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