Gung Ho Fat Pigs

Sunday marked the Chinese Year of the Golden Pig. But with the recent run up in China's markets, will the New Year continue to nourish hungry traders, or are the hogs getting fattened for the slaughter?

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Of course I mean “Gung Hay Fat Choy” to wish you happiness and prosperity in the Year of the Golden Pig. But as I savor a tasty dumpling to celebrate the Chinese New Year, I can’t help thinking I’ve seen this movie before: Yuppies betting their paychecks on a sock-puppet stock only to wind up eating cheap takeout for the next five years.

Regardless of our own recent history, millions of Chinese cast in today’s remake are banking on their own good fortune, despite identifiable patterns. Pundits warn that formerly flush Chinese Internet stocks have flattened while the Shanghai Composite has doubled - perhaps predicting a remake of US telecom’s last stand, which outlasted the dot com bubble by less than a year.

Still, the benchmark Shanghai Composite Index hit another record high Friday, bouncing in a week from 2600 to something beyond the auspicious 3000 mark. All of this despite the fact that China’s Vice Chairman of the National People's Congress admitted only 30% of the 840 companies listed on the Shanghai Stock Exchange, “are good to invest in by Western standards.”

Overnight his comment chopped 5% (the biggest one-day drop) off a market otherwise up 130% year to date; prompting fund managers to proclaim a correction. Some good that did.

Despite their comrade’s call for caution, the masses still continue to fatten themselves – if only on paper - and seem unfazed by the numbers. For instance: The country's largest life-insurance company, China Life, trades in Shanghai, Hong Kong and New York. A few weeks ago, China Life shares had a P/E near 70 compared to the S&P’s average of 18. According to a recent JP Morgan report, 8 out of 37 Chinese companies listed jointly in Shanghai and Hong Kong trade on the mainland at double their Hong Kong valuation. Last year, 2.4 million investors joined the party at the Shanghai exchange - a 250% increase in new accounts. And until the recent government ban, Shanghai speculators were taking out second mortgages to buy third-rate stock. Yet even in this frenzy, BNP Paribas estimates that only 11.38% of Chinese personal assets are invested. The global average is 30%.

If this seems irrational, consider the luck factor.

Doubters of the Chinese predilection for gambling need only look to Macao. But on the mainland, betting is illegal unless you’re playing the market. By ignoring details like earnings, transparency and an unpredictable legal system, mainland investors get to play really high stakes. According to the Securities Law of the PRC, share listing requirements include: approval of the (communist) State Council, capital of RMB 50 million and 3 years of both profits with no “major illegal activities” or false accounting records. If it were that easy here, I could IPO Marion Barry.

Additionally, as James Clavell readers remember, Chinese trading psychology depends on feng shui, the ancient Chinese practice of encouraging harmony through numbers and design. The Year of the Pig is symbolized by fire and water. Fire represents the financial market, and water brings growth, but according to practitioners, fire over water is an illusion that could generate unrealistic optimism.

You may scoff, but when China talks, people listen. Prediction is so popular that Beijing recently intervened to regulate horoscope texting, and new start-ups pop up daily to portend your financial future. "Because of the water element in the Year of the Pig, the economy will continue to grow, which also paves the way for another round of interest rate hikes," heralds one market fortune teller.

Plus the whole market thing is relatively new. The post-Cultural Revolution exchange was only born in 1990. It’s still hard for communists to stand by and watch. In 2005 Beijing instituted a year-long ban on IPOs. Regulators halted the sale of new mutual funds. Last month the government-owned CCTV broadcast warnings not to use homes as collateral for stocks, and banks were barred from lending for stock investments. And old China hands knowingly nod that the markets usually rise before the lunar New Year, perhaps on governmental support intending to provide an auspicious start.

Will Beijing bolster the bubble? What if it doesn’t? Will the masses get a valuable education in free market economics -- or a costly re-education courtesy of Beijing? With the mandate of China’s successful international debut at the Summer Olympics, the real risk lies in Beijing’s temptation to control the market rather than encourage its natural growing pangs through reasonable listing requirements and enforceable law.

Record highs or not, if you have the tenacity and the insomnia to keep a close eye on China, with $10 billion in impending IPOs, this year’s lucky pig could still bring home more bacon.

Heather Flick

2/20/07

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