Michael Hiltzik: Learning to live with China

Economic nationalism -- or is it merely xenophobia? -- is nothing new on these shores. It crops
up whenever America's hegemony as the world's No. 1 economy appears to be threatened by an upward-scuttling challenger.

As my column for Monday observes, today the challenger is China, heir apparent to the role of America's global counterweight once occupied by the Soviet Union and Japan. As in those earlier cases, the global contest provokes American leaders to questioning our adversary's motives (economic, political and military), its moral adequacy, its designs on our way of life.

Among the more unnerving manifestations of China's expanding economic role is its interest in making investments in the U.S. Some of these have been rejected on strategic grounds, some as the result of pure political posturing. Zachary Karabell, the principal of investment firm River Twice, a frequent guest on CNBC and the author of "Superfusion," a new book about the U.S.-China economy, argues that the best way to tether China's interests to ours is to welcome its investment yen.

In this context, it's worth remembering the Japanese experience. When that country began buying up iconic American assets such as Rockefeller Center with the dollars it earned from a favorable trade balance, bookstores filled with tomes heralding the death of American global dominance.

How did that work out? The Japanese bought at the top of the market, and American sellers laughed all the way to the bank. The Rockefeller Center investment landed in bankruptcy court. Today, more than two decades after the Japanese ascension, its economy is struggling along. Its exports to the U.S. have shrunk to less than one-third of our No. 1 trading partner ... China. Will history repeat itself?

The column begins below.
  

When President Obama embarks on a round of bilateral meetings with the Chinese leadership in Beijing today, he’ll be laboring under a heavy burden of history and politics.

Many in the U.S. will want him to place human rights issues -- a preoccupation of the regime’s critics dating to even before the Tiananmen Square protests 20 years ago -- on the front burner.
The rest of the talk-radio agenda would have him meeting the Dalai Lama (that won’t happen until after the current trip), threatening a trade war over one commodity or other and discouraging China’s putative search for a global reserve currency to supplant the dollar.

Zachary Karabell isn’t among the agitators. An investment manager and commentator who first visited mainland China in 2002 while setting up a China-U.S. growth fund for Fred Alger Management, Karabell believes the two economies have become entwined in a web of mutual interests.

Read the whole column.

-- Michael Hiltzik

China's Shanda Games IPO flops after investors pay up

Greed got the best of the owners of Chinese online gaming company Shanda Games Ltd. -- and the buyers of the firm's initial public stock offering paid the price.

Shanda’s shares plunged today as they began trading, a day after the company's parent and its underwriters squeezed as much as they could out of investors who bought the IPO.

The stock tumbled $1.75, or 14%, to finish at $10.75 on Nasdaq.

Shanda Games is a spinoff of Shanda Interactive Entertainment, which thanks to Shanda Games became China’s biggest online gaming company. Thursday's IPO allowed Shanda Interactive to cash out of a large chunk of its holdings: It raised $880 million for itself by selling 70.4 million of the 83.5 million shares offered in the offering. Shanda Games raised $163 million in the deal.

The IPO was initially expected to offer 63 million shares between $10.50 and $12.50 a share. Earlier this week Shanda upsized the offering to 83.5 million shares, and when it came to pricing the offering on Thursday the underwriters, led by Goldman Sachs and JPMorgan Securities, went for the top of the price range.

The upsizing made Shanda Games the year's biggest U.S. IPO, raising $1.04 billion in all.

But the decision to grab as much cash as possible left no room for a first-day pop to reward the IPO investors.

"People believe Shanda Games has been priced at market," Tian Hou, a New York-based analyst with Pali Capital Inc., told Bloomberg News. "What’s the room to go up if it’s already priced at market?"

Shanda Interactive’s U.S.-traded shares also slumped, falling $6.77, or 12%, to $50, after surging early in the week on prospects for the deal.

The poor reception for Shanda Games contrasts with the hot offering from rival Chinese online game company Changyou.com in April. Changyou.com sold shares at $16 each, and they jumped to $20.02 on their first trading day. On Friday Changyou.com closed at $37.23.

-- Tom Petruno

The dollar's in the dumpster, and nobody's worried -- for now

"A strong dollar is in America’s best interest," the Bush and Obama administrations have repeatedly assured us.

And yet for most of this decade the dollar has been sliding. Now, the greenback again is one of the world’s currency weaklings. But global financial markets, and governments, seem to be taking it in stride.

The dollar has taken a renewed pounding over the last two weeks, driving the DXY index -- which measures the buck’s value against six other major currencies -- to nearly a one-year low.

The euro has been the big winner as the U.S. currency has lost ground. The euro was at $1.47 on Thursday, its highest level since last September and up from $1.42 on Sept. 1.

But the dollar’s troubles haven’t set off alarm bells in Washington. Nor have the Chinese raised a new stink about the buck’s weakness and the devaluation threat it poses to their American asset holdings.

The lack of a ruckus this time reflects that the dollar is dropping for the right reasons, currency analysts say.

For one, investors worldwide are feeling better about the global economy, which is pulling money out of the classic hiding place of the dollar in favor of  riskier assets, including emerging-market stocks.

"A lot of money is coming out of safe-haven dollar bets," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

Investors and traders also are reacting normally to the interest rate differential between the U.S. and other countries: With U.S. short-term interest rates lower than those of most other nations, and the Federal Reserve in no hurry to raise them, the dollar naturally is at a disadvantage to currencies in countries with higher rates.

Yet even as the greenback has lost ground in recent weeks, there doesn’t appear to be a rush out of U.S. Treasury bonds by foreigners whose assets are devalued with each tick lower in the dollar. The yield on the 10-year Treasury note, at 3.39% on Thursday, was unchanged from its level on Aug. 31.

What's more, Wall Street has continued to rally, pushing major market indexes to 11-month highs.

The dollar's decline "doesn't seem to be impacting U.S. stock or bond markets," says Sophia Drossos, a currency strategist at Morgan Stanley.

Meanwhile, there are some key constituencies for whom the buck's losses are a blessing. U.S. exporters obviously love a sliding dollar because it makes their products cheaper for foreign buyers. And because most commodities are priced in dollars, oil and other raw materials get cheaper for countries with strong currencies.

At the same time, discounted U.S. goods and services become more of an attraction for foreigners looking to vacation here.

For U.S. investors who own foreign stocks and bonds the dollar's drop this year has brought a windfall, just as it did for most of 2002 through 2007. A lower dollar means securities denominated in strong foreign currencies are worth more when translated to dollars.

The Canadian stock market is up 28% in Canadian dollars this year, but it's up 47% in U.S. dollars. The Australian market is up 26% in Aussie dollars -- and 56% in U.S.

But as with all currency moves, there are losers in the buck's stumble. Foreigners' U.S. assets are declining in value (or, in the case of stocks, aren't rising as much). At some point, foreign exporters in Europe, Japan and elsewhere are likely to start screaming about an unfair trade disadvantage. If they're forced to mark up prices of their goods, we'll import inflation. Lastly, Americans who were thinking about foreign vacations may have to reconsider.

The big question is how low the dollar will go. For now, it's still above the worst levels (or best levels, depending on your perspective) of 2008. But it's getting closer to those depths. If it breaks through, there will be a new torrent of speculation about the dollar losing its status as the world's primary currency, and about the risk that that would entail for an economy so dependent on foreign creditors.

Americans have been warned for decades about a possible dollar panic if the world were to lose faith in us. The current decline is no panic. Neither we nor the rest of the world can afford for it to turn into one.

-- Tom Petruno

 

 

Chinese stocks edge up as economy stays on growth track

Some upbeat economic data helped Chinese stocks stabilize Tuesday after plunging into bear-market territory on Monday.

The Shanghai composite index closed up 15.98 points, or 0.6%, to 2,683.72 after swinging multiple times between gains and losses.

From Bloomberg News:

China’s manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.

The Purchasing Managers' index rose to a seasonally adjusted 54 from 53.3 in July, the Federation of Logistics and Purchasing said in an e-mailed statement in Beijing. A PMI released by HSBC Holdings Plc also climbed.

Gains in output, orders and jobs added to evidence that Premier Wen Jiabao can meet his 8% growth target for the year as a stimulus package counters falling exports.

“China’s equity market has taken a battering in the past few weeks, but the economic data suggests that the recovery remains on track,” said Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong. “Beijing still faces the difficult task of managing liquidity conditions to avoid a bubble or a bust.”

The market has been hit by fears that the government's efforts to rein-in bank lending will slow the economy to a crawl, or worse. The Shanghai share index tumbled 6.7% on Monday, leaving it down 23.2% from its summer high reached Aug. 4. By Western standards a drop of 20% is considered a new bear market.

On Wall Street, the concern is that if China's expansion stalls out it could signal the same for Western economies.

But the August purchasing managers' index showed signs of strength across the board, which at least appeared to discourage a heavy new wave of selling in Shanghai to follow Monday's drop.

From Bloomberg:

The output index rose to 57.9 from 57.3 in July. The measure of new orders climbed to 56.3 from 55.5. An export-order index was unchanged at 52.1. An employment index gained to 51.4 from 50.8. Readings above 50 indicate expansions.

“This clearly shows that we are in a broad-based economic recovery,” said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. The gain in jobs was “very encouraging, as it shows that firms are confident enough to increase hiring, which will also help boost consumption for the rest of the year,” he said.

-- Tom Petruno

Photo: The Shanghai World Financial Center tower. Credit: Eugene Hoshiko / Associated Press

 

 

Australia OKs Chevron's plans for huge gas field

Australia has given the green light to Chevron Corp.’s plans for a major natural gas production and liquefaction project off the country’s northwest coast.

The development of the Greater Gorgon fields is expected to provide huge quantities of liquefied gas for export to China and other Asian nations.

From Bloomberg News:

Environmental approval has been granted with an additional 28 conditions, Peter Garrett, federal environment minister, told reporters in Canberra today [Wednesday]. The ruling was among the final obstacles before Chevron, Royal Dutch Shell and Exxon Mobil Corp. can make a decision to build the venture.

Gorgon is among more than 12 liquefied natural gas projects proposed for Australia and Papua New Guinea competing for Asian buyers.

San Ramon, Calif.-based Chevron is the operator of the project and has a 50% interest; Royal Dutch and ExxonMobil each have a 25% stake.

Australian Prime Minister Kevin Rudd has estimated that the value of gas sales from the Gorgon fields could total $249 billion (U.S.) over 20 years. Chevron calls Gorgon Australia's single largest natural resources project.

ExxonMobil this month signed deals to sell much of its share of Gorgon production to Asian importers including PetroChina Co. and India’s Petronet LNG Ltd.

Chevron’s shares have rallied from a 2009 low of $56.46 on March 5. The stock slipped 11 cents to $70.65 on Tuesday.

Just an FYI for income-oriented investors: Major energy stocks have been sources of rising dividend income this year even as many other companies have slashed payouts because of slumping profit. Chevron raised its quarterly dividend 4.6% last month, to 68 cents a share from 65 cents.

The stock’s annualized dividend yield is 3.8%, based on Tuesday’s price.

-- Tom Petruno

Photo: A liquefied natural gas transport ship off Yokohama City, Japan. Credit: Kimimasa Mayama / Bloomberg News

Wall Street bears lacking firepower despite help from China, oil

China's renewed stock market selloff this week and crude oil's surprising surge might otherwise have been excellent excuses for a pullback on Wall Street.

Except that it's August, and there might not be enough engaged human investors in the market to care.

"The market should be starting to correct, but it's not going to correct because there's no one around to sell," says Dave Rovelli, head of equity trading at Canaccord Adams in Boston.

That's hyperbole, of course. Yet despite some volatile sessions in the last couple of weeks, major U.S.  market indexes are about where they were when the month began, and haven't lost much from their recent highs.

The Standard & Poor's 500, at 996.46 on Wednesday, was off a mere 0.6% from its close of 1,002.63 on Aug. 3.

So the lucky ranks of investors who've fled to the beaches, mountains or their own backyards this month haven't missed much of anything by not paying attention to the market.

It could have been worse given mounting warning signs of a near-term peak in share prices, including a sharp jump in bullish sentiment in the first half of the month.

Then, when China's hot market began to tumble, it seemed to be a logical bell-ringer for markets worldwide after July's big gains.

China may yet turn out to be a harbinger of trouble for global stocks. But the Shanghai market mostly traveled alone in its 19.8% plunge from Aug. 4 through Wednesday. (It regained 4.5% on Thursday.)

Measured from its nine-month high reached on Aug. 13, the S&P 500 was down just 3.3% through Monday's close, before rebounding 1% on Tuesday and 0.7% on Wednesday.

Among other markets, the pullbacks this month have been no worse than 4.7% in Germany, 3.7% in Japan and 3.6% in Mexico.

Outside of China, stock bulls and bears may have reached a kind of stalemate for the moment, waiting for more signs of economic recovery -- or of renewed weakness.

Is oil pointing to the former? Crude futures in New York rocketed $3.02 a barrel on Wednesday to finish at $72.21 after the government reported a steep drop in U.S. inventories last week, suggesting tightening supplies.

But analysts were at a loss to explain the size of the shortfall. "There was no story to justify it," said Stephen Schork, an energy analyst in Villanova, Pa. That didn't stop traders from pushing oil to just below its 2009 high of $72.68 a barrel reached in mid-June.

Technical trading factors may overtake the fundamentals if oil-price optimists can get futures above $75, Schork said. "$75 is the number the permabulls want to gun for," he said. Reaching that level could trigger short-covering by market bears that could quickly get the price to $80 or even $85, he said.

The stock market clearly isn't worried about oil at $72 a barrel, and may even take encouragement from it. But the trend at the gas pump is going the wrong way for any investor who's concerned about the financial health of cash-strapped consumers and their ability to help spend the economy into a lasting recovery.

It may just take until September to get enough people back on Wall Street to think it all through.

-- Tom Petruno

 

Chinese stocks plunge again, leading global rout

China's stock market led the rest of the world higher in the spring rally. Now it's leading again -- as investors bolt for the exits on fresh doubts about the global economy.

The Shanghai market sell-off that began Aug. 5 accelerated today, driving the main index down 176.34 points, or 5.8%, to 2,870.63, in the biggest one-day slump since November.

The index now has plummeted 17% from its 2009 high on Aug. 4, after rocketing 91% since Dec. 31.

China's dive has helped fuel selling around the globe. Stocks slid 3.1% today in Japan, 2% in Germany, and prices are down sharply on Wall Street, with the Dow Jones industrials off 153 points, or 1.6%, to 9,163 at about 9:15 a.m. PDT.

Chinese speculators who've been looking for an excuse to cash out found plenty today: Ping An, the country's No. 2 insurance firm, reported weaker-than-expected first-half earnings; Yunnan Copper reported a first-half loss and said there were “no clear signs” of a recovery; and the government said foreign direct investment in China plunged nearly 36% in July from a year earlier.

From Bloomberg News:

“These disappointing earnings from big companies have reaffirmed concerns that share prices have moved ahead of fundamentals,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “The correction will continue.”

The Shanghai gauge trades at 31 times the reported profit of its companies, compared with a price-to-earnings ratio of 18 times for the MSCI Emerging Markets Index.

“Valuations are at such a stretched level that a correction is overdue,” said Yan Ji, who helps oversee about $850 million at HSBC Jintrust Fund Management Co. in Shanghai. “There may be another 20% or 30% downside for the index.”

The U.S. stock market, too, has been flashing classic warning signs in recent weeks that at least a short-term sell-off was imminent after the heady gains since July 10.

-- Tom Petruno

Photo: An investor at a Shanghai brokerage today. Credit: Eugene Hoshiko / Associated Press

 

The script calls for a sell-off in stocks. So where is it?

Many of the classic warning signs of an imminent pullback in stock prices are flashing red. Yet the market has continued to push ahead, seemingly oblivious.

The bears proffer the image of Wile E. Coyote, off the cliff but with his legs still in motion.

On Thursday, despite the government’s unarguably disappointing report showing a drop in July retail sales -- raising yet more questions about the consumer’s ability to spend -- major stock indexes posted modest gains to close at new 2009 highs.

The Dow Jones industrial average added 36.58 points, or 0.4%, to 9,398.19, its highest close since Nov. 4.

Even if you believe that the rally since March 9 is a genuine new bull market rooted in expectations of an economic recovery, no such advance proceeds without sharp setbacks along the way. And we haven’t had one.

For the broader Standard & Poor’s 500 index, the most significant decline so far was a 7% drop from June 12 to July 10. Blink, and you missed it.

Since July 10, amid a flood of better-than-expected (i.e., less bad) second-quarter earnings reports, the S&P has jumped 15.2%, lifting its gain since March 9 to 49.7%.

Even many bulls now look around and worry this is all too much, too soon.

As I noted in this post on Monday, gauges of investor sentiment have moved quickly and solidly into bullish territory since mid-July. That's often a good excuse for a bout of profit-taking.

The latest weekly Investors Intelligence survey of market newsletter writers showed 49.4% were bullish this week, up from 47.2% last week and the highest reading since January 2008.

Another warning sign: "Short sellers" who bet on falling stock prices have been scrambling to close out their trades.

Meanwhile, individual investors’ total purchases of domestic and foreign stock mutual funds swelled to $5.5 billion in the seven days ended Aug. 5, the highest since mid-May -- which was just as the market was tiring from its spring surge, although it never took a spill.

But maybe the most troubling clue is coming from China, where optimism about the economy -- and a speculative frenzy fueled by cheap money -- drove a 91% gain in the Shanghai market index from year’s end through Aug. 4. Since then the index has slumped in six of eight sessions, including today’s drop of 3%. It’s off 12.2% from the recent peak.

Fundamentally, Wall Street’s bulls still have a legitimate case: If the market is supposed to price in the future, rather than the present or the past, "It’s saying that the first half of 2010 is going to look a whole lot better than the first half of 2009," says Art Hogan, market analyst at Jefferies & Co. in Boston.

Between here and there, however, what are the odds of a pothole-free ride?

-- Tom Petruno

Image: Wile E.'s Looney Tunes stamp from 2000. Credit: Associated Press

Chinese stocks sink again, now off 10% on economy fears

Gravity has taken over in the Shanghai stock market.

Doubts about the Chinese economy triggered another torrent of selling Wednesday, driving the Shanghai composite share index down 152 points, or 4.7%, to 3,112.72.

The index now is off 10.3% from its recent peak reached Aug. 4, its biggest setback since late February.

At its recent high the market was up 91% for the year as speculators poured in, betting that the country’s economic-stimulus program would keep growth on track.

But the commerce ministry warned Wednesday that China’s domestic demand was unlikely to "provide a full remedy for the sharp contraction in external demand," meaning exports.

"Despite a more self-evident economic turnaround in China, the prospect for the world economy remains unclear and the downside risk to external demand remains significant," the ministry said.

What’s more, the government’s new efforts to restrict bank lending -- after encouraging a lending boom in the first half of the year -- appear to be taking hold.

From Bloomberg News:

"China’s new loans plunged to 355.9 billion yuan ($52 billion) in July, less than a quarter of advances in June, official data yesterday showed. China Construction Bank Corp. President Zhang Jianguo said last week the world’s second-most valuable bank will cut new loans by 70% to avert a rise in bad debt.

" 'The slowdown in new lending is an excuse for investors to exit a market that’s risen too fast and gotten too expensive,' said Philippe Zhang, chief investment officer at AXA SPDB Investment Managers in Shanghai.

"Investors should sell China’s stocks as the market is in 'bubble territory' and share prices already reflect expectations for a rebound in the economy and earnings, Shenyin & Wanguo Securities Co. said in a report yesterday."

-- Tom Petruno

Photo: The Shanghai skyline. Credit:  Philippe Lopez / AFP/Getty Images

Amid inflation fears, U.S. will boost issuance of 'TIPS'

If higher inflation is on the horizon, bond investors will have more opportunities to hedge that risk: The Treasury says it expects to issue more inflation-protected bonds in the fiscal year beginning Oct. 1.

The government has been selling Treasury Inflation-Protected Securities, or TIPS, for more than a decade, but they’re still a small part of Uncle Sam’s total debt. That makes sense, because inflation hasn’t been much of a concern -- so the appetite for bonds guaranteed to earn returns that keep up with inflation hasn’t been huge.

There were $532 billion of TIPS outstanding at the end of June, accounting for just 8% of the $6.6 trillion of Treasury debt held by the public.

But "market participants can expect [TIPS] issuance to gradually increase" in the new year, the government said Wednesday in its quarterly statement on future borrowing plans.

The timing isn’t a coincidence: The Treasury knows that many potential buyers of U.S. bonds -- including China -- fear that inflation could surge given the massive sums the Treasury and the Federal Reserve have pumped into the financial system since last fall.

Rising inflation would erode the value of fixed-rate bonds. If inflation jumped to an annual rate of 5%, a 10-year Treasury note bought at the current annualized yield of 3.76% would plunge in value.

With TIPS, however, the principal value of the bonds adjusts each year to keep up with any increase in the Consumer Price Index.

Besides boosting the volume of TIPS to be sold, the Treasury said it may consider replacing sales of its 20-year TIPS bond, now the longest-term issue, with a 30-year security. That could help long-term investors such as pension funds better hedge their portfolios for inflation and protect retirees' benefits.

Marc Chandler, head currency strategist at Brown Bros. Harriman in New York, said the Treasury’s move to ramp up TIPS issuance suggests the Obama administration wants to show that it will be serious about restraining inflation if the economy recovers enough to make that a worry.

By issuing TIPS the Treasury "takes on the inflation risk -- transferring it from the investor to the U.S. government," he noted.

But many analysts are more concerned with the willingness of the Federal Reserve, which controls the money supply, to begin tightening credit once the economy turns. That will be a politically difficult decision if, as expected, unemployment remains extraordinarily high even as the economy begins to grow again.

-- Tom Petruno

Photo: The Treasury building in Washington. Credit: Chip Somodevilla / Getty Images