Wednesday, July 29, 2009

The Debts of the Lenders: Chinese Bubble Continues To Grow Larger

Credit *bobb513, Gato.chan, Clair_Hayashi, panicof2009

A major disconnect between reality continues to accelerate. One wonders how many shares the smart money is selling into. . . . oh wait - we know where and who already - it was the biggest 1 day drop since 2008 in other sectors.

Keep in mind that there is NO SHORT SELLING ALLOWED in Chinese markets.

The significance behind no short selling is simple - in a period of forced liquidation ( such as a stock market panic ) there is NO bid to catch the ask. Or at least anything remotely near the asking price. And so the ask will keep on dropping until it hits a lower bid. Throw in market orders and you have a formula for a spectacular crash.

Well, savvy and well connected institutional shorts are shorting the credit spreads on CDS (but you have to be an institutional player to play that game). No problem though, the resulting loss paid out by the CDS sellers will be paid out by the taxpayers . . . . again.

July 29 (Bloomberg) -- China State Construction Engineering Corp. jumped 56 percent on its first trading day in Shanghai as confidence in the nation’s economic recovery stoked demand for the world’s largest initial public offering in 16 months.

The biggest drop in Shanghai’s benchmark index in eight months today failed to curb enthusiasm for State Construction stock, which was sold at a higher valuation than China’s four previous IPOs this year. The gain underscores the difficulties the securities regulator faces in reining in speculation on IPO stocks partly driven by record lending.

“The macroeconomic conditions are probably not as positive as we think,” said Xu Jiulong, a Shenzhen-based funds manager at Greatwall Fund Management Co., which oversees more than 9 billion yuan ($1.3 billion). “State Construction is too expensive. The surge is unsupported by its earnings.”

State Construction’s closing price values the stock at 42 times last year’s profit, according to Bloomberg data. The Shanghai Composite Index sank 5 percent, the biggest loss since Nov. 18, tempering a rally that pushed China past Japan as the world’s second-largest stock market by value this month.

“Feverish investor sentiment is driving up the stock price,” said Wang Xiaoyong, a Shenzhen-based analyst at China Merchants Securities Co.

Trading in State Construction shares surpassed the 2 billion end-of-day volume in PetroChina Co.’s Shanghai debut in November 2007. Activity also eclipsed the 2.6 billion shares traded in Industrial & Commercial Bank of China Ltd. on its first day in October 2006.

Chinese demand for IPOs was bottled up after the securities regulator halted first-time sales for nine months to aid a stock market recovery. Companies who sold shares in Shanghai or Shenzhen last year gained an average 152 percent on debut, according to data compiled by Bloomberg.
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