George Chen

By George Chen
The opinions expressed are the author’s own.

I remember a veteran trader once told me of the three scenarios under which one should sell stocks.

First, sell when you start to sense the government is beginning to tighten market liquidity, indicated for example by a sudden influx of IPOs or a tougher monetary policy. Second, sell when you see almost everyone, from monks to neighborhood grandmothers, is buying. Third, when you see big banks such as Goldman Sachs downgrade their economic forecasts, which basically means they know they misunderstand something and have to fix the misunderstanding, sell.

So, this week Goldman Sachs trimmed its economic growth forecasts for China to 9.4 percent this year, from 10 percent previously, citing a recent run of surprisingly weak data, high oil prices and supply constraints. Goldman’s report created a buzz in the market, pushing some investors to sell further amid already weak sentiment. More banks are expected to follow Goldman’s move to trim their China forecasts in coming days and weeks.

Will Beijing be happy to see economic growth finally slow a little amid concerns of possible overheating in some sectors, for example, real estate? The answer is both yes and no. Yes, Beijing expects to see some cooling of the economy, but if it extends too far it could lead to massive money outflows, which would be an even bigger headache for the government than high property prices, in my view.

If you don’t trust Goldman Sachs’ forecast, you should trust gold prices — some traders shared a trick with me to forecast the timing of a market rebound. When you see gold (and other commodities) prices start to cool, then it may be an opportunity to buy stocks.

In the secondary public market, the most common question you can hear in China these days is: “where is the bottom?” Apparently, there’s little confidence of a reliable answer. Some say 2,700 points and others expect 2,600 or even 2,000 points if Beijing doesn’t do anything to improve market liquidity.

To tell you the truth, I’m more worried about the IPO market. According to IFR China, a Thomson Reuters service, Beijing-based online clothing retailer Vancl was looking to raise $1 billion from a U.S. listing in the fourth quarter, possibly the largest Chinese Internet listing this year.

One of my friends, who used to be a customer of Vancl only to give up in the end, was amused by the news. He bought some shirts from Vancl that were cheaper than what you might pay at a store, but the quality was also cheap.

These are details that investors and fund managers on Wall Street may not be fully aware of. What they learn about China is just a vague so-called “China story”. But what is the China story?

The growing question about the “China story” is the same as asking what the “China model” is. My political science professor tried to convince me there was no such thing as a “China model” — or “Beijing consensus” in other words — but just a China experience for the reference of others. And I say there is no “China story” in general.

China is so big that nothing can be simply translated into a uniform system. Even in the garment industry, every company has its own circumstances and problems and investors should do a better job of investigating before putting in real money.

Businessmen always say the IPO is not the end, but a new beginning for a company. But when you feel the global market environment is not so healthy, why struggle to list? You may say you want a bigger challenge.

Well, it’s true the market is undergoing a very challenging time. Do you know what my veteran trader friend plans to do this season? He just told me he has decided to take a holiday in June. “I’ll be back when I can get a clearer view of the market,” he said.

Does this make more sense to you than just a vague “China story” that your wealth manager is still trying to sell to you?

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A man walks past an advertisement by HSBC promoting China’s renminbi or yuan related products and services, in Hong Kong May 17, 2011 REUTERS/Bobby Yip

By George Chen
The opinions expressed are the author’s own.

Today is April Fools’ Day, a rare opportunity to make fun of friends and colleagues with pranks and practical jokes. Ever ahead of the game, Goldman Sachs produced an amusing mistake yesterday making it look more than a little foolish, as many investors and rival bankers may attest.

The bank’s Asia structured products unit said yesterday that trading in four index warrants it issued in relation to the Nikkei 225 was abruptly suspended in Hong Kong because of errors in supplemental listing documents. The formula of “cash settlement amount per board lot” for the warrants was misstated, Goldman Sachs Structured Products (Asia) Ltd said in a filing with the Hong Kong stock exchange. Click here to read the Goldman Sachs statement (PDF).

Before being suspended, the warrants surged by between 130 and 1,077 percent on Thursday morning, which local media reported could cost the bank millions of dollars.

Well, I understand it’s still a small figure to a bank like Goldman Sachs, although the story was certainly the most widely talked about matter in the equities world yesterday. Traders said this was a rare mistake that once again raised concern about the understanding of banks in relation to sophisticated financial products.

I am a bit worried about the fate of the Goldman Sachs bankers responsible for those Nikkei warrant errors. Should they be fired? Perhaps. It’s indeed embarrassing for Goldman Sachs and the timing is perfect — a day before the Fools’ Day — although this, sadly, was not a joke.

Or am I worrying excessively? The financial crisis is apparently over and there are good days ahead for investment banking professionals — at least those who work on China matters. Swiss bank UBS, the Asia-Pacific leader in equity underwriting, plans to double its China headcount over three to four years as it expands stock research coverage to small and medium-sized companies in China, the bank’s co-chief executive for the region said on Thursday.

Chi-Won Yoon, co-chairman and co-chief executive of UBS in the region, said at a forum in Hong Kong yesterday that the next real growth area for UBS in China would be small to medium-sized companies. I think this makes a lot of sense.

After the huge IPOs from the likes of Agricultural Bank of China in Hong Kong, we may not see many $10 billion and $20 billion deals for a while. Bankers are now talking about how “small is beautiful”, making deals and fundraising more workable and affordable to investors. Private businesses in China already contribute far more than half of national GDP growth annually.

But let’s not rush. I’m happy to teach Goldman Sachs bankers an old Chinese saying: “More haste, less speed” (欲速则不达 yu su ze bu da), as I believe a lesson should be taken from yesterday’s foolish mistake. The news of UBS hiring more China researchers should make rivals nervous.

After all, the financial industry is still short of talent, especially China experts. So is the media industry. A banker friend once asked me, these days if you know China, you speak Chinese and you have good communications skills, why not be a banker rather than a journalist and earn more money?

Good question.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: Goldman Sachs Chairman and CEO Lloyd Blankfein testifies before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee hearing on “Wall Street and the Financial Crisis: The Role of Investment Banks” on Capitol Hill in Washington April 27, 2010. REUTERS/Jason Reed

By George Chen

HONG KONG, March 2 (Reuters) – A former partner of D.E. Shaw and an ex-Goldman Sachs partner are setting up a new firm to raise about $500 million for a China-focused private equity fund to join the growing competition for deals in the world’s No.2 economy, sources told Reuters on Wednesday.

Meng Liang, a partner and Greater China CEO for D.E. Shaw, one of the world’s largest hedge funds, has resigned from the firm to join hands with Kevin Zhang, a former Goldman Sachs partner who was co-head of its Asian Special Situations Group from 2005 to 2009, to launch their own investment firm, said the sources with knowledge of the matter.

Meng and Zhang, both Yale MBA graduates, received some capital commitment for the new fund from some Chinese entrepreneurs whose companies were invested by Meng and Zhang when they were with D.E. Shaw and Goldman, one source said.

“The private equity industry in China is becoming more rewarding and more mature,” said Poddy Feng, an analyst at industry consultancy China Venture.

“Setting up your own PE fund is now especially attractive for experienced senior professionals and there still seems to be an ample supply of deals in China,” Feng added.

The departure of Meng, who helped D.E. Shaw open its Greater China business out of Hong Kong in 2007, has been internally announced at the firm, said the sources who declined to be identified as they were not authorised to speak to the media.

Some high-profile and profit-making deals led by Meng for D.E. Shaw included Rongsheng Heavy Industries, China’s top private shipbuilder, which raised $1.8 billion from its Hong Kong IPO late last year, and GCL-Poly Energy, China’s No.1 solar company by market capitalisation.

During Zhang’s days at Goldman, he helped the U.S. investment bank invest in China’s top meat processor Shuanghui and Western Mining among other deals — two of the most profitable investments Goldman ever made in China.

Meng, a former co-head of China investment banking at J.P. Morgan before he moved to D.E. Shaw, declined to comment when reached by telephone. Zhang, was not immediately available for comment.

STAR BANKERS

Meng was made managing director at J.P. Morgan in 2004 after he helped the firm expand its merger & acquisition advisory business into an industry leader in Asia.

Meng was the first Chinese appointed partner of D.E. Shaw, once the world’s No.4 hedge fund by assets under management.

Zhang was also one of the first Chinese partners appointed at Goldman. Zhang’s former colleague Fred Hu, who was also a Goldman partner, also recently launched his own fund after leaving the firm, according to media reports.

Despite high-flying career at the investment banking and hedge fund industry, many senior industry executives have chosen to open their own outfits since the financial crisis and more money inflows are seen into Asia, in particular China and India.

Last week, Reuters reported that former Goldman Sachs star trader Morgan Sze was set to launch his $1 billion-plus hedge fund, registering Azentus Capital with the Hong Kong market regulator this week.

Photo: People look at an electronic board at a brokerage house in Shanghai December 27, 2010. REUTERS / Aly Song