Uzbekistan isn’t the financial capital of anywhere, so it was a curious place to for Chinese Premier, Wen Jiabao, to sink the current Hong Kong stock market boom.
But that’s what he did on Sunday with comments as elliptical as they were direct.
He talked about ‘through trains’ and individual Chinese being allowed to directly invest overseas, leaving no one in any doubt that the country’s legendary resistance to the blandishments of foreigners still holds a powerful grip over the Communist Party.
The ‘through-train’ was a way of describing the mechanism to allow direct offshore investment by Chinese citizens in Hong Kong.
The Chinese Premier said the government needs to study the risks, increase knowledge among Chinese investors and prepare regulations to protect the stock markets in Hong Kong and at home before launching the program.
Its just individual investment: moves by banks and mutual funds to invest offshore remain in place.
The news saw Hong Kong shares fall sharply with the benchmark Hang Seng index ending down 5%, its biggest fall since September 12, 2001. It was down 3% in the morning session and kept on falling. Other Asian markets were also weak.
The Hang Seng fell below the 30,000 level for the first time since October 26 and finished under the 29,000 mark. Despite the Shanghai debut of PetroChina at record levels, the market lost ground, around 2.5% after the Chinese government revealed changed rules for mutual funds.
Hong Kong’s stock market had climbed over 40% since August 20, when China’s State Administration of Foreign Exchange first announced the so-called “through train” program, climbing above the 30,000 point level for the first time.
China’s currency regulator said on August 20 Chinese investors in the northern Tianjin city’s Binhai economic zone would be allowed to invest in Hong Kong stocks with a Bank of China account. In fact the index has risen 35% in the past month alone in anticipation of the imminent relaxation and ignored suggestions from the mainland that the relaxation could be postponed for an indefinite period of time.
Why the announcement was made on a weekend in Uzbekistan is one of those wonderful oddities of Chinese life. The announcement was probably made outside of China for symbolism’s sake: Hong Kong is outside China in terms of overseas investment, just as Uzbekistan is outside of China and Russia in central Asia.
This decision could have been announced after the People’s Congress in Beijing last month. From reports it was all but decided then and there have been those hints about problems since before the Congress.
Some Hong Kong brokers tried to play down the significance of the decision, suggesting it had already been factored into the market. But then why has the market exploded so forcefully in the past month or so if that was the case. A bit of special interest pleading there and a wary eye on Beijing. Chinese citizens are barred from putting their money abroad directly like us in Australia or in the US, except when Chinese companies are listed on separate markets such as an overseas stock exchange,
At the same time foreigners’ ability to buy shares in those companies is heavily restricted. Trading is allowed indirectly through special bank accounts with limits on how much can be invested and in what companies.
One bizarre result is that shares in Shanghai - accessible to Chinese investors with few other options - can trade at a vast premium to shares of the same company listed in Hong Kong.
We saw that with PetroChina’s listing in Shanghai yesterday. It gave it a market cap of a massive $US1 trillion at one stage.
PetroChina passed Exxon Mobil as the world’s largest company by market value after its float. Exxon has a market cap of around $US488 billion.
Brokers said PetroChina’s Class-A shares more than doubled, advancing as high as 48.62 yuan ($US6.52) from their sale price of 16.7 yuan. When the shares topped 45 yuan the company was valued at a smidge over $US1 trillion. The shares finished almost 44 yuan.
The company is China’s largest oil and gas producer and has been listed since 2000 in Hong Kong where its shares are up 78% so far this year, following the Hong Kong market higher since August and the surge in world oil prices well above $US90 a barrel. Based on the Hong Kong listing price, it’s capitalised at $US420 billion, still behind Exxon.
Bloomberg said: “PetroChina trades at 24 times earnings in Hong Kong, compared with Exxon’s valuation of 13 times. The Chinese oil producer’s market value is higher than Russia’s stock market.” And Australia’s GDP, for that matter.
The listing saw China become the third biggest market in the world by capitalization, moving past London. But PetroChina shares fell in Hong Kong’s sell-off.
PetroChina though is hostage domestically to price controls on oil products, and we saw how sensitive a subject that is with the decision last week to allow a 10% rise in the price of petrol, jet fuel and diesel to allow oil companies to reclaim some of the higher prices paid for crude oil in higher selling prices.
That was despite the controls on government prices imposed before the Congress last month.
Those controls were to allow the government time to try and get inflation under control: allowing price rises for such sensitive items like fuel isn’t what inflation busting is about - it’s about making sure state owned, controlled or associated oil groups don’t have cash flow crises and need a bail out, especially with PetroChina listing.
The premier’s comments will feed the domestic share mania: allowing greater and freer outward investment would have provided, over time, a way of allowing the market bubble to slowly subside.
Despite the claims of some Hong Kong brokers that the decision won’t have an impact: it will if it continues for a while. The PetroChina listing in Shanghai shows the opportunity lost.
The brokers and others in the Hong Kong financial community have pushed this “through-train mechanism” to let wealthy Chinese bring in funds, and they have also sought to allow arbitrage between Hong Kong and mainland share listings which would have been ideal for foreign investors, such as hedge funds and Chinese partners.
The arbitrage suggestion was mentioned several weeks ago as a way of tackling the investment concerns and meeting the desires of those in Hong Kong. This may still be an option.
For China, easing capital outflows, while still limiting foreign access to its home market, make some sense but would put pressure on the currency to float more freely, something the Government has ruled out numerous times.
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But direct investment by Chinese companies isn’t banned. Far from it.
Australian agricultural chemicals business, Nufarm, says it likes a $17.25 a share offer from a consortium comprising China National Chemical Corporation (ChemChina), The Blackstone Group and Fox Paine Management III LLC. The offer plus a final dividend of up to 30c a share values Nufarm at up to $3 billion.
The Nufarm board has recommended that shareholders vote in favour of the scheme of arrangement.
“We acknowledge the consortium’s proposal which may lead to a transaction which realises fair value for Nufarm shareholders,” Nufarm chairman, Kerry Hoggard, said.
“As contemplated, the transaction would combine Nufarm with certain agricultural chemical businesses of ChemChina to create the global leader on off-patent crop protection.”
The price of $17.55 a share is 27% higher than the closing price on October 30.
ChemChina is the first state-owned Chinese company to team up with buyout firms for an overseas acquisition.
Buying Nufarm gives ChemChina entry to the $US36 billion global market for herbicides and pesticides as a worldwide agricultural boom spurs acquisitions.
Nufarm is Australia’s biggest supplier of farm chemicals and the shares rose sharply (even though the bid was rumoured late last week) to a high of $17.52 on the ASX.
ChemChina is already a player in Australia, having bought the Melbourne-based chemicals group, Quenos, for around $180 million in April of last year.
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