Contact Center Solutions Industry News

[February 28, 2007]

Markets shatter China's dreams

(Daily Mail (London) (KRT) Via Thomson Dialog NewsEdge) Feb. 28--China has just entered the Year of the Golden Pig, a highly auspicious time which only occurs every six decades. But for its business community, which had hoped for a boom in fortunes, the massive slide in Shanghai's stock index has brought a stark wake-up call.

Shares in China recorded their sharpest falls in ten years on fears that a government crackdown on illegal stock offers and banned investments will put paid to a seemingly unstoppable rise in values.

Shanghai's leading index, which had reached an all-time record on Monday, tumbled more than 9pc yesterday. That wiped 55bn from the stock market and sent jitters across Asia, raising fears that the Chinese "bubble" could be about to pop. No one is suggesting will grind to a halt, more that investors need to realise that the pace of expansion -- which has prompted the stock market to double in a year -- can't go on forever.

Part of the reason the Chinese government is trying to stop its citizens from using personal loans to buy shares is that it wants to prevent a runaway surge in prices that might then lead to a slump.

Even Standard Chartered, which makes two thirds of its banking profits in Asia and is long experienced in developing markets, is sounding a note of caution.

Chief executive Peter Sands says: "We are pretty confident about the underlying robustness of economic growth in China but we do think there will be bumps along the way. You don't get an economy growing this fast without some turbulence."

The fall in Asian stocks and warnings of a potential US recession by former Federal Reserve chief Alan Greenspan, pushed Standard Chartered shares down 59p to 1450p. This came despite a 19pc rise in annual pretax profits to 1.6bn and 11pc rise in the dividends to 71.04 cents (36p).

But Sands is planning to ramp up investment and begin offering a full consumer banking service. "We see increasing opportunities in China," he says. "We are very happy with our strategy and our ambition is to build a business there."

Yesterday Wal-Mart, the world's biggest retailer, agreed a 500m deal to buy 35pc of loss-making supercentre chain Bounteous Co and buy control by 2010. This gives it 101 hypermarkets in China under the Trust-Mart brand. Wal-Mart already owns 73 stores in the country and, like UK retailers Tesco and Kingfisher, is keen to grow further.

Rising disposable incomes has whetted the appetite of western retailers looking for fast-growing overseas markets. There has also been a rapid increase in the need for financial services. Many other sectors are also benefiting, as the industrialisation of previously rural areas leads to a surge in demand for goods.

Mergers and acquisitions activity has soared, though ownership restrictions mean foreign firms often opt for joint ventures. But doing business in the Communist state is not easy. Beer giant Foster's threw in the towel last year and sold its last Chinese brewery after 13 years of losses.

George Budden, a merger integration specialist in Shanghai for Deloitte, says only 20pc of foreign investors are really pleased with the value delivered by Chinese deals.

He says: "Though most of the Western companies I've spoken to are very happy they are in China, they are not always happy at the speed with which they have made their investments pay off." Regulations can be hard to decipher and corporate governance and financial controls are sometimes lacking.

"Often if you buy a private company they will have more than one set of books," warns Budden. "One set might be for the taxman and the other set for the annual accounts."

Since many British firms have already come a cropper on foreign shores, such pitfalls make it all the more important that they do their homework in China and don't put all their faith in the "Golden Pig."

WESTERN FIRMS PUTTING THEIR CASH INTO THE PEOPLE'S REPUBLIC

--Wal-Mart: 500m deal to buy 35pc of Bounteous hypermarket chain

--HSBC: 35 bank branches, stakes in Bank of Communications, Ping An Insurance

--RBS: Shelled out 900m for 5pc in Bank of China

--Standard Chartered: 22 branches, launching full retail banking to locals

--Tesco: 90pc stake in 47-strong Hymall chain

--Kingfisher: 54 B&Q stores

--Smiths Group: Factories making components for oil, telecoms and aerospace industry

--Vodafone: 2.3bn investment in China Mobile

WHO CAME A CROPPER?

Beer giant Fosters pulled out of China in 2006 after 13 years without profits

To see more of the Daily Mail and the Financial Mail on Sunday, or to subscribe to the newspaper, go to http://www.thisismoney.com.

Copyright (c) 2007, Daily Mail, London
Distributed by McClatchy-Tribune Business News.
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