By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s hard to think of a company more plugged into the 0.1 percent than Graff Diamonds. The UK diamond merchant, which in 2011 sold rocks worth almost $100 million to a single customer, plans to list its shares in Hong Kong, in an offering that could raise $1 billion and value the whole at $4 billion. Strip out the hype over the ascent of the super-rich, and the valuation looks solid if not a steal.

The business model is pure plutocracy. Around half of Graff’s revenue in 2011 came from pieces worth more than $1 million. Whereas the likes of LVMH or Prada rely on expanding wealth, Graff can benefit simply from growing inequality. That helps explain its 25 percent revenue growth over the past three years.

Against that, investors have to weigh unusual risks. Sales could prove lumpy, since Graff gets around half of its revenue from just 20 customers. Billionaires, especially in Asia, can fall from grace alarmingly fast. There’s also the risk of false confidence. The super-rich are often touted as shock-proof spenders, but that was proven wrong in 2009, when Graff’s sales fell by 25 percent.

To see what Graff is worth, split it in two. First, there’s a super-high-end retailer. If Graff can expand last year’s $624 million of retail revenue by 15 percent, and sustain its current 20 percent margin, it could make $165 million in retail operating profit by 2013. Pop that conservatively on the 10 times multiple that LVMH commands and it’s worth $1.7 billion.

But Graff has another asset – its remarkable $880 million inventory of rocks, valued at cost, and mostly bought when prices were lower. Assume a market value twice as high, in line with the increase in high-grade diamond prices over the past five years, and these could be worth $2 billion. Combine the two parts, and $3-4 billion looks like a fair price.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s property chickens are coming home to roost. Last week’s economic data shows that a year of falling prices is finally changing developers’ speculative behaviour.

After years of boom, most developers, like many investors, have acted as if the downward move were no more than a blip. When barred from getting bank credit, many property companies found funds elsewhere, notably through so-called trust companies, which make loans funded by short-term retail funding. Throughout 2011, developers merrily continued to add new floorspace at the same rate as they had a year earlier.

April’s data shows there has been a rude awakening. The amount of housing floorspace completed dropped off 56 percent from the total figure for January and February, months usually lumped together to account for the New Year’s holiday. The shift is more than seasonal – the drop off was a milder 35 percent in the previous two years.

Space under construction also failed to show its usual post-New Year spike. Overall, residential real estate investment grew 4 percent year on year in April – a tenth of the rate of a year before. Adjust for inflation, and that’s equivalent no growth at all.

Since new property development accounts for about a tenth of China’s GDP building, a modest slowdown will be enough to cause overall economic activity to sputter. Then there is the second-order effect – local governments depend on proceeds from land sales to fund spending on infrastructure projects. According to the official data, the value of land sales in April was only a little more than half that of March – and was a third of the monthly average for 2011.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Temasek is turning into a financial chimera. Where that mythical beast was part lion, goat and serpent, the Singaporean fund combines aspects of a hedge fund, private equity house and investment bank. That combination sounds good for returns, though it might not sit well with Temasek’s political ties.

First, consider Temasek’s recent opportunistic actions. It sold $2.5 billion of shares in two China banks on May 3, just weeks after buying $2.3 billion of shares in another. Temasek reportedly flipped China Construction Bank shares for 20 percent more than it paid last November – which in turn was 20 percent below where the shares were trading when it sold in the previous July.

The fund has also shown a taste for private-equity style financial engineering. Temasek is kingmaker in a proposed $7.2 billion takeover of Indonesia’s Bank Danamon by Singaporean bank DBS, which would leave the fund with 40 percent of the combined group. Last year’s exchangeable bond, convertible into part of Temasek’s 18 percent stake in Standard Chartered, reflected more cleverness than necessity.

Finally, there are shades of an investment bank. Temasek has hired big-hitting bankers like UBS finance director John Cryan, whose influence may explain the change of gear. So too may its investment-bank-like pay, which leans heavily on performance. Temasek even claws back past bonuses when the fund fails to meet its internal hurdle rate, as happened in 2010.

This combination could be just what’s needed. Temasek’s return to the finance ministry, its sole shareholder, was below 5 percent in 2010, its last reported period – compared with a 20-year average of 15 percent. Without healthy returns, it’s hard to justify the $155 billion fund’s existence. Singapore already has a bigger sovereign piggy bank in the form of foreign reserve fund GIC.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s food industry is accident-prone. Milk laced with melamine, fake eggs, glow-in-the-dark pork and cadmium-tainted rice have all made headlines. Now there is formaldehyde-laced cabbage, found in Shandong province. Thus treated, the vegetables will last for a week. The economic effect of food-scares can last far longer.

Food accounted for just 2.8 percent of China’s overall goods exports in 2010, according to the World Trade Organisation. But the WTO reports that food exports – such as seafood, apple juice and garlic – have tripled since China joined in 2000. Food scares are toxic for trade. Since chemical-tainted milk killed six children and sickened 300,000 in 2008, China’s exports of powdered milk collapsed to almost nothing, while imports have roughly quintupled. Non-food products too may suffer from a kind of reverse halo effect.

However, the gravest side-effects of food scares are domestic. Cabbage fears are likely to lead consumers to pay up for guarantees of safety. That’s inflationary, since fruit and vegetables have the third largest weighting in the China inflation food basket, according to Rabobank. The poor get the worst deal, since they can’t afford to buy organic, or foreign goods as an alternative.

More subtly but more profoundly, such scandals undermine Chinese consumers’ faith in the country’s institutions and systems. Lack of trust lies behind many of China’s distortions, from too-high savings rates to frequently fraying tempers. Each report of poisoned meat, contaminated vegetables or undrinkable tap water erodes consumers’ sense that the rule of law is taking shape.

The answer is partly economic. Cabbage growers seemed to have used the poisoned spray because long transport times lead to rotting produce. Specific investments – think refrigerated vans and more mechanisation – can reduce this waste.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

An escaped Chinese dissident takes refuge in the U.S. embassy. It’s a diplomatic crisis, but needn’t become an economic one. Washington values rights, but it also needs a stable and cooperative China. As for Beijing, it has a chance to improve its image.

Blind lawyer Chen Guangcheng’s escape from house arrest came just days before the U.S. and China’s annual economic summit in Beijing. In a year of political transition for both sides, things could escalate. China hates foreign meddling; the United States has accepted high profile defectors before. Though Secretary of State Hillary Clinton favours “principled pragmatism”, she is an outspoken critic of China’s human rights record – and of Chen’s plight.

But a deep freeze between the world’s two biggest economies would be bad for the world. Besides, there is a deep economic co-dependency. While China’s overall trade surplus has been shrinking, the trade gap with Uncle Sam has actually widened. It hit a record $299 billion in the 12 months to February 2012, Reuters data shows.

A face-saving solution is certainly possible. If Beijing gives Chen some guarantees that he and his family will be left alone, he could return to his Shandong village. There are precedents: Lai Changxing, a ringleader in a notorious corruption ring, was extradited from Canada on the promise that he wouldn’t be put to death. Beijing could even blame Chen’s captivity on wayward local officials, and burnish its own credentials for upholding the rule of law.

The Chinese approach to human rights will remain a political challenge. More asylum-seekers in the United States come from China than from any other country, and the number of petitioners has been growing at a double digit-rate. By Western standards, Beijing still lags in the protection of its citizens.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Hong Kong shouldn’t rush to lock up miscreant sponsors of initial public offerings. The city’s securities regulator rightly wants to toughen up the regime for new listings. But talk of making bankers individually and criminally liable for what goes in the prospectus is overkill, and such policy would make Hong Kong less efficient.

The Securities and Futures Commission has argued often that sponsors – whose job is to shepherd an IPO and conduct due diligence – often do too little homework. Sending juniors to quiz management, and relying on desk-based research, are common complaints. Last week the SFC suspended Mega Capital, a Taiwanese broker, and imposed Hong Kong’s biggest fine so far, at $5.4 million.

Reputation should make sponsors behave, but doesn’t always. That may be because a lot of banks are crowding a single deal – commodities trader Glencore named 18 underwriters in its 2011 IPO prospectus – so the reputational hit of an issue gone bad is shared. At worst, some issuers might favour sponsors who have the lightest touch.

Opening negligent sponsors to lawsuits, as the United States does, therefore makes sense. It may mean overall IPO fees, currently a third of what they are in America, go up. But that should be offset by increased trust in the market. Now, if a mainland Chinese company proves to have cooked its books, Hong Kong investors have little chance of seeing their money again.

But to make individual bankers criminally liable could have unintended consequences. Sponsors may turn to “box ticking” rather than using their common sense – already a problem among auditors. Global banks would be incentivised to run even their high quality IPOs through other markets, like Singapore or London.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Could Temasek’s tinkering put Standard Chartered in play? The Singaporean fund’s recent reshuffle of its bank assets has revived talk about its 18 percent stake in the UK-based emerging markets lender. Now might be a good time to find a new owner.

Rival banks have long eyed StanChart. It spans Asia and Africa, but lacks exposure to slow-growing European markets or U.S. subprime mortgages. It’s conservatively run, too: loans were equivalent to just 76 percent of deposits in 2011. Moreover, there are signs Temasek is open to offers. It issued a bond exchangeable into StanChart shares last year. And an old idea of guiding StanChart into a merger with Singapore’s DBS seems to have fizzled; DBS is now chasing other deals, with Temasek’s blessing.

Potential buyers are many. U.S. banks like JPMorgan or Wells Fargo should be attracted to StanChart’s exposure to emerging market trade. Australia’s ANZ and Japan’s Mitsubishi UFJ are aggressively targeting new markets. Even a Latin American aspirant like Brazil’s Banco Itau may take a look.

Leaving aside the potential clash of cultures, not many could pull it off. StanChart’s attractive portfolio – and some bid speculation – mean its shares trade on a higher multiple of book value than most prospective suitors.

Second, local regulators may be chary of allowing already-big banks to expand further. And while StanChart isn’t yet labelled as a globally significant bank, or “G-Sifi”, as part of a bigger lender it probably would be, which would see its return on equity crimped by an additional capital buffer.

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s present condition can’t be summed up in a few tenths of a percentage point. True, judged by the headlines, GDP growth of 8.1 percent in the first quarter of 2012 was a miss. Economists polled by Reuters expected 8.3 percent. Investors shouldn’t overthink it: growth is the least of China’s three big worries.

The slowdown is real, but well flagged. Premier Wen Jiabao set a target of 7.5 percent GDP growth for 2012, compared with last year’s realised 9.2 percent. Against that, the current reading is hardly shabby, and may improve. Getting banks to lend more is one recourse that has already begun, with loans reaching 1 trillion yuan in March. There are signs things are already ticking up – such as the inching up of electrical production in March, often touted as a “more reliable” measure of growth than GDP.

If investors want to worry about something, they should start with politics. The mysterious ouster of high-profile Chongqing party chief Bo Xilai, and the arrest of his wife on murder charges, suggests a rising political risk premium as China nears next year’s leadership change. There’s no sign of a political breakdown, but increased anxiety at the top could slow big reforms on major issues such as opening up restricted investment sectors or liberalising interest rates.

Fretters should also have an eye on the financial system. As with GDP, numbers mislead. China’s banks reported non-performing loans of just over 1 percent of their total books in 2011. But that’s unsustainable, even if accurate. The banking system is built on distortions that promote misallocation of capital, with lending guided more by policy, collateral levels and implicit government guarantees than by considerations of risk and return.

Not that GDP growth won’t present China with some thorny issues in 2012. Policymakers will soon have to decide, for example, whether they are happy to tolerate the inflationary pressures that come with using bank lending to stimulate the economy. And a political or financial shock would quickly make itself felt in the GDP figures. But the more complex China’s situation gets, the less useful one big number becomes.

By John Foley The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Jaguar Land Rover wants to be China’s luxury brand of choice, but it is taking a circuitous route. The high-class car maker, owned by India’s Tata Motor, has announced a joint venture with China’s Chery Auto, a state-owned producer known for being cheap and cheerful. As a strategy for snagging a bigger share of China’s giant auto market, this is risky.

It’s easy to see why luxury brands want more of China, now the world’s biggest car market. Jaguar Land Rover’s sales there grew 58 percent by volume in the fourth quarter of 2011, year on year. While sales of passenger vehicles overall have slowed, and even luxury models are being discounted by dealers, the underlying trend for trading up is still strong. Audi, BMW and Mercedes Benz are the top brands, thanks to their own joint ventures, and BMW reckons China could become its biggest market this decade.

With a partner JLR can start producing in China, which should boost its already-healthy 17 percent EBITDA margins. It may also get better treatment with a local badge. Foreign manufacturers are heading for a tough time, since China’s own auto companies are wrestling with chronic overcapacity, and yet adding ever more. Foreign brands were excluded from a recent list of approved models for official purchases.

The regulatory road, though, is long. The National Development and Reform Commission, which gets to rule on the planned venture, recently removed the car industry from its list of priorities for foreign investment. Other foreign joint ventures, like HSBC’s credit card deal with Bank of Communications, have taken years to get through.

Then there’s the choice of partner. Chery, despite some unimpressive forays into the high-end market, is distinctly low-end. Its classily named Riich G5 Sedan didn’t take off, and the company is only in the black thanks largely to government subsidies. Fiat, Chrysler and Subaru have all come close to shacking up with Chery, only for the wheels to come off in all three cases.