Did I mention they have no subprime exposure? :) [China Bank Shares Fall Sharply]
- Shares in China's banks fell sharply Monday after news reports said its No. 2 lender, Bank of China, might write down holdings of U.S. mortgage securities and two others increased reserves for possible losses.
- The reports were the first indication that Chinese lenders, which have so far avoided damage from the U.S. credit crisis, might face problems due to their holdings of subprime securities.
- Also Monday, China's banking regulator warned that lenders might face risks from fluctuations in fast-rising real estate prices.
- Bank of China is expected to announce a "significant writedown" on its $7.95 billion in U.S. subprime mortgage securities, Hong Kong's South China Morning Post newspaper reported, citing unidentified sources.
- Bank of China shares fell 4.1 percent in Shanghai market and by 6.4 percent in Hong Kong. China's biggest banks are listed in both cities, with shares in Shanghai off-limits to most foreign investors, while Hong Kong is open to global traders.
- The fall in bank stocks helped to drive overall market declines in both cities, with Shanghai's main index sinking 5.1 percent and Hong Kong plunging 5.5 percent -- its biggest percentage drop since 2001.
- Two other major lenders, Industrial & Commercial Bank of China and China Construction Bank, are increasing reserves for possible writedowns on subprime mortgage holdings, the respected Chinese business magazine Caijing reported. ICBC, China's biggest commercial lender, raised reserves to cover 30 percent of its subprime holdings, while Construction Bank's reserves covered 40 percent of its holdings, the magazine said, without citing sources.
- China's banks have seen revenues and profits soar in recent years, driven by a fast-growing economy and rising real estate prices. But the country's industry regulator warned in a report released Monday that they might face higher risks from fluctuating real estate prices and financial conditions.
A lot of "myths" have been busted of late. A couple of myths still left to be destroyed are "it is safe to buy Chinese stocks until the Olympics" and "emerging markets are safe havens". The latter is especially shocking - if you said that 5 years ago, you'd be laughed out of a room. Now it's conventional wisdom. This ties into another myth - that if 3/4 of the world's GDP is heading to contraction (US, UK, Western Europe, Japan) - especially consumer lead... that somehow the small sliver of middle class in India, China, Brazil will offset that. Hardly. So this leaves these markets a lot of room to fall.
... once the myth of "decoupling" between emerging markets from developed markets is broken, we could be subject to a large sell off. I don't know when this myth is busted but I believe 2008 will be a year one can make a lot of money with Ultrashort Emerging Markets (EEV) along with Ultrashort Xinghau China 25 (FXP), both introduced in October. [New Ultrashorts Being Introduced for Foreign Markets]
Much like the US stock market this fall and early winter I expect a thrashing type of action to take place in these foreign emerging market indexes as "denial" battles with "hope". Just as we denied the slowdown and thought the Fed would fix everything (remember that powerful move off that first Fed cuts post August). So it won't be straight down but Singapore and Hong Kong already seem to be telegraphing what the rest of Asia might be facing.
*****
As we've seen how swiftly the shoe can drop here in the US once "denial" turns to "recognition", as these cockroaches emerge one by one, and the "myth" that is "there is safety in a communist country with poor financial controls and an inflated real estate market, chock full of inflation and a billion peeved rural poor" it should be an interesting time. But hey CNBC told me it's safer than the US.... so it must be true.
Remember, this whole global credit system is like a big web -> our smart guys in NYC have infected the entire globe - Cleveland, California, Florida, UK, Spain, Ireland, Germany, little towns in Scandanavia, now we take over Asia! Our "good work" is everywhere. :)
Who said we are not an export country? We export contagion!
Remember the quote of the century
Emerging markets are being favored in part because "financial innovations are less common in developing countries," said Heidemarie Wieczorek-Zeul, German economics minister, in remarks to the IMF/World Bank Development Committee.
