China Trying to Tame Bulls

07/23/2009 9:27 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The exit strategies of central banks are positively crawling with good intentions, causing some apprehension as to where exactly they will lead. China's planned path from its current credit orgy towards monetary chastity is studded with toll booths and lined with subdivisions. The day trippers and home buyers are sure to follow—that is if they don't go broke at the brokerage betting big on the Chinese Dream.

Money supply, bank loans, and brokerage accounts have exploded, while nosebleed price/earnings ratios are setting teeth on edge. So, Beijing hopes to tame animal spirits and mop up excess liquidity with a new wave of initial public offerings, ending a moratorium imposed at the market bottom last year.

First down the pike was Sichuan Expressway (Hong Kong: 0107). The toll road operator had the equivalent of $100 billion in hot money chasing its modest $264-million Shanghai offering. But that was just a warm-up act for China State Construction Engineering Corp. The home builder's $7.3-billion IPO will be the world's biggest since Visa (NYSE: V) charged into New York 16 months ago. Waiting in the wings is the automaker Chery.

Meanwhile, a new Nasdaq-style electronic board in Shenzhen is to serve as a cheap source of capital for tech start-ups. The steady stream of new investing propositions briefly unsettled the bulls in Shanghai, but by midweek the index was at a new 13-month peak. 

Europe is too mature for loan-growth targets or day trading. The European Central Bank was content to inject $621 billion of 12-month liquidity into the banking system, instructing grateful recipients to lend out what they can. And then a few weeks later, European stocks are up eight days in a row, on their best upward tear in four years.

Coincidence? Conspiracy? Like anyone cares, besides all the blogging bears. Europe, like the US, has been basking in the afterglow of better-than-expected earnings, and there's no mystery to those aside from the question of when the severances, jobless benefits and rainy-day funds propping up the top line will run out. The answer seems to be, not soon enough to save the shorts.

Things are even looking up in Japan, where the Nikkei's win streak stands at six and the ruling party stands to lose its 54-year stranglehold on politics in the August 30th election. The opposition has promised to raise the average household's disposable income by 20%, with savings realized from cutting unspecified waste. The average household would be happy enough if its income stopped going down, for a change.

Impatience with sub par economic and investing performance is challenging the Japanese establishment's resistance to change, writes Carlton Delfeld in this week's global perspective. He's skeptical that change will come via this year's election. But recent polls show the opposition well ahead.

As for China, count Carla Pasternak among those leery of the recent speculative surge. But the income guru does see value in one China fund with a long and strong record, as well as the debt and preferred shares of several European banks.

Shares of Chinese online travel booker Ctrip (Nasdaq: CTRP) are up 20% since Timothy Lutts spotted "a high-potential setup" two weeks ago. They're back at a key resistance level, and those betting that enough's enough are bucking the very broad and persistent recent trend in stocks.

Investors with a lower (but still lofty) tolerance for risk can opt to play Asia growth via Canadian grain equipment maker Ag Growth International (TSX: AFN.TO; OTC: AGZZF), as recommended by Roger Conrad. Because win or lose, bubble or bust, everyone will still expect to eat.

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