China Southern Fund Management is on track to raise nearly $8 billion in one day for its overseas equity fund. The fund will invest in stocks in ten different countries, beginning first with Hong Kong and the US.
I hadn't expected there to be much interest among Chinese investors in investing abroad because the expected currency appreciation creates too much of a hurdle, so I doubted the recent market openings -- making it easier for Chinese to invest money abroad -- would have much impact on limiting reserve growth and monetary expansion. The success of this fund will have no major impact, because $8 billion in outflows makes little difference for a country that may see reserve growth of as much as $400 billion this year, but it is a good start, and if it is succesful (a big if, given global market difficulties and booming local markets) it may lead to further outflows.
Some analysts were concerned that this kind of outflow might spell trouble for the domestic stock markets, but the Bank of Beijing's IPO on the same day attracted more than 30 times as much demand -- about $250 billion for a $2 billion deal.
[Added two days later] Total outward direct investment in 2006 surged by over 40% from 2005 numbers to $21.2 billion. This is a little less than a third of inward FDI.
Indeed, based on the experiences in July and August, every time we met a sudden down/crash in A&B share market, then we are checking whether there are IPOs on that day. Normally, even in a 3% down day, it is also quite possible for us to find out 200%~300% up IPO cases in one single day! Everytime I see that I then say "GOD, there are still plentiful of money in the system."
By Oliver - 9/12/2007 10:03 PM
For the PRC local markets to go down is more of a good thing than a bad thing. One of the challenges right now is to figure out ways of "popping the bubble" without sending the entire economy into a tailspin, and moving cash overseas seems like a good start to doing that.
One way I look at it is that for trade goods, the RMB is deeply undervalued, but for capital goods (i.e. stock, real estate, and factories) the RMB is deeply overvalued, and this reflects the underlying inability of the Chinese financial system to turn invested capital into goods and services for domestic consumption.
One other way of looking at it is that there is a "traffic jam" of money in the Shanghai stock markets, and one way of resolving that traffic jam is to move the money through NYC and London.
Twofish, I wander why you so sure about something is "overvalued" and some others are "undervalued".
RMB versus a basket of major currencies are typically depreacating but rather than appreciating. Purchasing Power of RMB in PRC is probably weaken than 3~5 yrs before; and since we spend great amount of money on uptrend real estate and education (this is also very very expensive in China), the real power of RMB is weaken all the way.
On the other side, if you make a countinous model, and set the annual growth of profitability of companies in china same as GDP annual change %, and so does USA. you will find 44 times P/E in shanghai is relatively reasonable while the P/E in NYC is 15 times.
The spread of P/E indicates a required/expected fast growth at current speed for around 15~20 yrs. if you believe in the long-term future of China, all the stuffs look like reasonable.
I posted all above not say you are wrong or I am so optimistic towards china, but want to show, whatever you give an analysis, i want your foundations, or basic assumptions. And also the reason you say that:)
By Oliver - 9/12/2007 11:38 PM
Oliver, From my own prospective, I think Twofish's was trying to use the opinion “the overvalued RMB on capital goods" to indicate the bubble of Chinese stock market. Since everyone has been engaged in the argument whether there is a big bubble in the market, most of them mentioned P/E ratio. However the P/E ratio is just an academic word to me. Different people set up different models and then come out different conclusions. I think in an emerging market such as China we should focus more on cash flows. For example, the IPO Phenomenon you have mentioned in your earlier comments.
By Ming Gao - 9/13/2007 9:04 AM
Indeed, cash/liquidity is nearly everything. I seemed focusing so much on modelling in the previous comment.
By Oliver - 9/13/2007 10:35 AM
Any time someone tries to value stocks based on expected future earnings rather than current earnings, big huge alarm bells should go off. If the projected future earning numbers are wrong (and all projections are subject to be wrong) then you end up with a crash. Also, if you are valuating based on future growth that means that you should see no rise in stock prices after you do your valuation, and if stock prices are continuing to rise, then there is something wrong.
In any case, the main thing that indicates that Shanghai is overpriced is that *the exact same share of stock* is selling a Shanghai for prices much higher than *the exact same share of stock* in NYC or HK. Why should the *exact same thing* be priced higher in Shanghai than in NYC? The obvious reason is that people who invest in Shanghai can't buy things on the NYC markets. Which leads to the obvious conclusion about what is going to happen when people can......
Long term China has bright future but bright futures don't necessarily translate into profitablity and higher share prices. The massive wealth that gets generated by China's growth might well end up in the hands of the workers and consumers rather than in the hands of the shareholders. As China's economy grows it is possible that things will be more competive leading to more money in the hands of workers and consumers and less money in profit.
An any case, markets in which people are investing because of high expectations of future growth tend to turn nasty when anything shakes that confidence.
People do come up with different models for stock price, but the key question is how stable the model is. People who price on the basis of price/earnings are going to change the value of the stock only when earning change, and that is a relatively slow process. However, the model I think most people in China are using is, "I think stocks will go up 50% next year because they went up 50% last year." Trouble is that if stocks don't go up 50%, then start selling, which leads other people to start selling, which leads other people to start selling...... And if you believe that stocks are fairly priced by future earnings, they won't go up 50%.
Something important about stock market bubbles is that there is a long history behind them, and it's odd to see basically so many people always get burned when the same exact thing happens over and over again.
One thing that is always the case with bubbles is that there is an element of truth in the bubble. In every single bubble, there was something new that promised huge riches in the future, *and that promise came true*. (American land in the 1700's, railroads in the 1920's, electronics in the 1950's, biotech in the 1980's, internet stocks in the early 2000's) The trouble is that the dream of riches made people make bad investments, and so very few shareholders actually profited from the new breakthough.
The time to buy is when everything seems like it is falling apart.
The other thing to remember -- especially for the students who have taken my capital structure class -- is that when we compare stock prices to call options, it should be clear that a high P/E means that the stock has high time value and relatively low intrinsic value. Intrinsic value changes slowly and according to real changes in enterprise value, but time value is very volatile and extraordinarily susceptible to changes in expectations.
When you expect a high P/E stock to go up, you are saying that you think changes in expectations will improve the time value component. This may or may not actually occur, but it is clear that either way you should expect a lot of volatility. By the way I met a senior fund manager recently who has extensive experience in a major US bank who told me that he thinks Chinese stocks are far from overvalued. It clearly takes both sides to make a market.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (8) for "Good news on money outflows"
- 9/12/2007 11:23 PM
January, 2008