George Chen

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

Two Chinese dotcom companies have apparently become the latest victims of the growing market concern about China “concept” stocks in the wake a series of accounting scandals.

Online video firm Xunlei Ltd and Chinese e-book firm Cloudary Corp have postponed their U.S. fundraising plans. They both blamed volatile global markets. Volatile markets? Really? Aren’t the markets always volatile?

More or less, to some extent. We still see other companies lining up to list in the U.S. although the near-term outlook for China IPOs to land in the U.S. market doesn’t look too bright. In return, such concerns — warranted or not — are growing about Chinese companies listing in Hong Kong and Singapore.

There were some early signs about Xunlei’s difficulties to go public. It failed to win direct investment from News Corp. And some analysts say Xunlei could face challenges from some Hollywood movie makers over copyright issues.

For Cloudary, it’s a different story. The company changed its name from Shanda Literature before the IPO plan, as the firm seeks to brand itself as an e-book maker and seller — trying to convince U.S. investors it could become “China’s Kindle maker”. In the end, the rebranding campaign didn’t make headway.

Maybe what the two companies should really blame is not the volatile market but the investment bankers they hired who should have gotten them to list faster and earlier. Remember the match-making site called Jiayuan.com? It may be a good idea to revisit my previous column “Is China exporting a dotcom bubble?“.

The reason I mention in particular the two Chinese dotcom companies today is to reflect the growing difficulties of selling so-called China concept stocks. China is not just a concept any more. Investors are getting more cautious and are asking more questions.

That should send a message to other Chinese companies considering public listings. For investors in Hong Kong, isn’t it time to review the China concept and related stocks that you hold in hand?

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

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

Chinese Premier Wen Jiabao once said there’s something even more important and precious than gold — people’s confidence.

In recent weeks, I’m afraid global investors have been losing confidence in Chinese stocks from the New York to Shanghai markets. Sino-Forest Corp became the latest victim of a slump in overseas-listed Chinese companies. The company earlier this week accused short-seller and research firm Muddy Waters of defamation for alleging in a report that it had fraudulently exaggerated its Chinese forestry assets.

Unfortunately, this is just the beginning of the hit to confidence over Chinese stocks, especially small caps listed at home or abroad, for example in Hong Kong, Singapore, New York and even on the second-tier board of the London Stock Exchange.

If you look at yesterday’s trading carefully, you may find investors suddenly became more cautious on small-cap Chinese stocks after the Sino-Forest case. There were already signs with the growing dotcom bubble exported by some Chinese Internet companies to Wall Street.

Remember matchmaking website Jiayuan.com, which recently listed on the Nasdaq? These days it’s in trouble with investors and users, who say its service may not be as good as its claim to be China’s No.1 online matchmaking site suggested. Read my previous column “Is China exporting a dotcom bubble?” here.

In China, the capital market doesn’t lack for bad news — fast-growing inflation, maybe 5.5 percent year on year in May to reach a 34-month high (official data to be released on June 14), slower economic growth amid tightening monetary policy and worsening liquidity in the banking system, and escalating property prices. There’s plenty of bad news, for sure.

Now we get the latest bad news (or even worse). Is China Inc still credible?

A friend at one of the Big Four auditing firms is saying the Big Four are becoming more picky about choosing Chinese corporate clients for IPO audit reports. In the past, clients were arrogant enough to be selective about the Big Four firms. Now it’s apparently the other way around.

One of the Big Four has put all ongoing China IPO audits on review. What does that mean for the public market and private equity business? It’s summer, which is to say holiday season. When you can’t see clearly, why not scale back and take time to think things through?

Take it easy. Confidence is gold!

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

Photo: A worker cleans the exterior of a CRH 380A bullet train serving the newly built high-speed railway between Shanghai and Beijing during its debut test at the Hongqiao Railway Station in Shanghai May 11, 2011. REUTERS/Carlos Barria

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.

There’s a new problem with the “one country, two systems” policy for Hong Kong and mainland China — the appreciation of the yuan can ease inflation in mainland China but not in Hong Kong.

In Hong Kong, the former British colony that returned to Beijing’s hands in 1997, things unfortunately work the other way round.

Peter Wong, HSBC’s Asia-Pacific top boss (and widely considered the most handsome banker in Hong Kong) said at a forum in Shanghai last week that because the Hong Kong dollar is pegged to the U.S. dollar, whose value is falling almost every day, food prices in Hong Kong are set to increase as Hong Kong needs to pay more to import food products from the mainland.

Former Hong Kong central banker Joseph Yam, now a senior representative of a Beijing-backed financial academy, added that he believed the Chinese government would let the yuan rise further and relax some policy restrictions.

So, a stronger yuan is in no doubt, and food prices in Hong Kong are certain to rise.

You may not care much about Hong Kong. When big investors are keen to trade stocks and make deals in mainland China, they of course pay more attention to Beijing’s monetary policy. Hong Kong? It’s more like the naughty child of Uncle Beijing these days.

But the naughty child can be a challenging problem and it’s becoming more rebellious. One of the world’s leading financial centers, these days it is also known as a city of protests, especially at weekends. In 2012, we will see a transfer of power in Beijing as well as in Hong Kong. And we will see elections in Taiwan and the United States. What a year!

Some investors think the potential for H-shares is much greater than A-shares, but political risks for H-shares could be greater if Hong Kong loses its political stability and thereby financial stability, thanks to a stronger yuan.

And if Hong Kong becomes unstable, Beijing will become naturally nervous.

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

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

I am hearing more complaints these days from trader friends about how boring the market is these days. Why boring?

Trading volume is low and there are apparently more risks than opportunities as investors seek clear signals about the central bank’s monetary policy direction and about what global funds think of China for the second half of the year.

With investors uncertain about the outlook for the Shanghai and Hong Kong stock markets, some are beginning to rethink their positions on Japan. Concerns about radiation are easing and I hear more people talking about the big potential for Japan’s market and economy to rebound amid massive reconstruction there. An old and new question then arises: can we bet on the Nikkei, again?

Australia also looks like a good bet to some rich Chinese investors. They say the property market alongside the long beaches in Australia offers profit-taking opportunities over the next few years.

Remember my recent column about many rich Chinese trying to emigrate in the next few years? Australia is always a popular destination. A number of local media reports also indicated some family members of top Chinese leaders already bought nice villas in the resource-rich country whose diplomatic relations with China have been up and down in recent years.

In China, an influential fund manager friend told me privately: “The property market in China is basically done this year and next year before Premier Wen Jiabao retires and we get a new government.” But he quickly added: “Premier Wen must do something to keep his promise to keep property prices under control, and he’s done almost all he can. The next government will be a different story.”

So, until we see clear signs of how much further China’s property market can go, some investors are naturally starting to shift their focus. Japan? Australia? What’s your say? I think the same logic can apply to China’s stock market amid record high banks’ reserve requirement ratio, now already 21 percent for most banks, and the country’s benchmark interest rate that Beijing keeps raising so far this year.

The fast-changing market sentiment about investors shifting focus in Asia may be a bad sign or even a sort of warning to the Chinese government, which is keen to fight asset bubbles but also doesn’t want to see huge foreign money outflows and a lack of confidence in its capital markets.

The Shanghai exchange remains keen to launch an international board to welcome HSBC “home”. If the main board of its local currency yuan-denominated A-shares sinks, how can you convince investors of the value of the new international board?

Li Daokui, an influential adviser to the People’s Bank of China, said yesterday that the valuation levels of most A-share companies were pretty low and he saw investment opportunities. To some investors, this is almost government propaganda to encourage buying.

However, he also warned that Beijing needs to raise interest rates further to rein in inflation and that’s not really good news for stock investors.

Remember what Warren Buffett said? Choose right and sit tight. However, Mr. Buffett may also be feeling a bit lost about his Chinese investment portfolio these days. Oh yes, that’s just another China story …

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

Photo: A woman carrying an umbrella walks past an office building that includes a China Telecom office and a branch of the Industrial and Commercial Bank of China in central Beijing August 25, 2010 REUTERS/David Gray

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

Few people outside of China really know what B shares are.

“B shares? Does that mean they are not as good as A shares?” That’s a typical question I hear from foreign friends when they first come to the mainland market and by chance learn some buzz about the B-share index.

B shares probably only attract public attention when trading gets excitable, as is the case now. The U.S. dollar-denominated B shares index sank more than 7 percent at one point on Thursday after ending down more than  5 percent on Wednesday.

So, what happened?

First, the B shares index tumbled on Wednesday without any clue or warning, surprising most people in the market. On Thursday, it retreated further, even after Beijing attempted to clarify a rumour about capital gains tax that was believed to have triggered the market panic. China was  not likely to start taxing investors on capital gains any time soon, a tax official told Reuters on Thursday.

China first launched the B-share market in the early 1990s, as part of the government’s “opening up” policy, with shares traded in U.S. dollars on the Shanghai stock exchange, and in Hong Kong dollars on the smaller Shenzhen bourse. They were mainly intended for foreign investors, especially those from Hong Kong, neigbouring  Shenzhen.

At the time, investors from outside mainland China were not allowed to buy yuan-denominated A shares, until Beijing launched the Qualified Foreign Institutional Investor scheme (QFII) in 2002 allowing licensed foreign investors to invest in A shares.

Also in the early 2000s, B shares, China’s only equity market fully open to foreigners became marginalised when Beijing stopped new B-share offerings by Chinese companies. In comparison with Shanghai, only few B-share companies are listed in Shenzhen for legacy reasons, with the Shanghai exchange playing the dominant  role.

Since the B-share market became marginalised, market speculation has been prevalent.  A merger with the much larger  A-share market is widely anticipated and, in the view of many investors, should benefit B shares, partly because of the appreciation of the yuan, in which A shares are traded.

Recent media reports suggest a number of large multinational corporations, for example, HSBC (born in Hong Kong and Shanghai, not London), have been selected for a yuan-denominated share issuances on the Shanghai stock exchange, where a brand new “international board” will be set up for such foreign IPOs.

This is exciting news and exactly what Shanghai officials want to fulfill the city’s ambition of becoming a leading financial centre, as it was in the golden era of the 1930s.

The prospect of an international board makes the B-share market seem even more boring, lowering expectations for the merger of B-share and A-share markets. Investors say B shares are not a priority for the Chinese securities regulator on and all  Beijing wants is probably to offer a plan to close the B-share market as painlessly as possible.

In other words, as Chinese leaders often like to say, the historical mission (for B shares in this case) has been achieved.

One institutional investor told me, “Now we feel it (B shares) are just like the Titanic – a sinking ship. It may not sink if the government wants to save it, but nobody wants to risk waiting to see what happens next.”

An even sadder truth is that today’s B-share market has more domestic investors than foreign. As domestic institutional investors are not allowed to trade B shares, the main direction of trade comes from domestic individual investors. Many foreign investors, in particular some early birds to the unique B shares market have already shifted their focus elsewhere, for example, preparing to buy HSBC’s new shares in Shanghai soon.

Those who quit B shares early may be the real winners. The unexpected B-share tumble this week came after big gains over the past one or two years, especially among real estate companies, which were believed to be a good bet on the appreciation of the yuan.

As the old Chinese saying goes: “Even the finest feast must end at last.” When the feast is over, who will be the last to sing?

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

Photo: A man reads information on an electronic screen at a brokerage house in Shanghai August 17, 2009. REUTERS/Aly Song

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

My readers on Reuters.com know me as a columnist who regularly writes about China and I also run a Chinese-language column, Mr. Shangkong, about Shanghai where I was born and Hong Kong where I call home now, on Reuters.com.cn, the China portal.

In fact, my day job is not just about writing columns but more about Trading China, a young and energetic Thomson Reuters project. It’s a public holiday in China today and the markets are relatively quiet, so I’d like to share something different in today’s column as I want to talk a bit about Trading China, which comprises Carmen, Joseph and myself.

Since receiving a call about a year ago from my boss North Asia Editor Phil Smith, aka “chart guru” in the Trading China community, I was quickly sent to Dubai to learn about and launch Trading China. Dubai is the place where Sex And The City 2, the movie, was not allowed to be filmed and our sister project Trading Middle East was launched smoothly.

Since then, most Trading China members know me as the man behind The Day Ahead, an email newsletter I write and send before the bell rings on the Shanghai and Hong Kong stock exchanges on every trading day. Whenever I meet our members, I’m usually  greeted with a similar exclamation: “Oh, so you’re the man who writes The Day Ahead column I see every day”. Yes, that’s me, composing about 300 emails a year if I’m not on holiday. I hope you find most of them useful. Drop me or Phil a note if you’d like to pass on a comment.

The Day Ahead is just one part of Trading China, which also consists of a real-time online forum where top CEOs and fund managers speak and a China-dedicated news site. If you ask me how we envisage Trading China, my short answer would be as a professional Facebook-like network, but by invitation only.

You may not have an opportunity to meet 150-plus trading peers together on the trading floor at the Exchange Square in Hong Kong but you can meet them all virtually with us in Trading China.

To many of you, Carmen Ng is known as the lovely girl in the chatroom and on Facebook. To be more professional, she runs the Trading China members-only web portal and keeps you up to date on the latest events, whether in China, Japan or North Korea. To those of you who attend our offline events such as the Christmas party at The Pawn, Carmen is also the one behind the camera putting together memorable video clips. Watch some video clips here.

Joseph Chaney is a Reuters journalist-turned business manager and my counterpart on the business side of Thomson Reuters, making sure our members and clients are happy with our service. Joe represents Trading China at many formal business occasions. He’s always well dressed, while I often look like a post-graduate student (in fact, I am doing a part-time master’s degree in international relations at the University of Hong Kong).

Of course, Trading China is a team project, with more than just those mentioned above. Many of them may not have the chance to meet you, but they work on the project behind the scenes, providing data, technical support and so on.

“Good morning, and good luck!” How can I forget to say this at the end of this note? You do know this line if you are already a loyal reader of The Day Ahead.

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

Photo: A giant poster seen in the subway station in Hong Kong’s Central district on December 9, 2009 Reuters/George Chen

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
The opinions expressed are the author’s own.

Have you had breakfast or lunch yet? In Hong Kong, I’m guessing few people are choosing sushi these days.

Many restaurants in Hong Kong, even Japanese restaurants, have been quick to distance themselves from the crisis in Japan since the earthquake as concerns about food safety are growing in many Asia-Pacific cities, including Beijing, Seoul and Sydney.

The Japanese authorities announced this week that they would widen a ban on exports of a wide range of food products from areas surrounding the earthquake-hit Fukushima Daiichi nuclear power station. In fact, even before the official ban, the health authorities in China, Hong Kong and South Korea were already monitoring all such imports from Japan.

I’ve seen a number of sell-side analysts recommend Chinese food and beverage stocks, including some fisheries, which are now expected to benefit from the Japan crisis as people turn to locally produced seafood. Australian and New Zealand seafood companies should also benefit. It sounds like a perfect time for banks such as ANZ to expand, helping Australian and New Zealand farmers and fisheries extend their reach beyond their domestic markets, turning a crisis into an opportunity.

Some Chinese brokerages called such stocks “post-earthquake concept stocks”. Have you read the story about how Chinese truck maker Sany sent to Japan their innovative truck that can shoot wet concrete several meters into the air? Sany is likely to be a typical post-earthquake star pick, as are construction companies in Japan.

It’s not a fun idea but it does make sense. After all, investors can’t just sit in front of television screens feeling sad but doing nothing. What’s your say about the post-earthquake era in Japan from the economic perspective?

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

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

You might consider yourself very smart, powerful or perhaps wealthy, but after watching live coverage on TV of the devastating earthquake and tsunami in Japan on Friday afternoon, what was your reaction? We’re all nobodies in the face of the forces of nature.

On Friday afternoon before the earthquake, the benchmark Shanghai Composite Index showed unexpected signs of recovery but the rebound was unfortunately short-lived. Immediately following the news alert about Japan’s worst earthquake in decades, stock markets from Hong Kong to Shanghai all retreated quickly.

This was a very natural reaction to such a massive natural disaster. Almost the same reaction was seen after the earthquake in China’s Sichuan province in May 2008. When investors feel uncertain and then the market sentiment becomes anxious, they sell. Fair enough – who really is in the mood to trade after seeing such a horrible event?

But think twice.

The phrase 危机 (wei ji) in Chinese for “crisis” is comprised of 危, danger and 机, opportunity. If you think you are smart, powerful or rich, is it time for you to turn the danger into an opportunity? It doesn’t simply mean you should immediately buy stocks to help the markets recover, so people may feel better and more hopeful about the economic outlook for Asia, but you need a plan to figure out what to do next.

So, what’s next? There won’t be any earthquake-like shock for Asia’s capital markets, I say.

Takuji Okubo, Chief Japan Economist for French bank Societe Generale, said in a research note to clients that the Japan earthquake would have a negative impact on regional equities markets over the short term but in the long run, it may help Japan’s economy grow, given the government’s big efforts to rebuild infrastructure, homes and so on.

What does that mean to China? Can Chinese materials and construction companies help? Because of growing concern about nuclear radiation, food safety is becoming another big challenge for Japan, especially to exports and this may be another angle worth studying about what a role China can play in and after the crisis.

We won’t be always in danger so your opportunity should come in next.

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

Photo: A man steps over a crack in the road as he walks towards the devastated area of Rikuzentakata, northern Japan after the magnitude 8.9 earthquake and tsunami struck the area, March 13, 2011. REUTERS/Lee Jae-Won