Desire to read novels but only time for headlines and blurbs

The world only seems to be getting smaller and more connected. This means every time we are ready to "turn off" and go to sleep, someone somewhere is just starting their day and ready to "get going." This becomes even more apparent when our friends, jobs, projects we are involved in, financial markets, etc transcend our own locations and time zones. Time is one of those things that there is only so much of but it never seems to be enough.

I've found that there is never enough time. The more tools that are created that are meant to help us manage time and stay connected sometimes only seem to complicate our lives and create more places we are supposed to be, things we are supposed to be doing and people we should be keeping up with. There are so many things I wish I had time to devote to, but the reality is that I just don't.

I sometimes wonder whether or not this phenomenon will ever reverse itself or if we will continue on this trajectory indefinitely.

Pursuing Passion

There is nothing more refreshing that talking to people who are passionate about something. While it would be great if everyone we meet fell into this category, the reality is that most people are less "passionate about something" and more "blah, about everything."

When I meet someone for the first time, I'm going to stop leading with predictable boring questions like "where are you from" and "what do you do." Instead I'm going to start asking "what are you crazy passionate about and how does that passion drive decisions you make?" I think understanding someone's passions and dreams can tell you a lot more about them than knowing where they happened to have been born or for which company they push paper.

It is funny that "dreams" don't show in social networks. They ask you, what is your favorite movie, what is your favorite book, etc. Most of us tend to provide run of the mill answers to these rather "blah" questions. How interesting/unique do you seem when you are one of 10 million people on Facebook that "like rap" or "enjoy hanging out with friends."

I think asking people something a little deeper like "if you could do anything, what would you do," "if you could change the ending of something that has happened in the world, what event would you change," "if you could go anywhere, where would you go," "if you could spend every moment of every day doing something, what would it be." I think answers to these questions would give other's a much deeper insight into who we are, what drives us and what we dream about. Answering these questions might actually require an ounce of thought.

This idea of "pursuing passion" begs the question: why do we do what we do? If we are to devote so much energy and time of our lives to a job, shouldn't there be passion involved. Sometimes their are circumstances that make working a job where there is no passion necessary, but more times than not I think other things drive these decisions (fear, social expectations, etc).

One of the things I've done a lot of following my move to Silicon Valley is meet with a lot of entrepreneurs. The great thing about entrepreneurs is that many of them are truly passionate about what they are doing. Their passion is not just a hobby or something they spend 1hr a day one, rather it is something that they are throwing themselves into, financially and physically. I don't always agree about how great someone's idea is, but this willingness to pursue a passion without hesitation is a rare quality that is contagious.

I guess the whole point of this post is that we are all interested in something but very few people seem to be outwardly passionate about anything. I want to do a better job myself of pursuing things I'm passionate about and would love to meet more people doing the same along the way. Before I can ask someone else, I should really ask myself "what am I crazy passionate about and how does that drive decisions I make."

The China A-share Market is Definitely a Rollercoster-The Question Is, Are We On the Way Up or Down?

We've finally returned from the May holiday

here in China. For all the credit China gets for working hard, and much of it is well deserved, there are three different times during the year when the entire country takes a whole week off. As a beneficiary of this policy I cannot complain because it provides ample opportunity for travel. It just cannot do much for productivity. Think if the entire US was off for a whole week three different times during the year. I cannot even think of a time where the entire country takes two days in a row off. Maybe a little lack of productivity is what you want when you are aiming to emply 1.3 billion people. Creating that many jobs in a super productive environment would be a challenge for anyone. I guess that is why when we go to department stores, there are 15 people ready to help.

Anyway, we are back and the the pent up demand for A-shares is evident. I guess retail investors didn't spend all of their money during the May holiday on stuff they probably don't need (an estimated $550 million was spent in Shanghai alone over the 7 day holiday). The Shanghai Composite Index is already up 2.6 percent for the day sitting at about 3941, yet another all-time high (yawn).

China is definitely the wild wild East and its domestic A-share stock market is a rollercoaster. The question is, are we on the way up or down. If we are on the way down, as is commonly asked at the Grand Canyon, how far is it to the bottom? Are we in for a Beowulf-like plunge? I think the above charts says it all. I'll leave it to you to draw your own conclusions. Buyer beware!

Why Chinese Entrepreneurs Rock!!

On a recent trip to Thailand, I was reminded over and over again why Chinese entrepreneurs or even just businesspeople in general, rock. I spent the May Holiday (essentially Labor Day in China) running around the island of Phuket just off the coast of Thailand. I was doing everything one would expect in such as locale: jet skiing in the ocean, island hopping (yes, I did see the location where The Beach was filmed, see the attached picture), snorkeling, getting buried in sand, buying some great T-shirts, drinking pinnacaladas, getting sun burned, eating great Thai food and just being a bum. My only regret was missing the opportunity to see a Thai boxing match and riding the token elephant, but that is what second trips are for. I really questioned whether or not it made sense to return to the chaos.

We can all agree Thailand is the quintessential tropical location. It rains almost every afternoon in Thailand. During the last night of my vacation, the rain forgot to stop and continued on into the night. It must have rained, and rained hard, for 8 hours straight. The water level in the street rose to my mid-calf. I wasn't afraid of melting, actually I rather enjoy the warm rain in Southeast Asia; I just didn't want to be drenched from head to toe when I went to eat dinner or into a shop to buy something. The toe part of that equation was already a lost cause, so I had only my head to keep above water. So, doing what I always do when it rains in China, I looked for the wave of people that suddenly appear on the street hawking umbrellas from $1 the second precipitation begins to fall. In Thailand, these people were nowhere to be found.

Maybe that one instance was an anomaly and not representative of how things usually are, but I was thinking to myself the whole time how this would never happen in China. In China, there would be 5 people standing in front of me with boat loads of umbrellas of every color imaginable undercutting each other with price wars to sway me in their direction. Maybe this simple example is a microcosm of why the Chinese economy continues to churn and grow at torrid rates year after year. Chinese entrepreneurs are enterprising people that look for opportunities at every turn.

In another example, I was walking through the shops on the beach just wasting time and money. I noticed some really cool paintings that looked very Thai to me, of Buddas and the like. I really wanted to buy one to put in my apartment, so I asked the shop owner about the price. He said, 7000 Baht (~$200 USD), without flinching. I laughed but he argued the merits of the price with me, reminding me over and over again the paintings were done by hand. I thought, "I can find something ever similar to that in China for 1/10th of the cost," so I politely told the guy I would think about it. He just let me walk out the door.

I could see they were actually doing the paintings in the shop, but, oddly, I saw the same paintings in shop after shop after shop. I wanted to know how he was getting at the $200 price, so I indiscreetly asked one of the guys doing the paintings how long it took him to do one. He said 2-3 days. I returned to the shop owner, wanting to judge his honesty, and asked him the same question. He answered "one week." So, not wanting to buy from that guy, I moved on.

I returned to a shop I had visited the day before where a Nepali girl (most of the store employees were from Nepal, Burma and India) had waited on me. She was there again, and I asked her about the price of the painting. The night before she had said 3000 Bhat, which was looking more and more like a reasonable price after a bit of market research. I told her if she came down to 2500 Bhat (~$71 USD), I would buy it. She used her cell phone to call her boss and came back to me with a down face. She told me her boss would only come down to 2800 Bhat. Realizing this was only the beginning of the negotiation and that I needed to talk with the decision maker, I asked her to call her boss back and let me speak to him. She did, and I worked him down to 2500 Bhat. When we were packaging the painting up for the trip back to China, knowing all of these paintings had to come from the same source, I asked her what her boss's cost was. Her best guess was 2000 Bhat. I could live with them making an 800 Bhat profit. I walked passed the first store owner and just lifted the packaged painting up. He knew I had bought elsewhere. I again thought to myself, a Chinese entrepreneur never would have let me walk out of his store without a heated negotiation. I guess they can afford to be more choosy in Thailand.

Chinese A-share Stock Market Hiccups...Again

After reaching an all time high earlier this week, the Chinese A-share stock market experienced a hiccup on Thursday falling 4.52 percent (163.38 points) to close at 3449.02. This correction, if you can call it that, was only half of the 9 percent pull-back the A-share market experienced on February 27 that sent a ripple effect to stock markets globally. Only 6 stocks reached the upward 10 percent daily trading limit on Thursday while over 40 fell by the 10 percent daily limit. This is a stark contrast to the past few months on the A-share market where approximately 50 stocks reached their upward daily limit on average while roughly 10 fell to the lower daily limit. Stocks reaching their upward daily limit on Thursday included three pharmaceutical companies: Da An Gene Co Ltd. (SHE-002030); Hubei Guangji Pharmaceutical (SHE: 000952); Chongqing Huapont Pharmaceutical (SHE: 002004).

The Chinese A-share market is largely driven by the whims of domestic retail investors instead of objective fundamental analysis that many in the west are accustomed to. Throughout the week, the sentiment was even the most optimistic retail investors were becoming increasingly apprehensive about the uninterrupted torrid upward movement of the market since the February 27 pull-back. More than 897,000 new trading accounts were opened from April 12-16, an average of roughly 200,000 per day. To put this statistic in context, approximately 850,000 trading accounts were opened during all of 2005. It is estimated these new market participants injected $800 million USD of capital into the market daily.

Following the 130 percent increase in the Chinese A-share stock market in 2006 and an over 30 percent increase thus far in 2007, a correction is natural. With the official Chinese May Holiday on the horizon next week, a continued ease off of the accelerator would not come as a surprise as domestic investors liquidate their holdings prior to the holiday. Many believe global investors were unjustifiably spooked by and overacted to the sudden pull-back in the Chinese A-share market on February 27. It will be interesting to see if history repeats itself and global markets take a cue from China's lead or if they brush the Chinese A-share market hiccup off as inconsequential.

Essence of a "Harmonious Society" is Lost in Translation

Every 5 years the CPC and Chinese Central Government devise a 5 year plan that will more or less direct the coming five years of development within China. It essentially serves as a road map defining the path the country should strive to travel over the next 5 years identifying areas of focus, specifying industries that should be built up, social issues that should be addressed, ect. The release of the 11th 5 Year Plan (2006-2010), was accompanied by the overall theme "to build a Harmonious Society."

This theme begs the questions, what exactly is meant by "build a harmonious society?" Answering this question is a bit subjective in nature. You'll get a different interpretation depending on who you as.

Below are a couple of interesting quotes from local media as to the meaning behind the theme. I'll leave it to you to draw your own conclusion:

"The resolution highlights the importance, guidelines and goals of building a socialist harmonious society. It puts forward the principles to be followed, the main objectives and tasks for building such a society by 2020, such as further improving the socialist democratic and legal system and narrowing the gap between urban and rural development and between different regions."

"The society in China now is generally harmonious. However, we do see disharmonies happening occasionally. This could be reflected in various gaps in development, between regions, between urban and rural areas, and between other areas. The increasing gaps are the problems we need to solve."

Building a harmonious society is not like building a bridge. How can you plan to have achieved that in 10 years or 15 years? How do you measure success of these efforts? Cultivating the mentalities and attitudes of people takes generations not 5 quarters. It isn't an infrastructure project. So what does this mean?

The best analogy I can think of is the scene in Bill Murray's "Lost in Translation" where he is sitting there shooting the whiskey commercial. There is a Japanese director instructing Bill Murray what to do, how to sit, ect. The problem is, the director is saying everything one hundred miles an hour in Japanese. Watching Bill Murray's facial expressions while the guy is yelling at him in Japanese is worth the price of admission. At the end of the director's 1 minute tirade, Bill's interpreter's say, "he said lower your head." Bill displays a very confused look on his face and responds with, "Is that everything? I mean, it seemed like he said quite a bit more than that." Bill's question is a reasonable one and one we should be asking regarding what exactly is meant by building a "harmonious society."

To many local Chinese, the government's aim with this theme is to try and solve fundamental problems within society, such as the blind pursuit of money. The government wants to cultivate a happy and peaceful culture and society in which people are content. But to me, the first questions that goes through my head is "is that everything? I mean, it seems like quite a bit more."

No one can question the progress of the Chinese economy over the past two decades. The growth and development has been nothing short of phenomenal and unprecedented in modern history. For that, the Chinese leadership should be commended. Having said that, many Chinese like to say "China is different." This statement comes up over and over again, regardless of the topic, when a Chinese person believes a foreigner isn't quite grasping what China is all about. I've stopped taking this personally because I've discovered, in some cases, Chinese people will say this to each other. If someone shows up in Shanghai from another province around China, local Shanghainese will be quick to say "you don't understand Shanghai" or something to that effect. This is a nice way of saying either "I don't know how to answer your question" or "you have no way of comprehending the answer to your questions, so I wouldn't bother wasting time giving you one." To me, every country in the world "is different" so I am not satisfied with this statement as an answer to everything.

To me, China isn't so different. It is much like many other countries in the world. The overreaching goals are to grow economically and provide people with a better life. China just happens to be bigger and have a longer history. Every time someone wants to engage me about the US, I could just as easily say, "you don't understand, the US is different" because it has a smaller more culturally diverse population and it is a younger country.

Regardless of how different China might me, laws of modern economics still apply. There has been lots of chatter both by onlookers abroad and economists/experts within China that China's economy is overheating and something needs to be done to slow growth. To me, this is the essence of the "build a harmonious society" theme for the 11th 5 Year Plan. The Chinese leadership is a sharp group. They realize the economy needs to be slowed down and have reverted to common economic tools to achieve this end such as raising interest rates 3 times in the past year, increasing the required reserve ratio for banks and even stating that many of the domestically listed companies lack the intrinsic value implied by their stock prices and in some cases should be delisted.

Despite these efforts to slow the economy, the China growth engine isn't listening as the economic growth is estimated to have accelerated to 11% in 1Q 2007 increasing from 10.4% growth in 1Q 2006, the local stock market is up over 30% during the 1Q 2007 following a sizzling 130% increase in the A-share market in 2006, a healthy pipeline of IPOs wait to list on the Shanghai Stock Exchange, exports experienced double-digit growth in 1Q, there are over $2 trillion in local savings that continue to be diverted into stock trading accounts to be invested in what is perceived to be a riskless market (oh contrar), the government has $1.2 trillion in foreign currency reserves, and fixed asset investment increased. What is not to like? The Chinese are a smart enterprising group that recognize opportunity when it presents itself.

To me, the translation for "build a harmonious society" is quite simple: slow down the growth by any means possible. Every approach using modern economic tools has been taken to slow growth to no avail. The fact that there are capital controls and a stock market that seems to only trend upwards at a 90 degree angle actually make these tools less effective rather than more effective. So, the approach to slowing growth is a softer one. The idea is to tell people not to focus so much on running after the all mighty dollar. As a result, people might stop focusing so much on making money and the economy might slowdown.

The logic behind the approach is understandable. People are probably listening and saying to themselves "yeah that is a good idea, other people should do that" as they scamper off to the local securities firm to make their next trade and continue ride the stock market tidal wave. Who can blame them? Where else, justified or not, can you get a 30% return in a week? I'd be doing the same if I could trade A-shares.

China Mobile Goes Underground, An Anhui Taxi Driver Weighs In On The Internet And A Bone Goes Missing

On a recent weekend trip to Huang Shan that included a minor bus accident, an insurance settlement negotiation on the highway, multiple wrong turns (left & right), a random wet driver pickup, a " mysteriously misplaced bone," 5 minutes of hail (no typo), a late-night Majiang showdown and pumpkin seed poker (who needs virtual currency), some new light was shed on the literal downward direction of China Mobile, Internet search and online gaming.

On a weekend that was meant for the PE Team to get away from it all, China Mobile was inescapable. In contrast to many of the wireless players who, despite their best efforts to avoid it, seem to bump into China Mobile at every turn, our weekend encounter with China Mobile was actually a welcomed one in the most unlikely of places. After arriving at Huang Shan (or at least nearby), we found ourselves in caves running like veins under the mountain that were dug out 1000 years ago, or so the tour guide said.

As is the case on most trips to the middle of nowhere, we were a little worried about whether or not we would get mobile service so far from our beloved Shanghai. Upon entering the cave, instead of being warned of swarming bats and falling stalactites, we were meant with a sign that read "China Mobile happily brings you service within these caves," or something to that effect. Right next to that sign was a similar one posted by China Unicom.

We laughed at the thought that even though China Mobile continues to add 5 million subscribers a month and make further inroads into second and third-tier cities, its expansion is not limited merely to a lateral direction. China Mobile is penetrating downward into the depths of caves that run through the base of China's mountains. Needless to say, we were all pleasantly surprised and impressed by China Mobile's reach. There is no word yet whether or not China Mobile will now add a vertical element to its future expansion strategy by offering service on the moon, but we wouldn't put it past them.

After emerging from the Huang Shan caves, the next day we found ourselves in a cab in route to some ancient city. We just couldn't help ourselves and engaged the cab driver in a discussion of Internet search and online gaming. When asked which Internet search engine he preferred, Baidu or Google, he answered Baidu, which came to little surprise. We attempted to dig a little deeper to understand why he preferred Baidu to Google and his answer was simple: "it's a Chinese company." This answer actually came as little surprise. In contrast to the west, where superior technology tends to prevail in the minds of consumers, many Internet users in China, particularly in Anhui (assuming our one person sample size is representative), still prefer local companies despite inferior technology.

Our conversation then shifted to online gaming. We learned that our taxi driver, who was probably 27, is a self-proclaimed "former gamer." His game of choice back in the day was Mir 2. We asked him why he wasn't playing anymore and he simply replied that he didn't have the time. We suspected time was likely one of a few variables driving this decision to walk away from gaming. As the gaming market in China matures and some gamers near retirement age (28-30) where time, job and family constraints make the time investment impossible, we see a niche market emerging. We suspect if there was a game on the market that would be fun for our taxi driver and his wife to play (his 2 year old daughter is not yet a gamer), he might consider dusting off the old mouse and sharpening some of those key stroke skills to get back in the game.

The story of the mysterious missing bone is more of an inside joke within my company. Suffice to say we were enjoying a typical 17 person dinner last Saturday night that included enough food for an army. One dish that appeared on the table was a rather large pork dish topped with a sweet tasty glaze. Once we devoured the meat, a bone 1/4 the size of a human femur was left on the plate. One of my colleagues has 9 dogs and his wife was determined to transport the bone back to Shanghai to feed it to their dogs. Mysteriously, in the midst of all the eating, drinking and laughter, the bone vanished. The waiter assured everyone she didn't take it. A comprehensive top-to-bottom search of the private dining room we were in was conducted to no avail. We even looked out the window with no luck. It was left a mystery. No one knows what actually happened to the bone except, of course, for the person that made it disappear ;)

The Bumpy Road to Property Rights

As real estate development continues at a torrid pace around and the Chinese authorities continued to make strides (ok, baby steps) on the path toward establishing individual property rights, a proverbial bump in the road presented itself in the form of a 30 foot tall "dingzi" (a Chinese word that means "nail" but is also used to describe someone unwilling to vacate their home) in Chongqing (the largest 30 million person city no one has ever heard of).

If a picture is worth a thousand words, the below link says it all.

http://www.ananova.com/news/story/sm_2237937.html?menu

Real Estate developers were unwilling to entice this brave soul to take an offer for their house, which happened to be sitting smack in the middle of the development project. Word of the story spread around forms around China, and the "hard as nails" homeowner became something of a cult hero overnight, viewed by many as someone standing up for the people and testing just how far the newly established property laws went.

Below are some associated quotes:

"At the beginning of March, a photo called "the coolest nail house in history" stirred up a lot of debate. Within the space of a few days, this photo was widely circulated and posted all over the Internet, and a lot of media as well as the general populace were interested in the affair.
This happened at the same time as the Property Law [was being discussed at the NPC], so people were even more curious about it. The final fate of "the coolest nail house in history" will be a famous monument to the progress of the Property Law.

The Tianya post has hundreds of comments representing many different points of view about the Property Law, the evils of state- and privately-owned real estate development, and the the rights of tenants. The online chatter about property rights makes for an interesting contrast with recent discussion of property rights in the traditional media, for example this story excerpted from The Wall Street Journal:
China Magazine Is Pulled As Property Law Looms

A landmark proposal to protect private property was formally introduced into China's legislature amid continuing controversy, and in one possible sign of the legislation's sensitivity, the latest issue of an influential Chinese business magazine that covered it was pulled earlier this week.

It wasn't immediately clear who blocked the issue of Caijing -- a move that came during one of the busiest periods in China's political calendar -- or why. But according to a person familiar with the situation, the issue included articles, among others, on the bankruptcy of a government-controlled brokerage firm and on the piece of property-rights legislation, which has drawn vocal criticism."

The homeowner, Ms. Wu Ping, was quoted as saying:

"Among the residents moving, I am the largest private property owner, furthermore you can basically say I am the only one who has complete papers, such as a property rights land right certificates, they both clearly indicated that it is a building zoned for business. At that time I had just finished renovations, and they (the developer) said they had to tear everything down and people had to be relocated, as a result this was really damaging for us. According to my property right certificate, I am clearly in ownership of 219 square meters, so for this use it should be returned to me."

Below is a link to an interview with Ms. Ping:
http://www.proxzee.com/index.php?q=aHR0cDovL3ZlbnR1cmUxNjAud29yZHByZXNzLmNvbS8yMDA3LzAzLzIyL2ludGVydmlldy13aXRoLWNoaW5hcy1tb3N0LWluY3JlZGlibGUtaG9sZG91dC8

In the end, it all came crashing down, literally. While the effort on Ms. Ping's part was valiant and will undoubtedly encourage imitators across the country, there are some things, property rights included, that will simply not be allowed to stand in the way of continued economic development, that includes "nails in the road."
http://feeds.feedburner.com/~r/DanweiRss10/~3/106193467/chonqing_nail_house_destroyed.php

Everyone Please Remain Calm-It Was Just a Correction

If last week taught us anything, it is that many of the world's most liquid mature equity markets have started taking cues from China, be it justified or not. Previously, the vast majority of people agreed that, given China's unquenchable hunger for resources, China was a significant player in determining world commodity prices (i.e. steel, oil). People also largely agreed that China was in many ways responsible for holding US interest rates down due to their feverish purchasing of US Treasury Bills. Yes, those of you in the US that took advantage of the low interest rates and refinanced your homes in the past few years, you have China to thank whether you want to admit it or not. China's buying of US T-bills has less to do with their attractive investment returns and more to do with keeping their own currency weak relative to the US dollar enabling their export engine to keep running. Keeping US interest rates low is in China's interest, because it keeps US consumers purchasing goods that China exports. Continued export customers keeps China's factories humming and employment up, something critically important in a country that must maintain over 7% economic growth annually to create enough jobs for new people entering the work force annually.

There has been chatter that China, in addition to many other nations (i.e. cash rich Middle-Eastern countries-->price of oil per barrel is denominated in US$), are looking to diversify their FX holdings into other currencies and/or gold. Currently, China holds over $1 trillion in US T-bills. No, that is not a typo. If I'm a market speculator, I'm definitely betting that gold is going up. The economics just make sense. If these countries do indeed choose to dump a percentage of their USD holdings in favor of other currency's or gold, expect US interest rates to jump and money not to come quite so cheap in the US. Adios, to the low financing of the new car.

The events of this past week warrant some consideration. We must ask ourselves, how does an 8% drop in a stock market (China's A-share market) that was among the world's worst performers in 2004 and 2005 and is coming off a year during which it increased 130% send such shock waves throughout the world? The following day, the Dow was driven down almost 4% and other indicies around the world took it on the chin as well for no real reason at all. After a 100+% rise in the China A-share market over 12 months, isn't a slight pull back justifiable, even expected?

Before 2006, the rest of the world didn't care what was happening on China's stock market. It was what many considered to be a casino. Maybe this is what was necessary for people to finally take notice or acknowledge that they already knew subconsicously. Officials have openly stated this year that over 70% of the listed stocks on China's A-share market are worthless and should be delisted. Granted, things are getting better, regulations are beginning to be enforced and more quality companies are starting to list in mainland China, but China's financial infrastructure has a long way to go. A country might be able to build highways and bridges in 20 years, but instilling the concepts of intrinsic value, corporate governance and regulatory enforcement take time no only to implement but to educate people as to why they are necessary for a well-functioning market.

My guess is, this won't be the last "pullback" China's market experiences. I believe there were actually people in China breathing a sigh of relief as the government has been working very hard to find ways to cool the already overheated market. The question is, how will the world react when it happens again, and believe me, it will. That is the nature of an emerging market.

I think we should stop pondering whether or not there is a connection between China's equity markets and the rest of the world or if the aftershocks are justified. Rather, it would be better to accept the fact there is a perception of a connection ingrained in peoples' minds. As one of my coworkers accurately stated, "fear and greed" drive the market. In the end, I think most people think there shouldn't really be a correlation between what happens on China's markets and the rest of the world, however, they "fear" there just might be, and that is enough to cause a panic.

Chinese Stock Market "Smashes" Records Two Days in a Row

2007 is shaping up to be an interesting ride for local Chinese Exchanges.

The Shanghai Composite Index, which tracks domestic Chinese RMB-denominated A-shares and foreign currency denominated B-shares, jumped 1.4% on Monday to close at 3040. This was the highest close since the bourse was launched in 1990. Three of China's largest steel companies lead the charge as Baoshan Steel, Angang Steel and Wuhan Iron and Steel jumped 8 percent, 8 percent and 6.5 percent respectively. Mainland banks China Merchants Bank, China Minsheng Bank and The Industrial and Commercial Bank, which had been responsible for much of last year's rally, fell 5.6 percent, 4.1 percent and 0.8 percent respectively in response to the central government ordering lenders to increase reserve-ratio requirements from 9.5 percent to 10 percent.

On Tuesday, the Shanghai Composite Index fell 8.84% to close at 2771.79, again "smashing" records as institutions locked in profits and individuals sold in response. This was the largest single-day fall since 1997 when the market dipped 8.91 percent following the death of former Communist Party leader Deng Xiaoping. A few listed stocks, including Chan Vanke Co (the nation's largest property developer) and China United Telecommunications Corp (China's second largest mobile carrier), fell 10 percent, the single day limit for individual stocks. Trading volume hit record levels soaring to 131.6 billion yuan (US $16.57 billion), a 42 percent increase over the volume during yesterday's rise. One market participant noted, "selling sentiment might continue for some time if there is no strong policy stimulus from the government." Someone should let this guy know the government is probably very relieved by the pull-back as they have been trying to figure ways to cool the red-hot local stock market that rose over 130% last year and was already up 15% for 2007.

Smart market players will see yesterday's pullback as a buying opportunity and look to jump back in. Liquidity continues to slosh around the markets as China launched a new US $1.29 billion mutual fund (the first new fund in 4 months) yesterday that sold out within 2 hours. Shanghai is also reportedly preparing to allow H-shares, Hong-Kong listed mainland companies, to start trading on local exchanges "soon" in an attempt to continue to increase the size and quality of the domestic market. These will be referred to as CDRs, Chinese depositary receipts. China Mobile and PetroChina are rumored to be among the first Hong-Kong listed mainland companies to sell CDRs. Hold on to your hats, because 2007 should be a wild ride.