Should Tata Motors Buy Jaguar and Land Rover?

Should Tata Motors Buy Jaguar and Land Rover?



Tata Motors, India's largest car maker, has been in the news for the past month because of reports that it is interested in taking over Jaguar and Land Rover, two marquee brands that Ford Motor Company has put up for sale. The Tata Group made a huge acquisition last year when it acquired the Dutch company Corus for more than $12 billion, making Tata-Corus one of the world's largest steelmakers -- and some analysts believe that by pursuing Jaguar and Land Rover, the Tatas are trying to hit another home run. But does it make economic sense for Tata Motors to take over these two iconic brands from Ford? What could Tata Motors do for Jaguar and Land Rover that Ford could not do? India Knowledge@Wharton discussed these questions and more about India's fast-growing car industry with Wharton's John Paul MacDuffie, a management professor and co-director of the International Motor Vehicle Program.

: Does it make economic sense for Tata Motors to take over Jaguar and Land Rover from Ford? And, what would Tata Motors do for these iconic brands that Ford could not do?

I think that there are probably several interested buyers of Jaguar and Land Rover that may share certain attributes. I think for a company in a developing country that's looking to put itself on the map in this industry, particularly Tata, which would not be a new entrant, but certainly with passenger cars and certainly in this high end luxury segment, they would be very new. And, as a former British colony there might be a certain sense of pride in acquiring the "Jewel in the Crown" so to speak.

One of the advantages that you might imagine is that India is a low cost manufacturing base. This is not very much a factor here. I suspect that as a condition of the sale that Ford would insist that the buyer not move manufacturing outside of the UK -- at least not right away. There are a lot of political sensitivities in the UK about that with respect to the auto industry.

Tata has admirable cost reduction skills as they have shown in the development of the Indica, which is a small car. And there is great excitement and impatient interest in the so called $2,500 or Rs 1-Lakh car which Tata has been promising for some time. People have looked at this closely and think that Tata has a lot of the skills to really do that. So the company that is quite savvy about cost control can probably apply those skills even to a luxury car segment.

Ford has been investing in Jaguar and Land Rover. Land Rover actually sells at a pretty good margin; Jaguar is more financially troubled. Ford is selling not so much because these brands are in the worst trouble that they've ever been in, but simply because Ford's overall crisis and Mulally's desire for focus is pushing them towards just concentrating on the core business.

So Tata or any new buyer could pick up these firms presumably at a pretty good price and at a point where they are already on the upswing towards being in better shape. And that might make it easier to look triumphantly like you've managed them beautifully.

News reports suggest that while India's car market is smaller than China's, it's growing at 20% a year, which is faster than the Chinese market. What factors are driving this growth and what are the implications for global auto companies?

Forsome time the fact that the China market growth rate was so much higher than India was attracting some attention for similar reasons. People expected that the opportunities were pretty large in both. I think that perhaps the main factor is that we are talking about economic dynamics affecting the per capita income of people where there's quite a lot of price elasticity.

So if the price of vehicles comes down a rather small amount, there are a very large number of people who suddenly can imagine purchasing a car. These are particularly people with some rising income levels of their own. The competition that causes the prices to drop and the other economic trends that are raising incomes can suddenly bring a large number of people over to what is sometimes called the motorization threshold. This is the point where people suddenly feel that they are able to buy a vehicle. I think that is probably the main thing.

Of course the outside investor interest in India has grown in recent years. People rushed first into China and then a little more slowly into India. But India then looked less crowded competitively, so that brought sort of a second rush. Perhaps the main constraint in this that has affected some of the investment, is that the infrastructure in India is really not adequate to take on a lot of new vehicles.

China governmentally at different levels has recognized this for a long time and they have been pouring huge amounts of money into new highways and other infrastructure. India has not. So we could have years of terrible, even worse congestion in India before that gets solved. But, my guess is that it might break some political logjams on the infrastructure side, if market growth continues.

Looking at the big Japanese automakers -- Toyota, Honda and Suzuki -- all of them have been expanding capacity in India for the past few years. Could you comment on the strategies that these companies are adopting in India? And do you think that they ought to be focusing more on the domestic Indian market -- which I believe, right now, is about 1 million cars sold a year but is projected to grow by 2012 to about 3 million cars. Should they focus on the domestic market or should they use India as a base to export cars to other markets?

There's a slightly different story about each of the companies that you mentioned. And you left out one that I think should be included which is Hyundai, the Korean Company. Suzuki has by now a pretty long history in India, having come in as a partner in Maruti which was half owned by the Indian government. And, partly because of that government investment and some other favorable regulations, Maruti at one time had a staggering 80% of the market, at the very small car end, and they really represented the first sort of modern automotive technology to come into India in some time. This was back now some 20-plus years.

The government has just in May of this year completed the selling of all of its ownership of Maruti. Suzuki now has a controlling 54% share. Suzuki has poured a lot of new investment into the Maruti plants and into expanding the Maruti product line. The classic automotive models like the Ambassador are perhaps a historical legacy in India. They often had very long lives because it wasn't easy to replace them and you could get them repaired any place in the country. There was a huge amount of expertise, spare parts and the like.

Maruti is starting to benefit from the same thing; If you've got a Maruti, you can get it repaired anywhere and you can keep it on the road for a long time. Suzuki is going to try to take advantage of all of that head start lead that they have. Toyota came in much more recently and decided initially not to come in at the very low end of the market, but at a slightly higher end. My sense is that they slightly misgauged how much demand there would be at that level. The product didn't sell as well as expected, although they have gotten some valuable experience there.

They, just like everybody, are trying to find just the right low cost car to bring into India to catch some of this swelling demand. I think the other Japanese companies like Nissan are in not terribly different situations. Honda generally comes into every country with motorcycles first, so that's where more of their Indian investment has been, but they're also aiming to grow.

Hyundai is the real surprise. They came in relatively [recently] and built a plant that was almost an exact duplicate of a plant in Korea. This included lots of automation, which you wouldn't expect. They made the Sonata, which is a fairly mid-sized upscale car. But they also then brought in some small cars and managed to bring the price point down enough so that they have had really spectacular growth. And they have done some savvy things with their marketing to align their products with some iconic Indian images and people. In a way, they are the biggest success story of all of the newcomers in the Indian market and they are going to be tough competitors.

Last month, Toyota's chairman, Fujio Cho, was in New Delhi and he said that in the next couple of years Toyota is planning to launch a new small car. They considered a lot of different countries, but he did say that India might well be the first country where they launch it. Now, given everything that you just said about Suzuki and the popularity of the Maruti in India, do you think that Toyota will be able to take on Suzuki in the Indian market? And if so, what should their strategy be?

MacDuffie: Toyota is a very able competitor, as we all know. Overtaking Suzuki and let's say Hyundai, as the most successful newcomer, probably depends on, first of all, getting the product right. Toyota had rather slow sales in Europe for quite a number of years, in which they mostly took models that were world models sold also in Japan. When they finally focused design effort and actually set up a design studio in Europe and produced a small car just for the European market, they suddenly started to take hold. They were doing lots of other things at the same time.

I would assume that they have India in mind as the first place that their design efforts are very much focused on consumer acceptance. That will be necessary from a styling and feature point of view, but probably price point will be the most important. Everybody is trying to innovate in every possible way to get the price point low enough.

Some of that involves the re-use of components from other vehicles; some of it involves judicious decisions about where you can cut back on lighter weight steel, and what paint jobs [you can use] that aren't based on dealing with road salt in the northeast U.S. It's the creativity to get the right mix of those kinds of cost cutting moves. I expect that Toyota will be very good at that and a lot of other companies will be trying.

If you have the right product at the right price point -- then I think the Toyota advantages of a strong brand will kick in very strongly. Now again, Maruti has been perhaps a bit of a national favorite. Although, people know of course, that Suzuki is behind Maruti. Probably Tata, as Tata becomes stronger, will be even more the national pride purchase for an Indian consumer.

The Hyundai example again suggests that right product and right price, smart marketing and moving quickly are the key. Perhaps I will just say that Toyota is often a bit cautious and careful. And if speed does end up mattering, that may slow them down. But they have a tremendous track record for steady improvement and learning from their mistakes better than almost anybody. I think that if we look out five to ten years, we can expect Toyota to be strong

Among the U.S. auto industry's many challenges are the ongoing negotiations between General Motors and The United Automobile Workers Union aimed at coming up with a new contract to replace the one that expired on Saturday. A major sticking point seems to be GM's plan to turn over health care expenses to the UAW, by way of a trust that would cover GM's unfunded health care obligations to employees, retirees and their families. How would a trust work and why would the union agree to this?

MacDuffie: Those are very good questions and there are negotiators laboring away in windowless rooms right now, in the Detroit area, trying to solve them. This is probably the most striking feature of what I think are correctly labeled historic negotiations this year between the UAW and the Big 3. GM was picked as the first target [because it is] probably the healthiest financially at the moment. This is not to say that this makes them all that healthy.

The trust is something that has been done once before on a kind of experimental basis in the auto industry, both at GM and Ford. It puts funds into the trust which can be used for health care liabilities and the trust is then managed by the union. After the GM and Ford experience, this has been used twice with supplier companies. Both Goodyear and then, more recently, Dana negotiated these VEBAs [Volunteer Employees Beneficiary Association Plan].

So, there is beginning to be a little bit of experience with them. But the scale of what would be involved to do this for GM is of such a magnitude that it would be difficult to predict exactly what will happen.

Billions, like $50 billion, $55 billion?

Exactly. One of the big issues is how much money gets put into the fund up front and where does that money come from? The companies would like to put in as little as possible at the beginning and hope that the funds they put in will accrue at a rate that will cover the eventual liabilities. People will be retiring over time -- these costs are not incurred all at the beginning. The union would like that amount to be as high as possible.

If we look at the precedent, both the Goodyear and the Dana settlements were funded at about 70% to 71% of the calculated health care liabilities. In the run up to these negotiations, analysts were saying that GM would probably shoot for 50% -- wanting to fund at a level of 50%. The UAW would be thinking of something more like 90%. So already that reveals a big gap; those percentages apply to very big numbers.

The next issue is where does the money come from? Is it put in as cash, or is it put in as stock? If a lot of it is based on stock, then the future amount in the fund depends on the future stock performance. So that's a kind of bet by both sides on exactly what the future performance of the company will be.

Just from some of the press coverage that I've seen, I understand that there is talk of some contingencies that would deal with unexpected future events affecting the total amount in the fund. I guess one possibility that this contingency would cover is what if the fund generates huge surpluses? What if the U.S. implements a national health care plan and suddenly a lot of those costs are taken off the back of the fund? So there would be a provision to handle that, probably more importantly for getting the union support and also some provision if the funds run out.

Part of the experience with the small experiments at GM and Ford was that the funds ran out much sooner than expected. So the union has that in their very short-term memory as a risk.

There's a pretty big gap between the 50% figure that GM wants to fund it with and the 90% figure that the union wants GM to fund it with. Where do you think they'll end up?

It's hard to predict because I think it will be combined and interacted with many other features of the deal. But, I think that the union will be aware of the political risks for the union leadership [if they bring] forward a proposal that looks like it's giving away these hard won health benefits or putting them at risk.

After all, the leadership can only put together a contract -- but it has to be voted on by the membership. The health care concessions that the UAW made to both GM and Ford in the last couple of years were approved by a very narrow margin. In fact, at Ford it was narrow enough to make everybody very, very nervous. So if they put together a deal that doesn't get ratified, then it's much more politically complicated to put a new package together.

What's your prognosis of how the deal will work out this time overall?

: Well, my sense is that both sides are ready to try to do something very different here. I mean they could end up with something that is more of a continuation of past patterns -- but it wouldn't really deal with this health care problem. My guess is that there's a lot of energy going into trying to find a creative solution to this. That will probably push up the level higher than GM originally wanted. But it will probably be less than the union wanted because of some of these contingency plans which may reassure some of their concerns.

You know, with the Goodyear and Dana benchmarks of around 70-71%, and given that the automaker workers have thought of themselves as kind of the aristocracy of the blue collar, for them to take a deal that's not as good as the Goodyear and Dana workers would be tough. So I wouldn't expect it to be below that level.

If we can switch gears and talk about Chrysler for a moment. A few weeks ago there were reports about them hiring away James Press, the head of Toyota's North American operations. And, of course they have their new CEO, Robert Nardelli. What do you think the outlook is for Chrysler in the coming year?

Well this is another, in a sense, completely new terrain. There's never been another automaker owned by a private equity firm and perhaps no private equity firm owning such a large and iconic company. So there are a lot of things to watch. The new owners did state, very clearly, that they intended to invest and rebuild Chrysler. They were not interested in what many often assume is the basic private equity motivation, which is to turn and flip the assets quickly.

It was quite important to get the head of the UAW to say that he would support the deal. And in putting together what some consider a kind of dream team of automotive and executive talent to run Chrysler, it seems to back that up. Now, Nardelli's reputation from GE, but even more from Home Depot, is certainly as a cost cutter more than anything else. So that perhaps brings some anxieties on what his preferred and natural approach will be.

Many people, and I would agree, have thought that Chrysler's problems are more on the revenue side than on cost side. They've got to get their product mix right and begin to attract consumers on that basis. Jim Press, on the other hand, has an absolutely stellar record of building Toyota sales in North America and is a proven revenue booster. You know, Toyota has had people poached from them during the years that they have been so successful in the U.S. before -- but never an executive who was anything like the level of Jim Press.

And of course Jim had recently been appointed as a member of Toyota's Board of Directors -- the first non-Japanese in that position. So if I think of examples where other people have left Toyota with the intention of applying Toyota's methods in another company, it turns out that there's an awful lot in the broader organizational culture and organizational systems that make it possible for that person to execute so well. Jim will be stepping away from all of that at Toyota and into a different situation.

On the other hand, sales has always been more customized to the market, and the Toyota sales organization in the U.S. has very successfully, I think, argued with Japan about the best way to sell cars in the U.S. So, these are not really the things that he will bring in terms of insights into selling cars in the U.S.... It's a question of whether the people and the systems and the culture behind it will work.

My sense is that Jim Press was approaching probably the last few years of his career at Toyota, where they quite strictly do ask people to retire at a certain age. This Chrysler opportunity was a challenge probably greater than any he would have been offered at Toyota.

I have a couple of questions about Nardelli. First, I wonder if you have any first impressions of how he is doing. And second, at Home Depot he faced certain interesting challenges in dealing with shareholders which are particularly relevant because Home Depot is a public company. Now, in an environment that is controlled by a private equity entity, I wonder whether you feel his leadership style will be a positive or a negative in this new context.
Well, he won't have to deal with shareholders, so that's the first obvious plus. Although, people talk about this being a kind of redemptive opportunity for him; he might look for opportunities to redeem himself on that front as well. I think running an auto company is a big and complicated job even if you come from within the industry. He obviously comes from outside.

Alan Mulally at Ford has shown quickly that he's determined to have a clear and simple strategy; to remove various obstacles to that, to stay focused on a few central challenges and then to work closely with the people who really know the business. So, to see Nardelli and the other people at Cerberus putting together a strong team is a good sign. How Nardelli then manages that team, I think is the real key.

It's certainly true that there were many reassurances at the time that the sale was announced that the cost saving plan, which Dr. Zetsche from Daimler Chrysler had announced, was as far as they were going to go with cost cutting. But I did see recently that Mr. Nardelli said in light of the sub-prime crisis, in light of the credit crunch and in light of the impact on car sales, there might need to be a reexamination of that. So, that seems true to form and would again perhaps stir up some anxieties that he'll reach for the cost cutting lever first.

With all of the fall-out from the sub-prime mortgage crisis and hints of less consumer spending and lower consumer confidence, what's the outlook for the auto industry?

Well, it's sensitive to interest rates and it always has been. Cars have a longer life than they ever have. Often upgrading a vehicle or getting a new vehicle at the end of a lease is more of an option than an absolutely necessary activity. I think it is in that sense an immanently postponable thing for people. And the U.S. has a very thriving used car market which is where people often turn if they are feeling pinched.

The other variable is gas prices and product mix, particularly of the Big 3 automakers. Products that are relatively expensive and not very fuel efficient are going to be even more vulnerable. But anyone who truly needs a car and wants some of the new fuel efficient offerings that are relatively new in the market, probably has to go to the new market, or perhaps to a part of the used car market. I don't expect a deep, deep drop. But these are conditions that will make it harder for GM, Ford and Chrysler precisely at a time when they could have used a boost.

I'd just like to end with a question about China. There have been news reports about a car price war in China that's eating into the profits of companies like GM, VW, Hyundai, as well as China's own auto manufacturers. This is obviously good for consumers. What are the implications for the companies and could this type of price war occur in other countries, or is China unique?

MacDuffie: That is a fairly familiar pattern of a gold rush mentality in which a very rapidly growing and promising market, first of all, provides phenomenal returns to some of the first movers who get in and start to establish a dominant position. Often that advantage does lag for a while, even when other newcomers come in.

But everybody is benefiting and at a certain point, even with rapidly growing markets, it's suddenly a crowded market place. Then the price competition starts to erode things. Sometimes those that have made the least commitment will actually back out of markets. This was a story in Brazil, for example, in the mid 1990s, when there was also a lot of turbulence in government regulation and tax policy which heavily affected those trends.

The consumer credit picture in China has jumped around a bit and that's affected demand. But ... nobody is going to leave China. It's too big and important. Everybody is going to want to hold on to a piece of that market rather than concede it to the Chinese domestic companies that are coming on strong.

I think everybody believes that there are things to learn from the pursuit of these low cost cars that can apply to a lot of the rest of their business. So, both in China and in India there are incentives to stay in that game. It wouldn't surprise me if, in a few years, the same phenomenon is showing up in India for a similar reason.

The Face of britain after 2010

Four major events will occur by 2010 that could have a devastating effect on your wealth.

First, let me show you exactly what these 4 landmines are, and where the biggest opportunities lie today...


Landmine #1: Even higher energy prices will crush the bull market in stocks
I'm sure you've felt the effects of rising energy prices in recent years. In 2006, for example, electricity bills in the U.K. rose 27% on average, and gas bills jumped 40%.
This was only the first sign of things to come. Energy costs are locked into a worldwide uptrend that will probably last the rest of your life. They are the product of a supply/demand squeeze, caused by the tremendous economic growth and industrialisation taking place in Asia. Unfortunately, it is a situation that will only get worse. In fact, our analysis suggests that within a few short years, the oil squeeze will cause energy prices to double, undermining both stock market returns and the world economy.

Consider, for example, that India's economy has been growing by more than 8% a year for the past four years, while China's annual growth rate has risen from 7% in 1999 to 10.5% today. That's nearly four times that of the U.K., and three times that of the U.S. This rapid Asian growth is pushing up demand for all types of commodities, including oil - which is why oil prices have climbed nearly seven-fold since 1998.

And yet, in Asia, per capita consumption of everything, including energy, is still very low compared to the West. While the average Brit consumes 10.4 barrels of oil per year and the average American burns through 26 barrels, the Chinese use only 1.5 barrels per person, and the Indians less than one barrel.
4.4 billion people all wanting fridges and cars means a HUGE demand for oil, whilst oil production is probably now in decline
As economic growth raises the average Asian's standard of living, his energy consumption will grow too. Soon every Chinese family will want a car. Every Indian family will demand a refrigerator and an air conditioner. Bearing in mind that China and India alone hold 4.4 billion people, the amount of additional oil needed to meet Asian demand will be staggering.
In fact, the International Energy Agency expects global oil consumption to rise by 50% in future years - largely as a result of Asian growth.
Rising oil demand would not be a huge problem - if oil production could increase by an equal amount. But no one has discovered a major oil field in nearly four decades. Instead, a growing body of evidence suggests that global oil production peaked in May 2005, and has already begun to decline.
American oil production, for instance, has been falling since 1970, despite the U.S. having the best technology in the world. Oil production on the North Sea started dropping in 1999, with the result that Britain is now forced to import oil from abroad. Today, we're also seeing oil output declining in countries such as Mexico, Kuwait, Russia, and Venezuela. Iran, currently the world's fourth largest oil exporter, has just introduced petrol rationing to avoid becoming a net importer in a few years!
In fact, the only countries where anyone believes oil output can still increase are Iraq (which we can't count on anytime soon) and Saudi Arabia. And Saudi Arabia is hardly a safe bet. According to analysis by Matthew Simmons, former energy advisor to U.S. President George W. Bush, Saudi Arabia has far less oil than it officially claims, and may be at its maximum production already.

I'm not saying the world will run out of oil, but from now on it will be harder and harder - if not impossible - to pump enough oil to satisfy demand. And that will lead to ever higher oil prices. Commodity expert Jim Rogers believes oil will reach $150 a barrel within a few years, more than twice what it costs today. If you think £1 is too much to pay for a litre of petrol, just wait. In a few years, it will seem like a bargain.
Of course, while the energy squeeze will certainly lead to economic hardship and lower profits for most corporations, it is also creating some spectacular investment opportunities.
Get ready to make triple-digit profits from oil shares!

As energy becomes more expensive, companies in the energy industry will see their profits expand exponentially. I would not be surprised to see some energy stocks double and triple in value in coming months. It's the one industry I feel you must have in your portfolio.
That's why, for the past five years, the team at MoneyWeek has been helping investors make money from leading oil shares. In August 2002, when many analysts were predicting oil prices to fall, in response to a "quick" victory in Iraq, we told our readers to BUY 4 oil companies poised to benefit from Asian growth and Venezuelan instability. By the end of 2005, oil prices had soared 115%. Those who heeded our advice made...
100% from Sibneft236% from Surgutneftgas275% from Lukoil300% from Premier Oil
One of our more recent picks, Heritage Oil is up 758% since we tipped it!
And as the oil squeeze continues, we'll help you find equally promising opportunities in the energy industry.
Opportunities such as 2 undervalued oil majors you can buy now for cheap, and watch skyrocket as the oil squeeze tightens.
Which downtrodden, overlooked industry could become the next big source of gains as oil prices rise.
The world's leading supplier of oil exploration equipment and services - whose fees (and revenues) are set to rise 75% this year.
Cutting edge developers of alternative energy, whose technology will become increasingly in demand as oil prices soar.
11 ways to cash in on the global rush to build nuclear reactors.
"Money Week encouraged me to go 100% oil, and I have gone £38K to £62K in a year." Garry Morrow, N Ireland
But while the oil squeeze may be the first of the Financial Landmines to hit the markets, it's by no means the scariest. You also need to be prepared for...
Landmine #2: The return of 1970s-style inflation will erode "safe" income streams, while making life more expensive
As oil prices rise, they add to the cost of everything - from getting to work each day, to transporting food to your table, to manufacturing virtually every product you buy. Another word for rising prices is, of course, inflation. And soaring inflation is the second landmine that will attack your savings over the next few years.
If you're old enough to remember the 1970s, then you know skyrocketing oil prices can drive inflation into double figures. During the 1970s, as OPEC embargoes forced oil prices from $5 to $40 a barrel, inflation in the U.K. averaged 13% a year - reaching a high of 27% in 1975. This time however, oil supplies are not tightening for political but for geological reasons - which means a solution will be much more difficult to find.
Every investor needs to pay attention to inflation, because rising inflation can cripple returns from nearly all investments, even those traditionally considered "safe." It increases expenses, reducing corporate profitability and share price gains. And it eats away at the returns from bonds and cash. For instance, if you keep your savings in bonds that pay annual interest of 6%, but the inflation rate climbs to 13%, then you will lose 7% of the purchasing power of your savings each year. That's what happened in the 1970s, and is likely to happen again.
Earlier this year the Consumer Price Index breached the Bank of England’s inflation target for the first time since it was introduced. It has since eased back a little, but don’t be fooled. Food prices are soaring, oil prices are higher than most experts believed possible this time last year, and crucially, the supply of cheap goods from China – which has helped keep official inflation down in the West – may be drying up, as manufacturing costs and soaring wages push up prices in the East. As energy and commodity prices continue to rise over the next decade, we expect to see inflation return to double figures once more. And when it does, the last place you want your money is in so-called "safe" investments, such as bonds. They won't be safe any more.
Of course, while rising inflation dampens the returns from most investments, it creates new opportunities in areas most investors will miss. Let me give you an example...
Be amongst the first to profit from the push for alternative fuels
Inflation is already becoming a problem in the food industry. Food prices are now increasing at a rate of 6% annually - the highest rate in a decade. Fish prices rose 12.6% in the past year. Vegetables are up 10.2%.
Several factors are causing food prices to climb - including rising wealth in Asia and climate change. But what may surprise you is that the oil squeeze is also a major factor. You see, as developed nations become more concerned about future oil supplies, they are promoting the use of new fuels made from agricultural products. Europe wants biofuels to meet 10% of energy demand by 2020. By 2012, half the cars made in the U.S. will be designed to run on 85% ethanol, a biofuel made from corn.
One consequence of producing more biofuel is that food becomes more expensive. For instance, the U.S. ethanol policy has already caused corn prices to hit a ten-year high in the spring of 2007. That's in spite of the fact that 2006 saw the third-largest crop on record. Protests took place in Mexico because the price of tortillas rose by 60% to 70%.
As the U.S. increases its ethanol production, corn prices will continue rising. And as they do, so will demand (and prices) for other grains, as people substitute wheat or rice for corn. Meat prices also climb, since most corn has traditionally been used to feed livestock. Higher meat prices will in turn raise demand for fish. And as more land becomes devoted to growing corn and other biofuel crops (such as rapeseed and tropical oils), less will be available for food production, adding to the supply/demand pressure, food prices, and inflation.
But while rising food prices are making life more expensive for everyone, they are also creating new opportunities for smart investors to profit. Taking advantage of these opportunities is an excellent way to preserve and grow your wealth as inflation rises. For example, we expect investors in food commodities and agriculture will make excellent returns as the push towards biofuels continues. That's why we'll keep you informed about such opportunities as...
How to use exchange-traded commodities (ETCs) to profit directly from rising food prices - and the 2 best diversified plays.
The 3 food giants best positioned to pass on higher food costs to consumers, and grow their earnings (thanks to their dominant market positions).
5 agricultural businesses whose shares will soar as nations struggle to increase crop yields to meet rising food demand.
4 companies that will profit from America's ethanol rush.
How to make substantial profits from the weather-driven ups and downs of 7 key soft commodities.
Of course, you may be asking, "Couldn't the Bank of England halt the rise of inflation by raising interest rates?" In theory, yes. The problem is that raising interest rates high enough to curb inflation runs the risk of detonating a third financial landmine...
Landmine #3: The collapse of the property bubble will devastate householders and turn "buy-to-let" into "buy-to-lose-money"
Since 1776, real estate prices and the economy have followed an 18-year cycle. The general pattern is 14 years of stable or rising prices, followed by four years of recession. In the light of this pattern, MoneyWeek advised readers in 2005 that the property market would experience two final years of rising prices, driven by reckless lending, before the next downturn began.
Now it's two years later, and the property boom is reaching its peak. Worldwide real estate markets have become dangerously overblown. In the U.K., property prices have risen 156% since 1996. In the U.S., they've doubled. And record high prices are occurring throughout Latin America, Africa, and Asia. Even concrete dwellings in Afghanistan, without running water, now sell for $300,000 - six times their cost two years ago.
The risk, as with all housing booms, is that property eventually becomes unaffordable for the average buyer, leading to a collapse in demand. According to the Land Registry Office, the average house in the UK now costs £211,000. If someone were to buy such a house with a typical 6%, 25-year, variable rate mortgage, he or she would pay roughly £1,264 a month. Unfortunately, the average worker only earns £1,550 a month - which means their housing costs would eat up 90% of their earnings! Not many households can manage such payments.
Nor are the deals any more appealing in the buy-to-let market. Last year, 58% of all mortgages sold were to speculative buyers, including buy-to-let. Yet, rental property yields owners just 3% income on average. That's less than what you can make in gilts. If you have to pay 6% mortgage interest on your rental property, you are probably losing money.
In fact, the only motivation for investing in buy-to-let right now is the hope that property prices will continue climbing - so that you can make a profit when you sell. And the only thing that's kept property prices rising is today's extraordinarily low interest rates.
Alert! History tells us that interest ratescould now practically double
This leads us back to the problem of inflation. You see, the Bank of England has kept interest rates low in recent years because it has been trying to stimulate the economy and ward off recession. (The housing boom was a side effect.) For comparison, in 1991, the last time inflation was as high as it is now, interest rates were close to 10%. Yet today they are a mere 5.75%.
The problem with low interest rates is that they allow inflation to keep rising. This puts the Bank between a rock and a hard place. If it raises rates to curb inflation, it risks recession. And if it lowers rates to stimulate growth, inflation rises.
So far, the Bank has tried to maintain a balancing act, raising rates as cautiously as possible - a mere 1% since last summer. But even slightly higher rates makes keeping up the mortgage payments on the family home much more difficult. Home repossessions are already at their highest rate in five years. According to Dr. Neil Blake of Business Strategies, if interest rates rise by just 0.75%, we could see 55,000 repossessions. That would certainly put a cap on housing prices.
As property prices stop rising, owners of rental property and other speculators will see their potential profits disappear. They will cease buying, and instead try to cut their losses by selling properties as quickly as they can, forcing prices down even faster. The result would be the end of the property bubble, and a decline in property values.
Ultimately, we believe the Bank of England will fail in its balancing act. It will neither increase rates fast enough to contain inflation, nor keep them low enough to prevent recession. According to the 18-year cycle, 2007 will be the last year when economic growth will occur. After that, a new recession will begin. But this time it will happen alongside rising inflation.
The result will be stagflation, that nightmare of the 1970s that gives investors the worst of both worlds. It will be a time when both unemployment and the cost of living rise at the same time. What's more, we believe this period of stagflation will be accompanied by a 20% to 30% decline in property values. If you own rental property, you may have only a few months to get out while prices are still rising.
Again, however, there are steps you can take today to avoid being hurt by this third landmine. In fact, there are ways you can make a considerable amount of money as the property bubble bursts. My team can show you...
2 stocks to sell short when property prices plunge - turning other people's loss into your windfall.
The newest buy-to-let scheme which you must avoid, because it will cost average investors big time.
The one country where real estate prices will continue to soar over the next few years - and your 5 best opportunities to profit from this trend.
One type of property you absolutely must avoid during the coming downturn.
... and many other ways to protect and grow your assets as the economy moves into stagflation.
However, there is still one more landmine I need to warn you about...
Landmine #4: The impending US dollar crash & the end of paper wealth
Over the past five years, the American dollar has fallen some 20% against other major currencies. This is an important trend to watch because many of the biggest companies in the FTSE 100 earn a sizeable percentage of their revenues in dollars. A falling dollar could eventually drag down share prices.
More importantly, the U.S. dollar has been the world's reserve currency for many years. A collapse, or even a serious run on the dollar would threaten the stability of the world's financial system.
Unfortunately, the fundamentals for the dollar are uniformly bad. In the first place, economic growth in the U.S. appears to be slowing. This year, the IMF expects the U.S. to underperform Europe. The Federal Reserve will therefore be under pressure not to raise interest rates (or even lower them) at the same time that rates are rising in Europe and Asia-Pacific. This makes the dollar less attractive to investors seeking income.
At the same time, inflation is rising in the U.S. at the highest rate in 10 years, just as it is here. Rising inflation is simply another way of saying dollars are becoming worth less - another reason not to own them.
Investors must also be concerned with the high level of government debt in the U.S., which currently exceeds $8.6 trillion - the largest debt anyone, anywhere, at any time in history has ever amassed. Would you want to lend money to such a spendthrift? Most likely holders of U.S. bonds will be trading them in over the next few years in exchange for something more secure. And this will put further downward pressure on the dollar.
And then there's the problem of the U.S. current account, which shows the balance of goods, services, and money flowing into or out of the country. Since 1990, the U.S. has been incurring ever higher deficits in its current account. Right now, the deficit stands at 6% of GDP. This is the level at which any smaller nation would experience a run on its currency. It's clearly unsustainable.
The rule of thumb among economists is that it takes a 10% drop in a currency to cause a 1% drop in the current account/GDP ratio. According to the Economic Policy Institute, this implies the dollar needs to fall at least 30% to 40% to reach a sustainable level.
Of course, when the dollar falls, other currencies go up. So you can protect yourself somewhat by investing in securities not denominated in U.S. dollars. Don't buy U.S. bonds. And don't buy shares in companies whose earnings are in dollars.
The real danger: a meltdown of the global financial system
The real danger, however, is that a collapse in the dollar would cause investors around the world to lose faith in the financial system, and in all forms of paper (or electronic) wealth. There are in fact no other currencies ready to take the dollar's place as the world's reserve currency. The Euro is the most likely candidate, but Europe has its own problems, including a declining population, social unrest due to immigration, and an out-of-control welfare state. The Bank of Japan is viewed as incompetent. China is hardly ready to step into the role of the world's financial bulwark. And the pound is laboured with similar problems to the dollar, including rising government debt and a record high current account deficit.
In a serious dollar collapse, most likely all currencies would lose value. The result would be skyrocketing worldwide prices for tangible assets. In other words, inflation.
If that occurs, the only people to preserve wealth (and make money) will be those who own commodities of all kinds, including metals, food, and fossil fuels such as oil.
And so we have come full circle.
Well, almost.
You see, there is one currency that would survive when all others are failing. It's the oldest currency in the world, and the only one whose value does not depend on any nation's financial management skills. That currency is... gold.
The one asset you can profit from in any financial storm
Gold traditionally gains value during periods of high inflation and declining currency values. During the inflationary 1970s, gold was one of the best investments. In the 1990s, when inflation was low, demand for gold waned and gold companies cut back on exploration. But since prices bottomed in 1999, gold has more than doubled in value. As a traditional store of wealth in most of Asia, gold is enjoying rising demand as that part of the world develops. Whilst in the West, increasing interest in "safe haven" investing is drawing more investors to the precious metal.
One reason we like gold is because gold can gain value in both inflationary and recessionary times. If central banks allow inflation to rise (by keeping interest rates low), currencies will lose value relative to gold. But if the banks raise interest rates too high (triggering a recession), gold will retain value better than paper assets, so its price will still rise. In other words, gold provides insurance against all types of economic woes.
Don't get me wrong. I'm not saying you should trade in all your investments for gold coins and bury them in the cellar. But keeping just 10% of your investments in gold or gold-backed securities can insure your savings against any weakness in the financial system. If the next few years turn out half as grim as I expect, you will be very glad to have some gold.
That's why MoneyWeek gives you the information you need regarding the best opportunities in gold, precious metals, and other commodities that can weather the coming financial storm.
For example, back in 2001, we recommended Merril Lynch's Gold & General Fund as an easy way for investors to get exposure to gold. Since then, this unit trust has produced a 165% gain. And our three top gold stocks are showing gains of 94%, 44%, and 174% respectively.
6 ways to profit from gold and precious metals
And in coming weeks, you can look forward to getting more great tips on gold and precious metals, such as...
Which gold mining stocks are currently underpriced.
How to profit from mergers & acquisitions in the gold industry.
Why some gold stocks have produced enormous gains in the last two years - and where to find similar opportunities right now.
The 10 mystery metals set to deliver major profits - and the shares that will benefit.
Why this precious metal (which is NOT gold) could be the single best investment you can own today.
Which precious metal ETF looks set to lag its fellows - and the one that's most likely to lead.

warrent buffet one eyes on small portion that multiplies very soon

Buffett's Largest Stock Purchase in Years!
Find Out Why The Most Successful Investor in History Has Just Bought 39 Million Shares of This Stock ...
Dear Investor,
Imagine, for a moment, that you wanted to build the first highway ever built in your entire state. You knew that the initial price to build it would be very expensive, but that didn't deter you.
Owning the only highway in a state full of dirt roads is just too tempting a prize. Once it's built, companies would be able to ship five times the amount of products each year, generating billions of dollars in extra revenue.
But that's not the best part.
Once the highway was built, your capital spending would be minimal. That's because the majority of your costs are upfront costs. For example, it may cost you $10 billion to build the highway but only $1 billion each year in upkeep to maintain it.
In other words, once you're finished building it, you'll be able to sit back while the money rolls in. In short, you'd own a business where sales and cash flow were increasing while capital spending, a huge portion of your costs, was decreasing!
That was the realization that occurred to me after I researched Warren Buffett's recent purchase of 39 million shares of Burlington Northern Santa Fe Railroad (SYM: BNI) in the $80/share range.
Not only has it been his largest stock purchase in years, but it reminded me of what made Buffett a great investor: the ability to "see" things before the rest of the investing public.
In fact, I’m so bullish on this one stock, I’m convinced that it will be the best stock idea you’ve heard all year. This is a recommendation that can make you 50% — 100% richer in the next 2-3 years. If you’re patient, however, I’m confident that you can easily make 10 to 20 times your money over the long term on this stock.
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I do hope you’ll read a bit more before getting to the stock pick, however, because you deserve to know something about who came up with it.
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You’d never guess it from all those commercials the big investment firms run. But the sad fact is Wall Street doesn’t have much use for the individual investor ... the so-called “little guy.”
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The individual investor gets leftovers. Warmed-over and watered-down gruel that’s gone stale before it ever gets to him.
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That’s right. Every single one of us who tries to invest on his or her own (or with the dubious assistance of a broker) ... is what Wall Street contemptuously calls “the little guy.”
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The Tycoon Report is the only publication that gives the individual investor ... “the little guy” ... the same information once available exclusively to the big institutional investors or the super-rich ... information critical to making serious money in the market.
Our Principles: What Makes The Tycoon ReportThe Most Valuable Investing Resource You’ll Ever Have
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More Winning Trades than Most Paid Services
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This is NOT, in other words, a stock picking newsletter … it’s a newsletter that will help you pick great stocks for years to come.That being said, our writers can't always resist sharing trade recommendations with Tycoon Report readers.
Have a look at some of our past recommendations, and ask yourself if you've gotten the same kind of performance from some of the services you pay good money for:
Date
Investment
Closing Price on Recommendation Date
Subsequent High*
% Return
8/5/2005
Gold
$444/oz
$730/oz
+64
11/1/2005
Suncor (SU)
$53.72
$89.19
+66%
11/1/2005
Phelps Dodge (PD)
$56.24
$96.90
+72%
11/11/2005
Jun 160 OSX Calls
$32.00
$42.70
+33%
11/22/2005
2 Sep 200 OSX Calls
$20.00
$38.90
+143%%**
12/6/2005
Research In Motion (RIMM)
$61.95
$86.75
+40%
1/4/2006
China Mobile (CHL)
$24.50
$30.55
+25%
1/17/2006
PALM, Inc. (PALM)
$17.48
$24.00
+37%
3/14/2006
China I-Shares (FXI)
$71.80
$83.73
+17%
3/14/2006
Salesforce.com (CRM) - Short Position
$39.78
$24.90 (subsequent low)
+37%
4/28/2006
NBTY, Inc. (NTY)
$22.65
$26.49
+17%
* Data for “subsequent highs” calculated through date of this writing (6/26/06). ** Combined June 160 OSX and 2 September OSX call trades.
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We ask ourselves these questions every single day.
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So, one of the foremost goals of The Tycoon Report is to provide a world class investing education to our readers, with each and every issue.
Readers who've been with us since the beginning have learned a lot, including …
A simple method for doing your own stock valuations;
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The basics on trading options … and more complex strategies such as “calendar spreads,” options straddles, and how to use options as “insurance” against your long stock holdings;
When to short a stock vs. when you should use put options;
How to remove emotion from your investing approach

Globally, the value of property bought or sold for investment totalled a record $382 billion in the first half, up 16.6 percent from the year before, it said.
Global real estate investment expanded for the 16th consecutive quarter, with the Americas, Europe and the Asia Pacific seeing record volumes, it added.
Property investment in the Asia Pacific jumped 12 percent to $55 billion, mainly bolstered by cross-border investments, the consultancy said.
"Japan, China and Singapore represented the strongest real estate markets in the region," it said.
"Singapore became 2007's hottest global market, with prime capital values increasing by 50 percent (in the first half) fueled by astounding rental growth and yield compression."
Singapore's property market is heating up after years of weakness following a regional financial crisis in 1997. A strong domestic economy and efforts by the wealthy island-nation to raise its competitiveness, including a decision to build two massive casino resorts, have helped perk up the property market.
Stuart Crow, head of Asia capital markets at Jones Lang LaSalle, said Asia remains attractive to investors due to its strong economies, improved liquidity through real estate investment trusts and better transparency.
"Cross border investment is at an all-time high, yet is likely to increase further in the next 12 months, particularly in the most sought after markets of Japan, Singapore, India and China," Crow said. In the Americas, total investment was up 32 percent to $170.7 billion and investment in Europe climbed 4 percent to $156.6 billion, with the UK, Germany and France accounting for more than two thirds of the volume, it said.

Vedanta is either truly on the expansion path or it is selling copper and zinc for gold and silver

As the old saying goes: It is not all gold and silver that shines. Vedanta Resources might look like a shining opportunity for investors, but to test whether it is for real, Vedanta needs to be judged by the execution of its stated expansion plans.

Many doubts have been raised by the investment community about the motives behind the Vedanta Resources IPO. The whole IPO process from timing, choice of banks, deal structure, management changes, targeted investors (hedge funds), information material and distribution has given this IPO an air of too much polish and too little substance. For the moment it is no more then a construct to attract investors with the following arguments: - rapid growth of Indian economy - substantial growth in the metals business due to strong demand from China - seasoned, big name, management in the person of the just appointed non-executive chairman Brian Gilbertson - Many expansion plans The hedge funds believe that the wider investment community will go for this construct and will start buying Vedanta after the IPO. They therefore, with the help of the banks, had a front row seat and have flocked to get a part of the IPO and made it a success. What to do now as an investor that was not included in the IPO? Given all of the above, it is imperative for investors as well as the Vedanta management to focus on the very substance of this IPO. While the growth areas and recently appointed big name management is all nice to have in the backdrop, the real test is whether Vedanta can successfully implement the expansion plans. Let's have a look these plans. (Source: The Hindu Business Line) “The investment programme envisages expansion of the Sterlite-controlled Balco aluminium smelter, Orissa alumina refinery and Hindustan Zinc Ltd. On the expansion programme of the company, Mr Agarwal said in the copper business, the expansion plans, which are expected to be wrapped up by December 2003, included expanding the capacity of the Tuticorin smelter from 1.8 lakh tones per annum (tpa) to 3 lakh tpa of copper anode and commissioning of a 1.27-lakh tpa copper refinery in Tuticorin. In the aluminium segment, the company plans to invest in two Greenfield projects — a 2.5-lakh tpa aluminium smelter at the Korba complex and a one-million tpa alumina refinery in Orissa. The refinery is expected to enable the group to supply alumina to the new smelter at Korba, as also to access the export markets. In the zinc segment, the company's principal expansion plans for Hindustan Zinc include expanding the capacity of its Rampura Agucha mine from 2 million tpa to 3.3 million tpa, Rajpura Dariba and Zawar mines to 1 million tpa and 1.25 million tpa, respectively, and construction of a new zinc smelter at Chanderiya to increase zinc production capacity by 1.7 lakh tonnes. In addition, Mr Agarwal said Vedanta group was looking at prospects for acquiring copper mines in Zambia. He pointed out that Zambia had the best copper mines and we have been selected as the preferred group. "As and when we get an opportunity we will look at further acquisitions," he said.” This all looks nice on paper, but only if Vedanta can prove to its investors that it is indeed rapidly investing close to 100% of the proceeds of the IPO into the mentioned expansion initiatives and manages to get a good ROI in the short to mid-term it is worth the trust of investors. Given the nature of this business, it will be difficult to show real audited results within a year from now. Until then, if I were an investor, I would let the hedge funds sit on their shares and be nervous.

Past and Future Equity Market Activity

The potential of China’s equity markets is "huge," says Laura Cha Shih May-lung of the China Securities Regulatory Commission.1 There’s no question that the vice-chairwoman of the nation’s stock watchdog is right.
And so is Nicholas Lardy. In his testimony before the U.S.-China Commission on December 6 of last year the Brookings scholar said: "China really is fundamentally different from many other emerging markets in that its domestic savings are more than sufficient to finance all of its investment." Therefore, it should be a simple matter for the equity markets in Shanghai and Shenzhen to put those savings to good use. That is, after all, what stock markets are supposed to do.
As Cha suggests, tomorrow the country’s bourses may work. Today, however, they don’t: the stock markets of the People’s Republic are inefficient, corrupt, and
endanger social stability. They are, in a word, failing. The country’s current
reliance on foreign direct investment is a reflection of its failure to put domestic savings to good use. In short, the great FDI inflows are a testimonial to the weakness of China’s equity markets.
The truth is in the numbers, the numbers showing where the money is coming from. During the preceding three calendar years, Chinese companies raised an average of US$8.0 billion in the domestic equity markets in initial public offerings. The average masks significant year-to-year changes, however. In 1999 Chinese companies raised US$6.5 billion in these stock markets. In 2000 that number increased to US$10.5 billion. Last year, however, the amount fell by 34.3 percent to US$6.9 billion.
To put these numbers in perspective, Chinese companies raised US$1.1 billion on foreign exchanges in 1999 in initial public offerings, US$16.6 billion in 2000, and US$2.4 billion in 2001.
Analysts speculate that the increase in amounts raised in 2000 was attributable to equity offerings that, but for the Asian financial crisis, would have reached the markets in the immediately preceding years.2 This effect is especially noticeable in the foreign offerings.
All these figures are dwarfed by the approximately US$157 billion in new loans 2
extended by Chinese banks in 2001.3
Domestic and foreign initial offerings, illustrated in Figure 3.1, are derived from a table found in Appendix 4. Figure 3.1 Amounts Raised in Initial Public Offerings 1999-2001 (US$bn) 6.5 85.5% 6.9 74.2% 10.5 38.7% 1.1 14.5% 2.4 25.8% 16.6 61.3% 0.0 5.0 10.0 15.0 20.0 25.0 30.0 1999 2000 2001 Foreign Mainland China
source: China Securities and Futures Statistical Yearbook (various years) websites of various stock exchanges Bloomberg
The statistics show China’s increasing dependence on foreign markets. In 1999 14.5 percent of its funds from initial public offerings were raised in foreign markets. The corresponding percentage in 2000 was 61.1 percent. In 2001 the number was 26.7 percent.
Figure 3.2 shows the amounts raised in equity markets in the United States. 3 Figure 3.2 Amounts Raised in Initial Public Offerings in U.S. Markets 1999-2001 (US$bn) 2.0 83.3%0.7 58.3% 11.9 72.1% 0.4 16.7% 0.5 41.7% 4.6 27.9% 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 1999 2000 2001 Non U.S. U.S.
source: China Securities and Futures Statistical Yearbook (various years) websites of various stock exchanges Bloomberg
Foreign markets are becoming more important than the domestic ones. Because the People’s Republic has more than enough capital for its own needs, we have to ask: What is wrong?
The essential problem is that the Communist Party, having authorized the markets in the era of Deng Xiaoping in the early 1990s, has failed to back crucial reforms during Jiang Zemin’s tenure. Incomplete development has left the exchanges in disarray, and Beijing seems to be paralyzed, unable to do what every observer agrees must be done.
There are a few explanations for this generally deplorable state of affairs. First, state-owned enterprises are powerful in China’s politicized economy and there is virtually no accountability to shareholders. Left to their own devices, managers of these businesses do what they want to: grossly waste resources in a variety of ways. In the past, the state was the victim of this behavior. Now, China’s small retail investors are also losers.
And these investors do, in fact, lose due to blatant fraud.4 In one of worst cases, the 4
major shareholders of Sanjiu Medical Pharmaceutical Ltd. misappropriated US$303 million, almost all the assets of the company.5 In the eyes of too many managers of listed companies, outside shareholders are there to be fleeced.
Second, the stability of the financial system of the nation could be undermined if the markets worked too well. The country’s banks are in poor shape, as discussed in Appendix 2. Insolvent, these financial institutions are kept afloat by a stream of new deposits from the nation’s small savers. If the domestic markets were really attractive, ordinary Chinese citizens might cash out their deposits to buy stock and reduce the flow of new liquidity that keeps these institutions going. That would be great for the equity markets but could be disastrous for the nation as a whole. It is true that, from time-to-time, technocrats try to coax a little of the money out of the banks and into the stock markets. Yet at the first sign of trouble, the whole process is quickly reversed: Beijing’s first instinct is to protect these sickly financial institutions, the lynchpin of the economy.
Third, the CSRC seems to be a captive of the industry it is supposed to regulate--the government watchdog just watches all the problems and barks only when prompted. As a consequence, the exchanges of Shanghai and Shenzhen are infested, plagued by market manipulation, insider trading, accounting fraud,
outright theft, and a dozen other corrupt practices. The markets are even worse than casinos. "Even casinos have rules and you cannot look at other people’s cards," said Wu Jinglian, one of the leading Mainland economists, in early 2001.6 Wu caught some flak in Beijing for that colorful statement, but nobody seriously questioned the accuracy of his assessment.
Today, in a sign that things are getting better, everyone seems to be aware of the problems in the markets. It is common, perhaps fashionable, for people in
Beijing to complain. Deputies at the recently-concluded National People’s Congress
meeting criticized the CSRC for the mess in the markets as did members of the advisory Chinese Peoples’ Political and Consultative Conference. In the words of the official Xinhua News Agency, the CSRC "should be responsible for the listing of unqualified companies, the falsification of financial statements by listed companies, joint trading of listed companies with their controlling shareholders, excessive speculation and insider manipulation."7 But bad practices in the Chinese markets are like the weather: everyone complains but no one really does anything.
Central government regulators rail against the situation, of course. Yet considering all of the misdeeds that occur, extremely few miscreants are
punished. Historically, Beijing has tolerated a certain amount of corrupt practices in the
markets so as to obtain the political support of the wealthy.8 Belatedly, the CSRC has tried to reduce the tide of market misdeeds, but only because it has had to. Financial system risk increased dramatically in 2001 because bank funds were finding their way into the markets through securities companies, which were losing money due to mismanagement and corruption. The losses are reputed to have been huge, thereby dramatically increasing the risk of systemic failure.9 The CSRC finally forced illegal money out of the markets to the tune of US$18.1 billion according to an estimate from 5
Shenyin Wanguo Securities.
The markets did not react well to the crackdown, and the CSRC subsequently backed off enforcing rules according to observers.10 Moreover, the CSRC has also lost enthusiasm for implementing important reforms as well. Perhaps the most visible retreat occurred this March when the CSRC decided not to impose tough accounting regulations. Instead, it issued a "dramatically watered-down version" of provisional rules issued in December,11 the last month in the CSRC’s "year of market supervision." Zhu Rongji can call accounting fraud "a malignant tumour,"12 but he either cannot or will not do much to cut it out.
So companies try to get away with as much as they can. Guangxia (Yinchuan) Industry manufactured almost 95 percent of its earnings reported in 1999 and 2000. This Shenzhen-listed company had the dubious distinction of being outed not by government officials but by journalists at the now-famous Caijing magazine.13 This incident
highlights an unwholesome development: pressure for cleaning up the markets is coming from below and is often resisted by those in authority.
And the authorities are dragging their feet, progressing as slowly as they can. Some of the worst offenders are those in charge of the legal system. The Supreme People’s Court has come out with rules that say how liability should be apportioned for false financial data. That’s good, but the thrust of the new regulations appears to limit liability.14
The effort to limit recoveries is no surprise because that court is no friend of the individual investor. In January 2002 the court lifted a temporary ban that it had previously imposed on shareholder suits. Now, investors can go to court, but only if the CSRC first punishes the company in question. In other words, the central government refuses to let shareholders take the initiative and keeps them at the mercy of the fraudsters. Moreover, the Supreme People’s Court said that shareholders may only sue for false misrepresentation; they are still prohibited from filing suits for other wrongs, such as insider trading and market manipulation.15
It may be no mistake that market manipulators are beyond the reach of shareholders because the biggest manipulator of them all is the central government. If there is one single reason why the domestic markets don’t work well, this is it. Experts like Lardy may see the exchanges as mechanisms to efficiently allocate capital, but Beijing created them as a way to sell off chunks of state-owned enterprises. So the central government, in its dual role as regulator and largest market player, delays necessary reforms when they threaten its ability to sell stock of state enterprises to investors.
As a result, the markets are kept at abnormally high levels. Chinese stocks in domestic bourses normally trade at price/earnings ratios well above those of markets outside the Mainland. Chinese stocks trading in nearby Hong Kong, for instance, can be found for ratios under ten16 while a few miles across the border in Shenzhen the prevailing ratios are five or six time higher on average. Stock prices in China can be more than ten times net asset value, and some high fliers have no net asset value at all. It is a gravity-defying act. 6
And a dangerous one. Not only is the potential of the markets huge as Laura Cha tells us, so are the risks that they pose to social stability. Beijing’s leaders are constantly concerned about falling stock prices, in part because of the fear of angering tens of millions of shareholders.17 And there is every reason to be concerned. "Their markets are an accident waiting to happen," one broker said referring to the exchanges in Shanghai and Shenzhen. "They’re like Nasdaq in 2000 or Japan in the 1980s."18 A steep fall, and maybe even a small one, could spell trouble: the average investor commits to the markets a sum equal to 23 times his or her annual income.19
So far, the central government has restricted the supply of new shares entering the Mainland markets as a means of maintaining prices. In an ideal world, Beijing could keep the markets aloft indefinitely by adopting this tactic. In the real world, however, technocrats face a tight deadline.
China’s social welfare system is almost bankrupt. As mentioned in Appendix 3, Beijing will need to come up with about US$1 trillion, and maybe even more, in the years ahead to make up funding shortfalls. For this purpose Chinese technocrats have devised a general concept that should work: sell more stock of state enterprises. The state still owns a majority of the shares of listed companies, some 70 percent according to state media.20
This concept was translated into a State Council plan, announced in June of last year, which essentially required companies selling stock on public markets to sell additional shares equivalent to 10 percent of the original offer size. The proceeds from the additional shares were to be handed over to the national social security fund.21 The rules applied to both domestic and foreign offerings.
In reaction to the June plan, the markets tanked, losing more than 30 percent of their value, some US$181 billion in market capitalization. Eventually, the CSRC suspended the plan to sell off state shares (on October 22, 2001).22 Markets soared after the CSRC withdrew the plan: stocks immediately hit their maximum 10 percent daily ceilings.23
Reversing course solved the problem of sinking prices, but it did nothing to take care of the original problem. But Beijing is nothing if not persistent. Just when technocrats thought that it was safe to reintroduce their plan to sell state shares, local stock speculators proved them wrong. In late January of this year the CSRC announced over a weekend several proposals to unload state-held shares. The following Monday (January
28) saw domestic markets plunge across the board (the indexes fell between 6.3 percent to 8.7 percent on that day).24 By Tuesday the CSRC was in "damage control mode" and announced that the plan was only "preliminary" and that "a lot of improvement needs to be made through further discussions." Stocks, predictably, went back up on the new announcement.25
"The hasty introduction and suspension of the scheme, though both well-intentioned, are indications of the CSRC’s inconsistent governance of the market,"26 wrote People’s Daily. The Communist Party’s paper is correct, of course, but the essential problems are 7
deeper than indecision of Laura Cha and her colleagues.
For one thing, Beijing is finally paying the price for operating wacky markets. "The plan’s fatal problem is that it is based on the premise that the market is operating stably," said Wang Yuanhong of the State Information Centre. "But we don’t have such a stable market now."27
Even if the markets worked in general, the CSRC plan would not have fared will. The technocrats have little, if anything, to show for all the turmoil that they have caused in the markets because they were in denial about one of the fundamental building blocks of economics: the law of supply and demand. These men and women, no matter how much they may think of their own abilities, cannot announce a plan to sell hundreds of billions of shares without causing a severe adjustment in prices.28
The CSRC in January did say that it would compensate existing holders of shares for price declines, but it was sketchy on details as to how it would do so.29 Apparently, the regulators thought that their good word was good enough to keep the markets high. No matter how credible they may be, they ignored simple economics. "No matter how the reduction is carried out, it means [a] big market expansion," said Dong Chen, a China Securities Co. analyst.30 "The plan fails to find a way to introduce new capital."
As even CSRC officials have learned by now, sales of state shares at market value will take too much liquidity out of the markets. Therefore, they could soften the blow by letting go of new shares below prevailing prices. Selling below market, unfortunately, is not considered an option for two reasons. First, there is a matter of finances. "The state needs cash," says Anthony Neoh, senior advisor to the CSRC.31 Second, there are politics and ideology: selling at a low price would look like a giveaway of state assets,32 dynamite in today’s China, at least among the senior cadres who care about these things.
Because the good options are not options, the CSRC can only say that its sell-down plan will be implemented gradually.33 The CSRC’s new proposals allowed for sales over a long period, maybe as long as 15 years, and a lock-up period in which the shares could not be sold after they became tradable.34 That sounds fine on paper, but in practice such a plan means that China’s markets would be burdened for a long time.
Even economists working for investment banks do not think much of the plan. Andy Xie of Morgan Stanley says that the lock-up period will not help: traders know that the shares will be coming onto the market in the future. The impact might be delayed, but the outcome will be the same, he believes.35 "This isn’t going to work," says Mou Xudong an analyst at Southern Securities in Shanghai,36 speaking of the CSRC’s January plan.
Today there has only been one concept that might help. There is talk that whatever funds are drawn out of the equity markets can be reinjected by the nation’s social security fund, which is now restricted to investment in bank deposits and government bonds. That plan, even if implemented, cannot have much effect because the need to pay pensions is so great--it is unlikely that the state will ever accumulate enough to have a material effect on 8
stock prices.
Now the Chinese markets exist in the worst possible of worlds. On the one hand, China’s social welfare system remains "on the verge of bankruptcy."37 And on the other, China’s equity markets are, in the words of analysts, "on the verge of collapse."38 Investors know that the share sell-down plan is coming, and the uncertainty is making the situation even worse. "It would be very hard for the markets to stage a solid recovery until the final selldown plan is revealed and clarified," says a stock analyst,39 expressing simple common sense. "I’m depressed," said one investor. "I hope the final decision can be made soon so that we know where the bottom of the market is."40
Investors may want to know where that point is, but the central government is not brave enough to find out. Yet Beijing will have to do something. China needs to pay pensions and unemployment benefits to workers. It can turn its back on the problem for a year or maybe even a decade, but at some point it will not be able to defer the problem any longer.41 The longer the pain is deferred, the worse it will be for everyone concerned.
Until they can figure out a solution, Beijing’s technocrats tinker to prop up the domestic
markets. Perhaps the most important tinkering in recent years involved the moribund B shares. The Chinese government maintains fractured domestic markets. There are A shares, available only to domestic investors, and B shares, once available only to foreigners. The former are denominated in renminbi and the latter either in U.S. or Hong Kong dollars. Trading in both types of shares takes place in Shanghai and Shenzhen. Chinese enterprises also issue shares in the foreign equity markets of Hong Kong (H shares), New York, Singapore, London, and Berlin.
Last February regulators opened the illiquid and cheaply-valued B share markets to domestic investors with foreign currency. A year after doing so, the reform still has not achieved its primary purpose of attracting big foreign money: "overseas investors are still shying away from this highly volatile and speculative market."42 Foreign institutions are repelled by the lack of good stocks, small free floats, and dominance of local speculators "stir-frying" (speculating). When foreigners want exposure to Chinese stocks, they invest their funds in the markets outside the Mainland, especially those in Hong Kong.
Of course Beijing should fix small problems, and everyone knows that last year’s liberalization of the B share markets was a step in the right direction. Yet major restructuring is more appropriate at this point in time: every analyst agrees that China eventually needs to combine all the separate markets. Technocrats won’t do that for years, and maybe even decades, because a complete merger contemplates making the renminbi convertible. So we can understand why the job won’t be finished soon. Yet Beijing is now moving in the wrong direction by effectively creating even more
categories of shares. The next major move will be permitting domestic investors to buy shares listed in Hong Kong pursuant to the qualified domestic institutional investor scheme (QDII), which could be put in place as early as July of this year.43 Moreover, a few foreign companies will get permission to list on domestic markets by selling China Depository Receipts (CDRs), and this will permit 9
Mainland investors to use renminbi to buy the shares of these companies.44 These further divisions of the market can only lead to more inefficiency in the allocation of capital--and lead to a further erosion of prices on the A share market.
These steps also show that Beijing’s main goal these days is to support the stock price of Chinese enterprises. There is speculation that the stocks in the QDII scheme will be limited to Hong Kong-listed Mainland companies "with the likely result of
sending their prices in a straight line up."45 And in the first batch of CDRs will be the Hong Kong-listed companies that are arms of Mainland enterprises. So expect to see rising prices for China Mobile (Hong Kong), China Resources, Shanghai Industrial Holdings, and Beijing Enterprises.46
The CSRC also is working on smaller adjustments to the equity markets, such as the recent deregulation of brokerage commission rates.47 Such deregulation is a definite improvement, and many analysts see steps such as this as proof that regulators are pushing in the right direction. Although many CSRC officials personally would like to see reform, the motivation for regulatory activity has little to do with improvement of the markets. Brokerage commissions were deregulated to stimulate interest in stock trading.
Stimulating such interest is also behind another "reform": the central government will soon permit banks to make loans to retail investors with stock as collateral. The purpose is to permit the investors to borrow for further stock market investment.48 Beijing spent the better part of a half decade getting the banks out of the equity markets to prevent the further erosion of credit quality. Now it is pushing the banks back in. Stock prices will benefit, but banks will inevitably create new nonperforming loans.
Worse, regulators have maintained their policy of avoiding the delisting of bad companies. Only three companies have been thrown off a Mainland exchange so
far,49 and retailer Zhengzhou Baiwen, a shell of a company, has somehow avoided sharing their fate.50 It is inevitable that it will be delisted, yet it should have gone long ago. Many people think that Baiwen should have had the honor of being the first to be booted off a Chinese bourse. And there are many more Baiwens that regulators choose not to see. "We all know that the Chinese stock market has a lot of very troubled companies that are propped up by helium," says James McGregor, a consultant based in Beijing. "You think Enron is bad? You should see some of the companies here."51
The current situation is untenable, at least in the long run. On the one hand, there is no doubt that Beijing can keep stock prices high in the long term. After all, it sets the rules and administers the game. So it mostly gets the desired
results. In the future, it can continue to employ all of the old tactics to support the markets such as restricting investment alternatives, leaning on companies to scale back offerings,52 providing financial and other types of support for listed enterprises, and, when all else fails, talking up the markets. Especially when all else fails, regulators resort to issuing happy thoughts. "The authorities don’t want to see the market fall too much, so they released good news to keep investors from becoming even more pessimistic," said an analyst at Pingan Securities in Shenzhen.53 10
On the other hand, all these proven tactics defer the change that must occur if China is to achieve important, and some say critical, goals. There is, after all, no point in having stock markets if they do not allocate capital efficiently and thereby promote economic development. Beijing should listen to some folksy advice that economist Hu Ruyin dispensed in March of this year: "Yesterday I went to the dentist to pull a tooth. That means some short-term pain, but otherwise we would have long-term pain."54
And what is the future of the markets? There will not be much progress over the next few years: Beijing, even at this late date, is unwilling to endure pain. What forward movement we will see will come about only because the government will not have a choice. We have to remember that in this period of political transition in Beijing, even economic reforms are being put on hold.
Nick Lardy testified on December 6 that if the central government reforms the domestic markets, Chinese issuers will issue at home. If it cannot, they will have
to issue abroad. Because reforms will be slow in coming, we will see a stream of initial
public offerings abroad, most of them in Hong Kong55 but many in the U.S. as well. As Joe Zhang, head of China research at UBS Warburg, said recently: "The fund-raising channels on the mainland are temporarily blocked, so they are coming to Hong Kong."56
And there are other reasons why Chinese companies will list outside the Mainland. Jiang Zemin himself is giving an impetus to domestic enterprises to list abroad.57 His "go outside" theory is being interpreted by local cadres as approval to have their best enterprises sell stock overseas, which is easier than listing on the domestic
exchanges. Lardy, in his testimony, supplies the reason why the better companies will
have to continue to go offshore for at least the next few years. "Very large issues are not possible on the domestic market," he points out. "The continuing paradox is that a country with the highest rate of savings in the world . . . can’t float a share offering of significant size on its domestic market."58
As efforts to increase offerings at home fail, the state will seek to increase the flow of stock sales in foreign markets. For example, last Christmas Eve the State Development Planning Commission announced a plan to encourage overseas listings, even hinting that foreigners would be allowed to hold controlling positions in large state enterprises, except for those considered vital to national or economic security.59 Up to now, the state has permitted foreigners only minority positions in larger state enterprises in public flotations of stock. And the state will resort to a time-honored technique: talking up the markets.
The country’s stock markets could start a bull run lasting a decade after a period of adjustment this year, says the prestigious Chinese Academy of Social Sciences.60 The truth is, the markets are so wacky they could do anything, but going up seems improbable unless more capital is made available. Beijing can lean on its academics or even Laura Cha to say something nice, but this tactic by itself is not going to help investor confidence.
Until the state can get its policies right, we will have to listen to other voices. A 11
professor at Shanghai Fudan University, Xie Baisan, says that China’s markets are at a "critical point between life and death."61 Not everyone would use such stark words, but facts speak for themselves. Last year saw a drop in stock prices, overall market capitalization,62 and trading volume.63 And, despite the sky-high multiples that can be found in the home markets, there was an acceleration of the trend of issuing stock offshore. The money knows that something is wrong.
1 The potential of China’s equity markets is "huge": Lester J. Gesteland, "Potential for China’s Stock Market is ‘Huge,’ Says CSRC’s Laura Cha," chinaonline.com, March 29, 2002.
2 Analysts speculate: Stephen Harner in his written testimony submitted to the Commission (p. 4) suggests that the surge in offerings in 2000 was a direct result of the Asian crisis.
3 approximately US$157 billion in new loans extended: Peter Wonacott, 12
"China’s Efforts to Revive Market Might Take Away from Reforms," wsj.com, April 16, 2002.
4 due to blatant fraud: Bei Hu, "Chinese Cookery Books," scmp.com, March 26, 2002.
5 Sanjiu Medical Pharmaceutical Ltd. misappropriated US$303 million: Elaine Kurtenbach, "Enron Debacle Adds Urgency to Corp, Fincl Reform in China," wsj.com, March 12, 2002; "China Pushes Corporate, Financial Reforms Amid US Woes," Dow Jones Newswires, March 10, 2002.
6 "Even casinos have rules": Tiffany Wu, "Foreigners Welcome China Crackdown as Market Frets," Reuters News Service, February 11, 2001.
7 "should be responsible": "CSRC Under Fire at NPC, CPPCC Sessions," Xinhua News Agency, March 9, 2002.
8 Beijing has tolerated: Dan Slater, "Caijing Leads the Difficult Battle Against Market Manipulation in China," FinanceAsia.com, April 3, 2002.
9 increasing the risk of systemic failure: Stephen Harner, e-mail to author, October 26, 2001.
10 the CSRC subsequently backed off enforcing rules: See, e.g., Peter Wonacott, "China’s Efforts to Revive Market Might Take Away from Reforms," wsj.com, April 16, 2002.
11 "dramatically watered-down version": Bei Hu, "Tough Audit Rules Eased After Outcry from Interest Groups," scmp.com, March 2, 2002.
12 "a malignant tumour": "China’s Zhu Decries Accounting Fraud as Tumour," scmp.com, October 30, 2001.
13 the now-famous Caijing magazine: For general background about the growing influence of Caijing, see Dan Slater, "Caijing Leads the Difficult Battle Against Market Manipulation in China," FinanceAsia.com, April 3, 2002. For information about the fraud at Guangxia (Yinchuan) Industry, see Sophie Roell, "China Tightens Fincl Acctg Scrutiny for Listed Companies," Dow Jones Newswires, December 25, 2001.
14 Supreme People’s Court: Pamela Pun, "Courts Cast Wider Net on False Data," Hong Kong iMail, March 27, 2002.
15 they are still prohibited: See, e.g., Eric Ng, "Court Door Opens to Investors," scmp.com, January 16, 2002.
16 Chinese stocks trading in nearby Hong Kong: Edith Terry, "New York a Step Too 13
Far for Shanghai," scmp.com, April 5, 2002.
17 tens of millions of shareholders: It is often reported that there are 60 million domestic shareholders, but that is the number of brokerage accounts. Many of them hold multiple accounts. A recent survey concludes that there were about 34 million shareholders at the end of last year. See Bei Hu, "Exposure to Stocks Unhealthy," scmp.com, April 16, 2002.
18 "an accident waiting to happen": Edith Terry, "New York a Step Too Far for Shanghai," scmp.com, April 5, 2002.
19 a sum equal to 23 times his or her annual income: Bei Hu, "Exposure to Stocks Unhealthy," scmp.com, April 16, 2002.
20 70 percent: "CSRC Must Move Carefully to Ensure Investor Confidence," People’s Daily Online, January 23, 2002. Foreign media generally say 60 percent or sometimes 65 percent. See, e.g., Kenneth McCallum, "Securities Authorities in China Soften Message on Plan to Sell State Shares," Dow Jones Newswires, January 29, 2002.
21 proceeds from the additional shares: See, e.g., Peggy Sito, "Rules Revealed for State-Owned Stock Sell-Off," South China Morning Post, June 15, 2001, Business Post p. 4.
22 the CSRC suspended the plan: For background information, see Winston Yau, "Pressure Mounts for Boost to Market," scmp.com, March 5, 2002. The suspension of the state share plan applies only to domestic offerings: foreign ones must still contribute to the social security fund, as Aluminum Corp. of China, better known as Chalco, did when it listed last year in Hong Kong and New York. Chi-Chu Tschang, "Welfare Fund Still Gains from Share Sales," scmp.com, April 29, 2002.
23 Markets soared: Mark O’Neill, "China Ban Lifts Markets," South China Morning Post, October 24, 2001, Business Post p. 1.
24 markets plunge: Joe Leahy, "China Shares Fall on Sale Plan," ft.com, January 28, 2002.
25 went back up on the new announcement: Kenneth McCallum, "Securities Authorities in China Soften Message on Plan to Sell State Shares," Dow Jones Newswires, January 29, 2002.
26 "inconsistent governance of the market": "CSRC Must Move Carefully to Ensure Investor Confidence," People’s Daily Online, January 23, 2002.
27 "But we don’t have such a stable market now": "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002. 14
28 a severe adjustment in prices: The problem is even worse than the market thinks because many of the largest state enterprises, about a third, have yet to be listed. See Emmanuel Pitsilis, David A. von Emloh, and Yi Wang, "Filing China’s Pension Gap, " McKinsey Quarterly, 2002 Number 2 (available at www.mckinseyquarterly.com).
29 it was sketchy on details: "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002.
30 "No matter how the reduction is carried out": "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002.
31 "The state needs cash": William Kazer, "Neoh Says Market Too Jumpy on State Stake Sales Talk," South China Morning Post, April 30, 2001, Business Post p. 3.
32 selling at a low price would look life a giveaway of state assets: Jia Hepeng, "Market Concern Refocuses on State Share Sell-Off Plan," chinadaily.com.cn, January 22, 2002.
33 implemented gradually: "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002.
34 The CSRC’s new proposals: Peggy Sito, "Sale Fears Hit Mainland Stocks," scmp.com, January 29, 2002.
35 the outcome will be the same: Peggy Sito, "Sale Fears Hit Mainland Stocks," scmp.com, January 29, 2002.
36 "This isn’t going to work": Kenneth McCallum, "China Shares Plunge on Plan for Non-Tradable Shares," Dow Jones Newswires, January 28, 2002.
37 "on the verge of bankruptcy": Emmanuel Pitsilis, David A. von Emloh, and Yi Wang, "Filing China’s Pension Gap," McKinsey Quarterly, 2002 Number 2 (available at www.mckinseyquarterly.com).
38 "on the verge of collapse": "Upcoming Meeting Bids to Stabilize Bearish Market," chinadaily.com.cn, January 23, 2002. For similar sentiments, see "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002.
39 "It would be very hard for the markets to stage a solid recovery": "Shares Rise as CSRC Continues to Ponders [sic] Sell-Off Plan," chinadaily.com.cn, January 30, 2002.
40 "I’m depressed": "Disappointing State Shares Plan Incites Selling Spree," chinadaily.com.cn, January 29, 2002. 15
41 it will not be able to defer the problem: There’s something else that is being deferred: an important side benefit of a sell-down is that state enterprises would eventually be run by private shareholders. "Nothing really changes if a company becomes publicly listed but the government owns all the shares," says David Hutton of ING Pension Trust. Chi-Chu Tschang, "Scrip Sale Easy Way to Resolve Dilemma, " scmp.com, December 19,2001. Reform of state enterprises may actually occur when managements really have to answer to owners.
42 "overseas investors are still shying away": Ramoncito dela Cruz, "One Year After, China B Shr Mkt Still Punters Paradise," Dow Jones Newswires, February 24, 2002.
43 qualified domestic institutional investor scheme: For details about this new
program, see Clara Li, "Opening into SAR Stocks Welcomed," scmp.com, April 4, 2002; Bei Hu, "Foreigners Tipped to Run Investor Scheme," scmp.com, March 29, 2002; Mark O’Neill, "China Share Trade Closer," South China Morning Post, March 14, 2002, Business 2 p. 1; Bei Hu and Peggy Sito, "Careful Words on Investment Keep Players Guessing," South China Morning Post, March 13, 2002, Business Post p. 5.
44 China Depository Receipts: See Chi-Chu Tschang, "Think-Tank Predicts Decade-Long Bull Run," scmp.com, April 25, 2002.
45 "with the likely result of sending their prices in a straight line up": Edith Terry, "New York a Step Too Far for Shanghai," scmp.com, April 5, 2002.
46 So expect to see rising prices: "Capital Market Continues to Further Open Up," chinabiz.org, April 5, 2002.
47 deregulation of brokerage commission rates: See "China Lowers Commission for Stock Trading," People’s Daily Online, April 8, 2002.
48 to borrow for further stock market investment: Pamela Pun, "Easier Loans Policy Nears to Lift Tired Stocks," hk-imail.com, April 11, 2002.
49 Only three companies have been thrown off: Jianguo Jiang, "Baiwen Revises Profit to Loss, May Face Delisting (Update 1)," bloomberg.com, April 12, 2002.
50 Zhengzhou Baiwen: For more information about this company, see Bill Savadove, "Loser Baiwen at a Loss Again," scmp.com, April 11, 2002.
51 "propped up by helium": Elaine Kurtenbach, "Enron Debacle Adds Urgency to Corp, Fincl Reform in China," wsj.com, March 12, 2002.
52 all of the old tactics: "Reshuffle Aims to Combat Foul Play," scmp.com, October 17, 2001. 16
53 "The authorities don’t want to see the market fall too much": Bill Savadove and Samuel Yeung, "China Sets Pace on Fees," scmp.com, April 6, 2002 (comments of Gao Xing).
54 "Yesterday I went to the dentist to pull a tooth": "Sell State Shares Fast--Economist," chinabiz.org, March 23, 2002.
55 most of them in Hong Kong: Bank of China (Hong Kong) Ltd. has just scrapped the planned sale of shares in New York according to reports. It will go ahead with just a Hong Kong listing. Rob Stewart, "Bank of China Abandons U.S. Listing Plans in Favor of Hong Kong," bloomberg.com, April 15, 2002. Not everyone agrees the reports are correct. See Louis Beckerling and Eric Ng, "BOC Considers Early HK Launch," scmp.com, April 17, 2002.
56 "The fund-raising channels on the mainland are temporarily blocked": Chi-Chu Tschang, "SAR Back in Favour for Listings," South China Morning Post, April 6, 2002, Business Post p. 3.
57 Jiang Zemin himself: Chi-Chu Tschang, "Jiang Gives Impetus to List Abroad," scmp.com, March 25, 2002.
58 "The continuing paradox": Peter Wonacott, "China’s Efforts to Revive Market Might Take Away from Reforms," wsj.com, April 16, 2002.
59 the State Development Planning Commission announced: Fu Jing, "Overseas Investors to Buy into SOEs," chinadaily.com.cn, December 25, 2001. For additional information, see "China to Push Foreign Stakes in Big State Firms," Reuters News Service, December 24, 2001.
60 "a bull run lasting a decade": Chi-Chu Tschang, "Think-Tank Predicts Decade-Long Bull Run," scmp.com, April 25, 2002.
61 "critical point between life and death": Peggy Sito, "CDRs May Be Lunar New Year Investors’ Gift," scmp.com, January 17, 2002.
62 market capitalization: "Securities Market Shrank 9% in 2001," chinaonline.com, March 4, 2002. Market capitalization of China’s domestic equity markets at the end of last year was US$525.4 billion, down 9.5 percent from the previous year, according to Zhu Zhixin, director of the National Bureau of Statistics.
63 trading volume: Bill Savadove and Samuel Yeung, "China Sets Pace on Fees," scmp.com, April 6, 2002. "Since last year, there has been a dramatic drop in trading volume because of the reduction of state shares," says Gao Xing, an analyst in Shenzhen for Pingan Securities.