terms.

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Submitted: Dec 5, 2007    Views: 579    Comments: 0    Likes: 4   


View Article: http://atimes.com/atimes/China_Business/IL05Cb02.html


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