TRANSCRIPT: Oil shock in China with supply and
price issues troubling Chinese oil majors; speculation
continues to mount on whether or when the bubble
in China equities will burst; and PetroChina's
A share IPO...
Sinomania! Volume I Webisode 38, November 2, 2007
Oil Shock — Gas Lines In Beijing!
Markets and a Big IPO!
ENERGY INSECURITY?
Gas lines appeared in Shanghai and Beijing for
the first time in two years finally capturing
the attention of China's national politicians.
Angry lines of truck drivers got vocal and in
one reported instance violent about the shortages
and rationing of fuel all over coastal and starting
this week interior regions of China. The disruption
was spiking inflation in Shanghai and causing
embarrassment in the lead up to next summer's
Olympics in Beijing. On Wednesday Chinese refiners
were allowed by China's top leaders to raise prices
for refined oil products ten percent overnight.
China's oil shock was not due to any embargo
or disaster to the oil industry but to a deliberate
shortage created by the big Chinese refiners the
holding companies for Chinese oil retailers Sinopec
and PetroChina whose stock is owned by people
around the world but still largely controlled
by the Chinese Communist Party. PetroChina in
fact is poised to overtake ExxonMobile soon as
the world's biggest corporation. The day before
the National Development and Reform Commission
(an agency of China's State Council) gave the
green light for the price increase a Sinopec executive
told the Reuters newsgroup that it was closing
down a major refinery an action that would create
a national shortage.
Even with the price rise vehicle fuel in China
is still less than the current average per gallon
cost in the United States and far less than the
price per liter in Europe. The reason Chinese
refiners slowed output was to stem losses from
the new rise in crude oil now hovering just under
$100 a barrel. They cannot pass on full costs
to consumers because of government price controls
and so will again be subsidized by a cash infusion
from Beijing.
Only two years ago the National Development and
Reform Commission warned that China's refining
capacity was insufficient. Several huge oil refinery
projects are planned in China but they are years
away from production. Ironically, only ten years
ago China had excess refining capacity as the
oil and gas industry was spread around the country
with many locally owned small capacity refineries,
a legacy of the Mao era. But those small and fragmented
companies were forced out of business or sold
off to create the big Chinese energy conglomerates.
They are now aggressively consolidating and exerting
new influence on the government.
MORE BUBBLE TALK
After a steady rise all week the Shanghai Composite
Index dropped down to settle just above 5,777
at the Friday close. As I've mentioned before
the index appears reluctant to stray far from
5,500. The CSI 300 Index - still the world's star
champ for the year - dropped over two and third
percent November 2nd to close at 5,472.93. Like
the Shanghai Composite it seems mesmerized by
the 5,500 line. After a big plunge at the end
of last week Shanghai Bs recovered somewhat but
are back down today to close at 370.408. ShenZhen
Bs recovered nicely from last week's slide but
ended down November 2nd at 784.174. The Hang Seng
Index remains above 30,000 and closed today 30,468.34.
There are now about eight weeks left to 2007
and it seems almost everyone with an opinion on
Chinese and Asian markets is blowing bubbles.
Once again no longer questioning whether asset
prices - particularly stocks but also property
and to a lessor extent commodities - are investment
bubbles but when the bubbles will burst.
I have a couple of general observations: first,
observers continue to press the comparison to
Japan in the 1980s - the Nikkei bull run - and
NASDAQ during the dotcom days. As I crudely showed
earlier this year comparing support and resistance
charts from those bubbles to today's Shanghai
Composite and Hang Seng does reveal interesting
similarities. But the reality is incredibly different.
For example, as high and unrealistic as some price-to-earning
ratios appear right now with some Shanghai stocks,
they are still far less than the zany p/e levels
of NASDAQ in the late '90s. Compared to Japanese
equities in the Nikkei run Chinese companies earnings
are strong and steady. When it comes to property
assets the real estate values in China are nowhere
near the valuations seen in '80s Japan or Hong
Kong before the Asian currency crisis ten years
ago. The pace of urbanization in China and the
ancient Chinese reverence for property make the
potential for a bust in Chinese property remote,
in my view.
As for equities - will the bubble burst? I've
got a balloon and a pin ready for the occasion
but when it happens is anyone's guess. I predicted
the Shanghai Composite would be at 4,600 around
the start of the new year - will it lose 1,000
points between now and then? Let's see!
IPO REPORT
Biggest story of this week and next is the A
share IPO of PetroChina on the Shanghai Securities
Exchange. Were the two and three percent or more
drops in the indexes this week because anxious
investors are readying their cash for the new
shares? Trading begins Monday and everyone expects
the offer to raise up to ten billion US dollars.
