The article below raises concern about financial stocks risk exposure in China and wonder which of our big banks have huge investment in China ? I seem to recall ANZ, CBA and may be WBC as well as NWS which have media business in China. Can someone confirm. Thanks.
WEEKEND EDITION Mapping the next China Syndrome If Shanghai stocks suffer a meltdown, how far would the fallout extend? By Jonathan Burton, MarketWatch Last Update: 9:17 PM ET Feb 9, 2007
SAN FRANCISCO (MarketWatch) -- The surging stock market enticed first-time buyers and fast-triggered day-traders, creating a giddy sense that share prices could only go higher. When skeptics spoke up, they were told, "It's different this time." The market tanked, and seven years later trades at half of its peak value. The Nasdaq's stratospheric rise in 1999 and its subsequent demise is becoming a sobering lesson for China, where heady stock prices are whipping up both speculation and concern. China's "A" share market -- restricted mainly to Chinese nationals -- has run up almost 140% in the past 12 months, soaring 46% in the fourth-quarter of 2006 alone. The Shanghai-based market's rapid ascent, the result of structural reforms that boosted investor confidence after a multiyear slump, has riveted Chinese people from all walks of life. "Late last year the market was exploding, and I thought this is just a super-bullish market," said Zhu Hui, a 28-year-old journalist in Shanghai. She started buying stocks in January, and says her investments are up about 10% so far. "Of course," she added, "the market has been going too fast, but I don't think it is too risky to be in the market right now." Across China, similar tales of riches are captivating the country and enticing millions. Investors opened an estimated 50,000 retail brokerage accounts a day in December. A new mutual fund from a Beijing-based money manager partly owned by Germany's Deutsche Bank AG raised the equivalent of $5.1 billion in its December launch, a new record. None of this excitement has been lost on authorities in Beijing. Indeed, the government is openly determined to keep this bull in China's shop under control. They fear that without deliberate intervention, the A-share market could inflate into a Nasdaq-like bubble. Only if this one bursts, market professionals and experts say, it could deal a sharp setback to China's political stability and market reforms. It also could have a chilling effect on Hong Kong-listed stocks -- the main way U.S. and other foreign investors have been engaged in China's unprecedented growth. "If the market goes up another 50%, eventually we may have a huge correction," said Frederick Jiang, manager of the Ivy Pacific Opportunities Fund in Overland Park, Kans. "Many sectors would be affected." Financial sector To be sure, a protracted downturn in the A-share market is unlikely to derail China's remarkable economic growth, observers say. But some of the nation's most richly valued sectors could be vulnerable, namely banks and life insurers -- including its largest insurer, China Life Insurance Co. Ltd. "I would be cautious on the financial sector, particularly something like China Life," said Edmund Harriss, co-manager of London-based Guinness Atkinson China & Hong Kong Fund. 'In the short term, there will be a correction. In the medium term, I'm optimistic, as long as China's economy doesn't experience a major adjustment.' — Ba Shusong, senior government research official He says companies that are well-positioned to absorb the shocks are tied to manufacturing and consumers, such as telecommunications provider China Mobile Ltd. and energy giants CNOOC Ltd., PetroChina Co. Ltd. and Yanzhou Coal Mining Co. Ltd. Richard Gao, manager of the Matthews China Fund, adds that he too is uncomfortable with China's financial-sector valuation. He's allocating new investment to infrastructure-linked companies such as Huaneng Power International Inc. It's not just domestic investors who are exposed to the market's risks. U.S. and other foreign investors in Hong Kong-listed "H" shares could also take a punch. Some high-profile A-share companies such as China Life are listed not only in Hong Kong but also in New York, giving foreign investors a stake in their futures. "The impact to U.S. investors will be fairly noticeable if China falters," said Roger Nusbaum, a money manager at Your Source Financial in Phoenix. "Clearly, the demand for all things China is reflected in the success of the local market as well as how U.S. investors have picked up on that theme." Last April, he cut his holdings in Chinese stocks and funds in half. One of those was China Petroleum & Chemical Corp. "I still own it, but over the next six months, I'd expect the whole China theme to drift lower," Nusbaum said. "I still own some of this stock because longer term we're still bullish on the company and the Chinese market." China's footprint is significant in many international portfolios. It makes up roughly 10% of the MSCI Emerging Markets Index, one of the most widely used benchmarks for tracking developing economies. It's also the basis for a hugely popular exchange-traded fund, the iShares MSCI Emerging Markets. Several other ETFs and mutual funds have upped their stakes in China in the past few years, Nusbaum said. "So if China drops, a lot of ETF and mutual-fund investors will be greatly impacted," he said. Mutual funds dedicated to China attracted about half of the $24 billion that went into emerging-market stock funds in 2006, according to Emerging Portfolio Fund Research Inc. Among them, U.S.-traded Morgan Stanley China A Share Fund, which has garnered about $400 million in assets since September. "Any movement in the A-share market has an effect on the H-share market," Gao said. "H-shares, compared with A-shares, trade at a more reasonable value. There will be a bad impact if the A-shares come down, but overall the H-share market is healthier." Leadership concerns China can ill-afford unrest from a market correction. The 17th Communist Party Congress this fall will shape strategies and decide key posts for its political leadership. Meanwhile, the nation is racing to finish preparations for the 2008 Summer Olympics, to be held in Beijing. Accordingly, senior policy-makers have attempted to put brakes on the A-share market, with some apparent success. One of the most visible signs came in January when Cheng Siwei, vice chairman of the standing committee of the National People's Congress, told the Financial Times that he sees "a bubble growing." He added darkly: "Investors should be concerned about the risks." Shanghai-listed stocks are off about 7% since then, although the market is still up about 17% so far this year. Others in influential positions echo that sentiment. "In the short term, there will be a correction," Ba Shusong, a senior official in the research and consulting arm of the Chinese government, said in an interview. "In the medium term, I'm optimistic, as long as China's economy doesn't experience a major adjustment." With that in mind, officials have taken concrete action in addition to trying to talk stocks down. Banks have been told to prevent investors from borrowing money to buy stocks. Retail investors are required to show brokerages proof of identification to prevent people from opening multiple accounts. A two-month moratorium on new mutual funds was lifted this past week, evidently with the aim of encouraging investment in diversified, professionally managed portfolios rather than single stocks. As Merrill Lynch pointed out in a recent research report, Chinese government controls will have to get stronger. That could lead to a 20% to 30% pullback in A-share stocks before the end of the first quarter, according to Merrill. Beijing may ramp up bank-deposit rates as a way to sop up liquidity from the system, Joan Zheng, Merrill's analyst wrote. But ultimately, Zheng concluded, only a tax on capital gains would deter buyers. Some China watchers believe the government has learned from the Nasdaq's collapse, and is acting accordingly. "It's very good for them to pour on some cold water, to make sure a bubble will not become a reality," said Jiang, the Ivy fund manager. One of the main lessons the government may have learned is the importance of portfolio diversification. That could impact one of Washington's longest-running issues to monitor: China's vast holdings of U.S. government debt. "It looks like they will diversify their investment," Jiang said. "How is a big question. We don't know when, how much money, and what asset classes they will invest in. It may be blue-chips in the U.S. or developed markets, private equity, strategic interests in mining and energy. "It's hard to say what the impact will be on U.S. Treasurys." he added. "Chinese leaders are very pragmatic. They will do things very gradually to minimize the impact on global financial markets." Jonathan Burton is MarketWatch's investments editor, based in San Francisco. Reporters Chris Oliver contributed from Hong Kong; Barbara Kollmeyer from Los Angeles; Murray Coleman from San Francisco; and Wanfeng Zhou from New York.
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