TRANSCRIPT: Shanghai back to pre
boom levels, Beijing's big new push for alternative
energy, news of Kellogg, Caterpillar, Condoleezza
Rice, Jim Rogers, more...
Sinomania! Volume II Webisode 59, June 30, 2008
The Shanghai Composite Index
slipped below 3,000 on June 12 and there it remains
closing today at 2,736. The last time the index
was this low was around the very first Sinomania!
Show in January 2007. The CSI 300 index, Shanghai
and ShenZhen B shares, all major Chinese indices
are down dramatically. Some analysts now believe
the Shanghai Composite won’t hit bottom until
it falls to between 1,000 to 2,000 and might not
recover for decades. After all, both NASDAQ and
Nikkei are still below their peaks and it took
a quarter century for the Dow Jones Industrial
Average to build back from the crash of 1929.
Last May, in episode 15, I pondered
if the Shanghai Composite would end up like the
NASDAQ or Nikkei bubbles. I argued then that Shanghai
was less meteoric and unlike the dot.com and Tokyo
property bubbles Chinese companies had real earnings
and long prospects. My prediction was a top at
4,700 at the start of this year. I was surprised
as many others to see Shanghai go up all the way
past 6,000 late last year.
Values are down around 50% for the
major indexes. But I think comparison to the far
more mature American and Japanese stock markets
is simplistic. There are too many variables with
Shanghai and this latest incarnation goes back
only to 1990 the year Tokyo crashed. Will foreign
buyers be allowed into the A market? Will A and
B shares finally merge? Will outflows by Chinese
retail investors be extended to all investors?
I think it is entirely too premature to dismiss
Chinese stocks as important and long position
investments, particularly in cleantech and green
One investor who agrees with me
is Jim Rogers most famous as co-founder
with George Soros of the Quantum Fund. At investment
forums in Nanjing and Shanghai this past week
Singapore resident Rogers said he’s not sold any
shares in Chinese companies. “I’m starting to
think about buying again,” he said adding “there
is much money to be made” from investing in China.
Warren Buffet accurately
foresaw Shanghai’s decline and sold his huge holdings
of PetroChina shares last summer though he did
miss out on PetroChina’s big price boom. A Chinese
investment manager, Zhao Danyang of the Pureheart
China Growth Investment Fund in Shenzhen, won
an auction today for lunch with Buffett with a
bid of $2.1 million US dollars to Buffet’s Glide
It is said that the most recent
decline in Chinese stocks is fear of interest
rate hikes from China’s central bank. Speaking
today from Switzerland at the Bank for International
Settlements meeting People’s Bank of China governor
Zhou Xiaochuan said he can’t rule out interest
rate increases. Morgan Stanley had been advising
investors that interest rate increases were off
the table this year.
There are now serious material effects
on the Chinese economy from the rise in oil prices.
It is impacting trade with China’s Asian suppliers
and its target markets, specifically the USA and
the EU. Pundits and politicians talk of a “rounder”
world soon with the pace of globalization slowing
if not receding.
Many observers say a hard landing
imposed by Beijing is coming after the Summer
Olympics. I think this chattering is wrong but
the pace of money growth and inflation in China
is dangerous. Cash continues to pour into China,
some of it due to US Federal Reserve action, some
from trade surpluses, much more from investment
inflows. Chinese foreign exchange reserves are
on pace to reach $2 trillion US dollars this year.
A NEW WIND
Given the negative impact of the
oil price spike on China so far, Beijing is moving
quickly to reduce exposure to oil. At the start
of 2006 China’s renewable energy law went into
effect and big new state directed investment is
now underway in atomic power including the latest
technologies from the USA and France, and in renewable
energy, particularly wind and solar power. I will
have a lot more to say about investment opportunities
in wind and solar in the months ahead.
On June 19 in London, China’s Renewable
Energy Development Project, part of Beijing’s
powerful National Development and Reform Commission,
won the Ashden Award for Sustainable Energy –
the most prestigious green energy prize in the
world. The prize was for work in photovoltaic
or PV solar power technologies.
Some projects of note involving
foreign collaboration: the Norwegian Renewable
Energy Corporation or REC just signed an almost
half billion US dollar deal with China Sunergy
(listed on NASDAQ under symbol CSUN)
to supply solar wafers over the next seven years.
REC has plants in Washington state and Montana.
REpower North China Company,
a joint venture with the German REpower Systems,
will supply Guangdong Baolihua New Energy
with 24 wind turbines of 2 Megawatt size for an
offshore wind farm off Guangdong Province to be
operational next summer.
US Secretary of State Condoleezza
Rice left China today after a brief visit during
which she met with President Hu Jintao and traveled
to the Sichuan earthquake area where she praised
the local recovery efforts and gave a Chinese
teenager a book about America’s national parks.
Meanwhile in Beijing, envoys of
the Dalai Lama resume talks with the encouragement
of the Dalai Lama himself and Secretary Rice.
Despite talk about the world “decoupling”
and globalization in jeopardy China and the US
continue their strange convergence: famous cereal
maker Kellogg announced today it acquired
Shandong based Zhenghang Food Company,
China’s leading cookie and cracker maker. Kellogg
will use Zhenghang to expand its product line
to Chinese consumers.
And Caterpillar will soon
break ground on a factory outside Nanjing in Jiangsu
Province to produce smaller (under 20 ton) extractors.
Caterpillar will wholly own and operate the factory
its 17th plant in China where the company employs
over 7,000 people.
I hope your summer is off to a great
start. See you next time on the Sinomania! Show!