31 Responses to “China has risen”

Comments

1. Dear Mr. Rachman,
   You mistake the value of an operating business with the price of a stock at a given time in a given market. They are not the same and should not be mistaken as equivalent.
   PetroChina sells a commodity that is constantly priced in a competitive market as do its competitors. It explores, develops, produces and sells that commodity with similar technologies and cost structures to its competitors. It has stated reserves, proven, developed etc. It has a forecast growth rate (of only 3% for revenues in 2008, by the way). Net, net, the company can be valued as an operating business and its valuation compared to other companies in the business. This going concern value is far below the Shanghai A share equity market capitalization of the company (normally the m&a value of a company is a significant premium to the public market value — see the bid price for Rio Tinto by BHP Billiton versus the stock price before the bid, for example).
   The reason the Shanghai A share stock price of PetroChina is so whacky is because of supply/demand distortions in the domestic PRC stock market (PetroChina trades significantly lower, as do the other dual listed A share companies, on the Hong Kong Hang Seng exchange). The A share market is restricted to domestic buyers, the share floats are small (the Government holds most of the shares and these do not trade, further skewing the supply/demand dynamics — companies like Exxon and GE have 100% float, not 2% float like PetroChina), PRC retail buyers have to choose between bank deposits (return below inflation) or betting in the stock market (which draws them with dreams of getting rich quick), and (little covered by the Western media) the securities firms that trade in these shares are basically unregulated bucket shops that would make stock operators on Wall Street in the 1920s blush. So, there is a big difference between companies and stocks.
   At least as far as oil companies are concerned, I don’t see the PetroChina announcement meaning much.
   As for China itself, obviously its growth is a whole different story, with very important consequences for the world.
   kc

   Posted by: kc | November 9th, 2007 at 8:18 pm | Report this comment
   

2. Ask Clive Ponting and he will tell you history is back on track. Mr Ponting wrote the most masterful world history I ever read (this is the same Ponting of the Belgrano affair). His history is certainly revisionist, but less so by the day.

   Ponting’s central premise is that the Industrial Revolution was a quirk of history, which shifted the course of events. The British and then European locus of the IR was certainly not an inevitability. On the contrary, during the second millennium of world history, Eurasia was constantly amalgamating technological advances — and the powerhouse for most of these was China, whence they spread westward (the strap-on harness, the windmill, gunpowder, paper, printing, a paper currency — just to name a few). Indeed the prescient Marshall Hodgson, the great scholar of Oriental Studies in Chicago, speculated as early as the 1950s that China was on the verge of an industrial revolution in the 13th century, which however was ultimately aborted by the Mongol onslaught.

   For most of the second millennium Europe was a sorry backwater. The “Middle Ages” were certainly a local affair and do not impinge on the general thrust of Eurasian history, in fact are a very inappropriate appellation for the history of the rest of Eurasia. The tri-partite division of Ancient Rome, Middle Ages and Modern History is a very parochial, European distinction. Europe was a ‘developing nation’, to use a contemporary term, and took up the existing technology of the day (beginning in the period of the Rennaisance - which was really a ‘catching-up’ of Europe with the rest of the world) and then took it off from there. The central point is this: by the 18th century an industrial revolution, happening anywhere, was long overdue: Eurasian technological development, accumulated gradually over the past millenium, had a reached a critical mass. The reason it ultimately occured in the least likely of places - Europe - is still a hotly debated subject (see Pomeranz et al). Be that is it may, once the IR occurred, Europe experienced exponential growth - no other part of the world had any chance of withstanding European hegemony. But up until the IR itself, Chinese productivity and per-capita GDP were equivalent or higher to that of the Atlantic economies in Europe (see the following NBER paper: http://www.nber.org/papers/w10778).

   World History: A New Perspective, by Clive Ponting — I highly recommend it.

   Posted by: RCS | November 9th, 2007 at 8:18 pm | Report this comment
   

3. Dear RCS,
   If your point is that Asia was ready for its own industrial revolution (before things took off unexpectedly in the West), that seems like a very simplistic analysis. Different countries with different cultures reacted differently to the challenges of the scientific and industrial revolution in the West. The Meiji era Japanese brought in thousands of Westerners, learned the technology and became a world power in record time. The Qing dynasty Chinese turned inwards and were divided and conquered.
   kc
   N.B.: Joseph Needham’s multi-volume series on the History of Chinese Science and Technology is the definitive reference work for this area.

   Posted by: kc | November 9th, 2007 at 8:38 pm | Report this comment
   

4. Dear kc,

   With an appropriate discount rate you could reach any valuation whatsoever. Is there really a single ‘value’ for a company, or just different values for different investors? (which depend on their opportunity cost of capital, their ability to practise control over the company etc.)

   Posted by: RCS | November 9th, 2007 at 8:42 pm | Report this comment
   

5. Dear kc,

   Joseph Needham is indeed the definitive REFERENCE work, which doesen’t contradict my view that Ponting’s is the best modern synthesis of the work of Needham and many others.

   Posted by: RCS | November 9th, 2007 at 8:51 pm | Report this comment
   

6. Dear RCS,
   1–The statement “With an appropriate discount rate …” has no rational meaning so I cannot respond to it.
   2–I did not say there was a single value. There is a range of values for businesses. What I said was there is a market for buying operating businesses (their value as a going concern to others in the industry or financial players who later re-sell to the industrials — just ask Warren Buffet, GE or Singapore Investment) that values businesses using operating criteria as opposed to a stock price. A share buyers are currently buying a stock, not a company. Please note the distinction, it is meaningful.
   kc

   Posted by: kc | November 9th, 2007 at 8:54 pm | Report this comment
   

7. Sorry for that dysfunctional link. I meant the following NBER paper:

   http://www.nber.org/cgi-bin/author_papers.pl?author=carol_shiue

   Posted by: RCS | November 9th, 2007 at 9:29 pm | Report this comment
   

8. GR: “The bubble argument has something to it. PetroChina’s shares shot up partly because there is huge demand and only 2.2% of the company was floated”
   KC “A share buyers are currently buying a stock, not a company. Please note the distinction, it is meaningful”.

   Chinese most the mose valuable companies!!! ???We really need to ask what that really means. There is no economy ready to overtake the United States like the same way that the US overtook the British Empire…Global traders must be able to rely on stability and even more important, the solvency of their economic transactions…it’s not clear yet how safe a bet China is…they can and have already made quite a great deal of global mischief economically and some real problems and make some people very wealthy …but overtake the West economies …no way!…they have a long way to go..

   Posted by: Lisa-Helene Lawson | November 10th, 2007 at 2:43 am | Report this comment
   

9. GR: There is some semblance of arrogance in your statement about China rise. Please don’t forget that it took the West centuries to be where it is today, but it took China LESS THAN 3O YEARS TO REACH WHERE IT IS TODAY. Now, go back to your Math!!

   Antonio L. Zate

   Posted by: Antonio L. Zate | November 10th, 2007 at 3:13 am | Report this comment
   

10. Mr. Rachman, Why would you assume that the price of PetroChina shares in the Shanghai market is somehow the right price against which to value PetroChina while the price of the same shares in the Hong Kong market (about one-third the price in Shanghai) is irrelevant? This kind of excited nonsense may make for better journalism, but when there are two very different and easily obtainable measures of PetroChina’s market cap, why would you use the one that nearly everone agrees is likely to be the more distorted?

    Posted by: Nelsoner | November 10th, 2007 at 7:45 am | Report this comment
    

11. Just from a numbers perspective, agree the case is overstated. Not sure that it is wholly fair/relevant to begin China’s development at the end of the Deng Xao Peng era. When the dragon mother awoke, the most clever of her “children” (maybe nieces and nephews in certain cases) — Japan, Korea, Hong Kong, Taiwan and Singapore — were economic powers.

    A Chinese bubble seems inevitable, but the sensational weight of temporal market cap rankings is driven not by surprising strenght from China, but by the possibility that the US is too reliant on other people’s money and has been on a 20-year binge and now faces a serious setback. Possibly worse than a recession. Just when the US should be able to capitalise through export growth on the back of a cheaper dollar, its warehouses are empty and machines rusted. At least in the near term, US consumers may need to pay relatively higher prices for essential goods and services from China. That will bite.

    Posted by: WCM | November 10th, 2007 at 9:32 am | Report this comment
    

12. “[W]arehouses are empty and machines rusted” doesn’t get the point today (or since the beginning of WWII for that matter, when the US literally transformed its entire industrial landscape and worker skill set within 2.5 years). General economic and specific business competitiveness and productivity are driven by adaptive skills and innovation (brains+adaptive skills+will+luck+favorable environment=success). This is a significant part of the reason why China has been successful recently — entrepreneurs (first Taiwanese and then PRC nationals) took advantage, beginning in Shenzhen in the early 90s, of the drastic reduction in shipping costs from pallet based to intermodal container shipping, the WalMartization of the US and an oversupply of rural labor to build export businesses (still the overwhelming base of the PRC’s economic growth). It has also been the main basis for America’s success post-Bretton Woods. So, I would not focus on the commodity business or mass manufacturing (which is also a commodity, read Peter Drucker 30 years ago on manufacturing and where it is going) if I was looking at future competitive strength but on the intellectual capital of a country or region and whether that country or region has an environment that allows for risktaking and innovation (here the PRC is also strong, but only for those who play the system, not those who follow the “rules”).

    Re China’s rapid change, technology is constantly driving change at an increasing rate (Google was a search engine with no revenues in 2000, for example) so I would be careful in making historical comparisons regarding the rate of change a country is undergoing (LESS THAN 30 YEARS … etc.; apples to apples, Meiji era Japan is still the champ).

    kc

    Posted by: kc | November 10th, 2007 at 1:39 pm | Report this comment
    

13. Please note that China’s large companies are only large in terms of their current market-cap, not in technology and in global influence. The premium of their domestic capital market valuation, I suppose, also indicates how much they will have to pay to learn to become true global competitor in the future. Of course, with so much money, they have the resources to do their learning successfully. But in reality, as in every case in history, some of them would fail bitterly.

    Posted by: Ed Zhang | November 10th, 2007 at 2:27 pm | Report this comment
    

14. Right, on a technological base Taiwan is much more developed than China, not to talk about Japan.

    China, and they know it perfectly, is still a developing nation without even the necessary high tech do defend themselves.

    Even if China is on the verge of surpassing Germany´s GDP there is not a BMW, there is not a Siemens, there is not a BASF…in fact those companies, like most in the rest of Europe or America, needed decades to reach their current level of organization and research.

    On a geoestrategical and social perspective USA and CHINA resemble much like ARGENTINA and BRASIL:

    -Argentina has a population that represents 21% of Brazil´s (similar to America´s 22% of China´s)

    -Argentina still boasts an income per head (at PPP), about $15,000 which is TWICE the Brazilian $8,000. (America still boasts an income per head which is EIGHT times the Chinese)

    -Argentina is still from every social indicator more developed than Brazil…

    Yes, but nobody takes Argentina and Brazil at the same level as powers. Just the most developed state of Brazil (Sao Paolo, over 40 million people) can boast a higher GDP than all Argentina…

    So, yes America is much more developed socially and technollogically, but the Chinese are right concentrating an important part of their resources in the 300 million Pacific Rim provinces because they can have in 20 years another big Sao Paolo, and that means a Macroregion with a GDP similar to that of all America…while the rest of the country continues with different paths of defelopment.

    How can be future different? Just by America keeping a population increase that can offset the shortening economic gap…and that means not just keeping the 1% annual population growth but also the integration of Canada, something which authomatically will mean a 10% increase of America´s population to over 25% of China´s.

    And southern Canada is warming and will be more ready for population during the next decades.

    But even that would mean just having 30% of China´s population by 2040….

    Posted by: Enrique Costas Mira | November 10th, 2007 at 3:22 pm | Report this comment
    

15. Points of both kc and Ed Zhang are well taken. We each have noted that all things are relative at any point in time. While I readily acknowledge exceptional dynamics in the US economy, I think we are observing here less a surprise in China’s development than a serious crisis of confidence in the US.

    To put it simply, as a society more Americans, I believe, can give one a meaningful synopsis of the story of Peter Pan than they could of George Washington, Abraham Lincoln or Jesus. Arguably, three generations or more could be described as Peter Panners, and thus the reason for the distortion of fears and neuroses observed there today. None stay young forever and America is short in its retirement account. It has also forgotten one of the key lessons of middle age: how to give back.

    Economically, the deficit represents shortfalls in many of the same materials and hard goods the US will need for the substitution effect to kick in. Infrastructure projects, which are now finally under discussion, will require resources that the US no longer has readily at hand. Parallels with the early 70s may have some meaning, but I caution on focusing too much on them.

    China is 21st century, even if it hits a bump in the road. Europe has retooled and is equipped for most of the changes ahead. Russia is a story in itself. Iran is primed for change and it will be positive. The US is fixated on what is more and more a mythical past. Its present frightens most and thus the collective denial and projection of responsibility elsewhere.

    Posted by: WCM | November 10th, 2007 at 3:30 pm | Report this comment
    

16. Dear WCM,
    It would take a book or at least a long essay to really answer you adequately in regard to the relative strengths and weaknesses of the PRC and the US. However, a few thoughts:
    1–America’s issue is not whether it has intellectual capital and financial capital to produce goods and services or finance and build infrastructure. By any set of rational measurements, it does. Its main problems have to do with defining what the President’s power should be, whether it should be the policeman of the world, general public education (as opposed to the exceptional quality of its elite universities), addiction to issuing dollars whenever Wall Street catches a cold, the disparity in wealth between rich and poor and dealing with how to finance its social safety net in the future. As an economic power, its human and natural resources will remain unmatched for the next 50 years (at least) even as it declines relative to China and others.
    2–China’s wonderful people are its greatest resource (as compared to its natural resources, which are middling to poor on a per capita basis). It has a growing middle class in the coastal provinces, highly energetic entrepreneurs, great export infrastructure (in terms of ports and port technology) and a super export machine. On the other side of the balance sheet, it does not have a functioning rule of law and court system (key to economic growth), there is a huge spiritual vacuum (being filled for the moment by money making and, to large scale degree not yet reported fully in the West, evangelical Christianity), pollution is horrendous and will get much worse (as economic growth depends unavoidably on building additional coal fired power plants), unsustainable water use (which in and of itself could force economic growth to plateau), a university system based on repetition rather than innovative thinking, no free press, a party that dominates all economic institutions (and controls them, directly or indirectly, even if they look private), a financial system that is extremely fragile (as it is built on party institutions that transfer “capital” among party agents rather than allocate capital to its highest and best use), an economic that is dependent on export trade to the US (domestic consumption as a % of GDP has actually fallen in the last two years), and, very importantly, difficult population demographics (the PRC population is aging rapidly and will have a significantly worse ratio of dependent population to working population than the US (the US population will have pretty good demographics in the first half of this century from an economic standpoint as the non-white segments of the population grow rapidly). So, while China, with its wonderful, energetic people, its export machine and its unique culture are the front page story of the early part of this century, in my opinion, it has already achieved the easy economic growth that can be achieved and the difficult challenges ahead are now much more complex and risky and some (like pollution) may have no ready solution. That said, I would bet on their finding solutions, at least over the longer term.
    3–As for Peter Pan, it is not as ingrained culturally as a story in the US as it is in the UK but I get the general point. However, if you were to ask a fair sample of Qinghua and BeiDa students who the greatest US President was and what they want to do when they graduate, their answers would be Richard Nixon and working for the CCP.
    kc

    Posted by: kc | November 10th, 2007 at 10:50 pm | Report this comment
    

17. kc–

    All good points. Nonetheless, I do not agree that America’s success has 50 good years left in it given its current mindset and many of the long-term policy-driven factors you noted. The decline began moer than a decade ago and is only now measurable. So much hqs been squandered, it will require a miracle to turn things around. By all rights, the US system should be offering more than 50 years in good prospects.

    Most importantly, the comments focus on relative factors for purposes of helping to wake America out of its Stewart-Colbert Nation comedy and Peter-Pan denial. The ROW has plenty of problems and while there may by some ups for the downs, the range of possible shifts for the big economies will remain relatively tight. Then again, Argentina’s GDP outstripped the US in 1900.

    Posted by: WCM | November 10th, 2007 at 11:17 pm | Report this comment
    

18. Sorry. I had just turned out the lights and was preparing to sleep before a long journey in the morning, when the words of my last post hit me as disingenuous and, perhaps, reflective of the malaise of denial that I’ve suggested affects American thinking.

    Two months ago, I had occasion to travel to the States after a relatively long and self-imposed boycott. I was in three major cities and took a road trip to visit the operations of one of its industrial giants and management totems. I was appalled at nearly every leg of the voyage, and that includes the sumptuous downtown hotels, offices and restaurants, which offered superficial-to-rude-to-lousy service and plastic ambience. Other more telling impressions that stick with me begin with the air traffic and airport situation; include observations of middle management and staff simply turning up for work, looking impressive and contributing little; and conclude with rides on rough highways through bleak, underinvested suburbs and mid-sized towns with unhappy looking people. All far worse than I had expected, and this is a country I once knew quite well. A European colleague of mine and an investor of some depth commented at one point, “What have they spent all the money on?”

    America’s slide could be a steep one and forget my throwaway remark about Argentina, which I know little of.

    Posted by: WCM | November 10th, 2007 at 11:45 pm | Report this comment
    

19. Dear WCM,
    It is best to deal with actual facts and metrics. Please set forth some facts and numbers underlying your argument about the US decline so I can respond; so far your arguments are general, argumentative, anetdotal and inaccurate. For example, Argentina’s GDP was $12,933,908,000 in 1900 ($2,756 per capita GDP * 4,693,000 population) versus a US GDP of $312,897,536,000 in 1900 ($4,096 per capita GDP * 76,391,000 population). Thus, the US total GDP in 1900 was 24x Argentina’s in 1900.
    kc

    Posted by: kc | November 11th, 2007 at 1:17 am | Report this comment
    

20. kc is right but probably WCM was talking about Argentina´s GDP per head which was one of the highest of the World by then, and probably by 1929 was similar to the American…

    As i said before in terms of comparision the economic, social and demographic relation between the US and China resembles very much as that between Argentina and China.

    China will have in 30 or 40 years a well developed Coast with a population similar to that of the USA and a GDP also similar to the American (in the same way Sao Paulo has a GDP similar to all Argentina) while the rest of China (like the rest of Brazil) will continue still as a developing nation.

    They have space and population for both.

    Posted by: Enrique | November 11th, 2007 at 6:48 am | Report this comment
    

21. I wonder if bloggers and Western journalists ever stop to think about what they say about China. The media’s excitement leading up to Beijing’s Olympics (hardly an event in any real sense — it’s a thoroughly corrupt sporting competition that between China in 2008 and Russia in 2014 does little more than prove it has no overarching “humanitarian” mission) has done a wonderful job advancing the CCP’s goal of “selling” China to a largely ignorant West. And that’s a media that, mind you, isn’t even allowed to travel freely in one of the world’s most autocratic and corrupt countries but largely sips Starbucks from its Beijing bureaus while reading the English-language reports in the government paper China Daily.

    Many Western journalists know their bureaus will be expelled from China and that they themselves could face punishment if they write anything beyond what appears in the state news agency, Xinhua. While China does indeed have a large population and a desire to increase its monopoly on all manner of manufacturing, it is a fragile country that is only tightening media controls as attacks escalate on Falun Gong, the Tibetans and the Uighurs, lest they spoil the gold-medal ballroom dance competition.

    If you spend any time in China, you will see a brutally poor country with minimal literacy rates and a lack of the most basic infrastructure (roads, sewage, electricity) away from the coast. A country scrambling to secure resources via support of regimes that are, like the CCP, morally vile (Sudan, Iran) as growing worldwide demand that it fuels pushes prices on those resources, food and other commodities ever skyward.

    Yes, China has got the rest of the world in something of a stranglehold with assembly of products and its GDP is indeed growing (though many economists believe not quite as fast as the government statistics show). But anyone who has spent time in the Chinese provinces knows no Chinese citizen would compare China’s economy or geopolitical clout to that of the established powers. And if it weren’t for their limited understanding of the nation, fear of expulsion, desire to grab headlines or a need to vindicate their decision to live in China, no Western journalist would, either.

    At some point, China will have to loosen its fantasy-world Soviet grip on the renminbi, sending the cost of manufacturing up. That, in addition to growing concern about the safety of Chinese products and, more importantly, about the wisdom of allowing one country to develop a near-monopoly on global manufacturing, will spur yet another manufacturing migration, which will no doubt leave journos in a new fit of hyperbole.

    Of course, China is a major economy (as it only should be, given every fifth human is a Chinese citizen), but it faces greater problems than almost any other place on earth. Let’s scrape the froth from our mugs and sober up a little bit — there’s no need to continue playing into the CCP’s Potemkin hands.

    Posted by: Raul | November 11th, 2007 at 10:05 am | Report this comment
    

22. Hi, Enrique:
    1– Re Argentina per capital GDP, as my previous response indicates, in 1900 Argentina’s per capita GDP was $2,756 versus US per capita GDP of $4,096 — thereafter it actually declined relative to the US (and significantly so by 1929 as the value of agricultural commodities went into a deflationary period).
    2–Re the “coastal” PRC becoming comparable to the US any time in the next 25-50 years, I would read and re-read Raul’s comment above and do some independent research on the cost and risks of a continued scaling of the PRC economy based on no rule of law, state control, subsidized energy and commodities, water and energy intensity, no pollution control, export dependency, no social net, a rapidly aging population with high dependency ratios by 2020 and cheap labor from Western China. Once again, I believe that China will continue to rise but the challenges are immense and will take 50 years or more to resolve.
    kc

    Posted by: kc | November 11th, 2007 at 5:10 pm | Report this comment
    

23. I take GR’s column in a metaphorical sense. I do not really think that the growth speed of the chinese SE means much.
    What I am impressed with are other parameters which produced this situation
    as well as OTHERS:

    There is a huge pile of savings that feeds prices in the SE. (And the housing market)

    The size of the reserves of the Chinese Central Bank (1.3tn $) and growing fast ,while the US$ is falling fast and price of oil keeps growing is a complex event.
    The Chinese will react here. The repercussions of their reaction will be global:
    Since they cannot leave the value of their assets exposed to possible decline i see a combination of measures like:
    (i) Bying off third world debt a lot of which is dollar denominated. (It is already happening in Africa.)

    (ii) More interesting is the question of what happens if they move into the M & A game and begin to come into competition with the private equity groups having the advantage of paying cash in a liquidity crisis situation.

    Obviously this is a non-exhaustive list
    of the effects of scale of this entity.
    GR, the other day, talked about some of the repercussions of 100$ oil.

    The central problem to consider is structural:size

    Posted by: Max | November 11th, 2007 at 8:52 pm | Report this comment
    

24. Dear Mr. Rachman,

    The best thing happening in the world today is the exploration and experimentation with fully electric power which economically uses solar energy. Wow! Just think what that could do to the oil mongers/tycoons then(regardless of location on the earth). Of course, realistically, this will never be allowed by the same idiots that made the big auto manufacturers chew up the last herd of electric autos, which were (cleverly)never sold, but just leased and those who price solar equipment so high that no one can afford to install it. Or possibly the big guys will find a way to just plain charge us for sunshine. Or have they done that already?

    Posted by: firewoman | November 12th, 2007 at 1:05 am | Report this comment
    

25. I’m new to FT comment columns and am impressed with the quality of the contributions.

    KC summarised the question of valuation - that distortions in the local market mean that such valuations have no wider significance.

    The question with China is is it realistic to extrapolate current growth figures very far into the future as clearly many are doing? Firstly as with all (currently?) second-rank technological countries they must buy technology from outside from companies who are determined to keep themselves at the forefront. China thus may reach a developmental ceiling where they either manufacture on behalf of others or offer their own cheaper but inferior versions. Secondly the particularly favourable conditions of a huge pool of labour willing to accept very low wages coupled to a gung-ho capitalist class contained in an authoritarian country on a mission to walk tall in the world may not continue unchanged.

    China exhibits nearly all the characteristics of Industrial Revolution Britain with the supreme difference that the technology - up till now - has come from outside. Again is it possible to extrapolate Chinese past inventiveness into the future? This is, as a matter of pride, assumed by the Chinese themselves to be the case. Indeed one has the impression that the drive to develop has at its root a mission to assert a continuity with “3000 years of Chinese genius” and restore the country to its earlier sense of its own grandeur. But in those days it was inward looking, self-contained and its valuation of itself was - like the value of the shares - distorted by it being an isolated market. The difference today is that China’s self-valuation now has to find a place in a world market where even the market leader shows a degree of humility and flexibility. Will China re-adjust to the wider market to achieve an equilibrium? That China has been able to reconcile seemingly opposite forces and stride forward suggests that they know what they are doing and deserve more credit for this than they are given.

    interesting that Joseph Needham remains such an authority - its a measure of an extraordinary man.

    Posted by: Bob T | November 12th, 2007 at 10:38 am | Report this comment
    

26. I thought the Lex column had some insightful analysis:-

    PetroChina rules
    Published: November 6 2007 02:00 | Last updated: November 6 2007 02:00

    There is big and there is humungous. On Friday, the world’s biggest company by market capitalisation was worth just below $500bn. By Monday, the new holder of the crown boasted a market capitalisation of more than twice that. Benchmarked against almost anything, PetroChina’s value is huge. It is worth more than Exxon Mobil and General Electric combined, roughly equivalent to the entire Brazilian economy, and worth substantially more than the combined economic output of the five founding members of the Organisation of the Petroleum Exporting Countries.

    The reality is less eye-popping. PetroChina, one of China’s three oil and gas majors, acquired its $1,000bn-plus market capitalisation on the back of a listing on China’s domestic “A” share market, which routinely attributes sky-high valuations to issuers. No wonder: issuers are parsimonious with stock - PetroChina’s mainland free float is a minuscule 2 per cent - and mainland Chinese investors are essentially restricted to buying shares at home. Such favourable supply and demand dynamics explain why the Shanghai market is trading at around 50 times earnings. Pricing the roughly 86 per cent of shares that are held by the state at the slightly saner Hong Kong price gives PetroChina a market cap of $420bn, behind Exxon Mobil.

    Operationally, too, PetroChina is something of a minnow beside its peers. Exxon Mobil generates double the earnings of PetroChina - although, since it does so on four times the revenues, the US giant’s profit margins are punier. PetroChina boasts a couple of potentially exciting exploration sites but, barring big discoveries, its outlook is dull. Analysts are forecasting annual earnings growth of 10 per cent this year and just 3 per cent in 2008, according to Bloomberg estimates. And forecast return on equity, at 23 per cent, is well below Exxon Mobil’s 32 per cent. Bigger, as China’s legions of investors will doubtless discover in due course, is not always better.
    Copyright The Financial Times Limited 2007

    Posted by: Pacifist | November 12th, 2007 at 12:35 pm | Report this comment
    

27. I thought the Lex column had some insightful analysis:-

    PetroChina rules
    Published: November 6 2007 02:00 | Last updated: November 6 2007 02:00

    There is big and there is humungous. On Friday, the world’s biggest company by market capitalisation was worth just below $500bn. By Monday, the new holder of the crown boasted a market capitalisation of more than twice that. Benchmarked against almost anything, PetroChina’s value is huge. It is worth more than Exxon Mobil and General Electric combined, roughly equivalent to the entire Brazilian economy, and worth substantially more than the combined economic output of the five founding members of the Organisation of the Petroleum Exporting Countries.

    The reality is less eye-popping. PetroChina, one of China’s three oil and gas majors, acquired its $1,000bn-plus market capitalisation on the back of a listing on China’s domestic “A” share market, which routinely attributes sky-high valuations to issuers. No wonder: issuers are parsimonious with stock - PetroChina’s mainland free float is a minuscule 2 per cent - and mainland Chinese investors are essentially restricted to buying shares at home. Such favourable supply and demand dynamics explain why the Shanghai market is trading at around 50 times earnings. Pricing the roughly 86 per cent of shares that are held by the state at the slightly saner Hong Kong price gives PetroChina a market cap of $420bn, behind Exxon Mobil.

    Operationally, too, PetroChina is something of a minnow beside its peers. Exxon Mobil generates double the earnings of PetroChina - although, since it does so on four times the revenues, the US giant’s profit margins are punier. PetroChina boasts a couple of potentially exciting exploration sites but, barring big discoveries, its outlook is dull. Analysts are forecasting annual earnings growth of 10 per cent this year and just 3 per cent in 2008, according to Bloomberg estimates. And forecast return on equity, at 23 per cent, is well below Exxon Mobil’s 32 per cent. Bigger, as China’s legions of investors will doubtless discover in due course, is not always better.
    Copyright The Financial Times Limited 2007

    Posted by: Pacifist | November 12th, 2007 at 12:35 pm | Report this comment
    

28. Dear Mr. Rachman,
    Re interesting news to write about, I respectfully suggest you analyze:
    1–China’s US$200 billion state fund investing $67 billion in China Agricultural Bank and $67 billion in Huijin (the state entity that holds the equity of the major state owned banks and distressed financial institutions)
    2–The report that the PRC state fund is also building a position in Rio Tinto to block a BHP merger or at least to impact iron ore pricing of a merged BHP/RT (obviously this would present a unique type of activist shareholding — one by a state that is acting against the interests of other shareholders).
    kc

    Posted by: kc | November 12th, 2007 at 4:07 pm | Report this comment
    

29. James Howard Kunstler

    November 12, 2007
    Peak “Money”
    The multi-dimensional meltdown underway in the finance sector illustrates perfectly how the complex systems we depend on start to wobble and fail as soon as peak oil establishes itself as a fact in the public imagination. Mainly what it shows is that we don’t have to run out of oil — or even come close to that — before the trouble starts. Just going over the peak and heading down the slippery slope of depletion is enough. Peak oil, it turns out, is also peak money. Or should we say, peak “money?”
    First of all, what is finance exactly? I’d bet that a lot of people these days don’t know, including many working in the financial “industry,” as it has taken to calling itself. Finance, until very recently, was the means by which investment was raised for useful economic activities and productive ventures — in other words, the deployment of capital, which is to say accumulated wealth. Historically, this accumulated wealth was pretty meager. There wasn’t a whole lot to deploy and the deployment was controlled by a tiny handful of people statistically greater only than the number of Martians in the general population. They operated as families or clans, and everybody knew who they were: the Medici, the Rothschilds. Even the Roman Empire was a kind of financial Flintstones operation compared to what we see on CNBC these days. Not having the printing press, the Romans had to inflate their currency the old-fashioned way, by adding base metals to their gold coins. Finance in the 200-odd-year-long industrial era evolved step-by-step with the steady incremental rise of available cheap energy. More to the point, the instruments associated with finance evolved in complexity with that rise in energy. It was only about two-hundred years ago, in fact, that circulating banknotes or paper currencies evolved out of much cruder certificates that were little more than IOUs. Once printed paper banknotes became established, and institutions created to regulate them, the invention of more abstract certificates became possible and we began to get things like stocks and bonds, traded publicly in bourses or exchanges, which represented amounts of money invested or loaned, but were not themselves “money.”
    Much of this innovation occurred during the rise of the coal-powered economy of the 19th century. It accelerated with the oil-and-gas economy of the 20th century, up into the present time. So, for about 150 years — or roughly since the end of the American Civil War — we’ve had a certain kind of regularized finance that enjoyed continual refinement. Even in the face of cyclical traumas, like the Great Depression, currencies, stocks, and bonds retained their legitimacy if not always their face value.
    Russia was a bizarre exception. Crawling out of the mud of medievalism relatively late in the game, Russia pretended to abjure capital while still faced with the need to deploy it in industry. They solved this paradox conditionally by disqualifying the Russian public from participation in any part of the industrial economy except the hard work, and pretended to pay them in promises for “a brighter future,” which never arrived as long as the Soviets remained in charge. (The Russian people repaid the system by only pretending to work.)
    In any case, finance for the purpose of deploying capital has prevailed as reality among people who use the implements of the dinner table, but something weird has happened to it in recent years. It has entered a stage of grotesque, hypertrophic metastasis that now threatens the life of the industrial organism it evolved to serve. Its current state can be understood in direct relation to the run-up to peak oil (peak fossil fuel energy, really, since coal and gas figure into it, too). The oil age, we will soon discover, was an anomaly. Many of the things that seemed “normal” under its regime will turn out to have been rather special. And as the beginning of the end of the oil age becomes manifest, these special things are starting to self-destruct pretty spectacularly.
    For one thing, finance in the past twenty years has evolved from being an organ serving a larger organism to taking over the organism, becoming a kind of blind, raging dominating parasite on its former host. Or to put it less hyperbolically, it has become an end in itself. That is what they mean when they say that the financial sector has been “driving” the economy. A feature of this ghastly process has been the evolution of financial instruments into ever more abstract entities removed from reality-based productive activities. Stocks and bonds were understood to represent direct investment in enterprise. Sometimes the enterprise was a failure, and sometimes the people running it were swindlers, but no one doubted that common stock represented the hope for profit in a particular venture like making steel or selling laxative chemicals. The new “creatively-innovated” financial “derivatives” of recent years are now so divorced from any real activities or product that often the people trafficking in them don’t understand what they’re supposed to represent. I’d bet that more than half the people in the New York Stock exchange any given day could not explain the meaning of a credit default swap if a Taliban were holding their oldest child over a window ledge across Wall Street.
    The innovation of mutant financial “products” is a symptom of the “crack-up boom” that characterizes society’s response to peak oil. The main implication of peak oil for an industrial economy is that the 200-odd-year-long expectation for continued regular growth in combined energy-activity-and-productivity at roughly 3 to 7 percent a year under “normal” conditions — that expectation is now toast. Under the new regime of peak oil and its aftermath, regular energy depletion, society can expect no further industrial growth but only contraction, and all the certificates, instruments, and operations associated with the expectation for further industrial growth lose their legitimacy. Seen in this light, one can then understand the temporary value of these mutant financial derivatives. They allowed participants to conceal the fact that these “investments” were not directed at productive enterprise. They also provided a cohort of sharpies with “vehicles” for converting the leftovers of the industrial economy into assets for themselves — a form of looting, really. Hence, the employees of Bear Stearns, Goldman Sachs, and Merrill Lynch gave themselves $50-million Christmas bonuses for trafficking in these inscrutable non-productive financial gimmicks, and were able to acquire fifty-room East hampton houses, Gulfstream jets, and impressionist paintings.
    Of course, the aftermath might not be so pretty for these guys, since the next thing they may acquire could be long prison sentences. If they flee prosecution in their Gulfstream jets, they will not be able to take their Hamptons estates aboard with them. Those who remain may live to see mobs with flaming torches outside their windows, as in the “Frankenstein” movies of their suburban childhoods. But this has yet to play out.
    For the moment it appears that we have entered the climax of the crack-up. The slick and inscrutable derivative vehicles infesting the ledgers of the investment banks, are now being systematically revealed as frauds of one kind or another, and, self-evidently lacking in worth. The process now underway is gruesome. The sheer dollar losses involved are almost as incomprehensible as the phony operations and instruments that they are derived from — twelve billion here, nine billion there. As the late Senator Everett Dirkson once quipped, “sooner or later you’re talking about real money….” Or are we? Is it money or “money.” And if it’s “money,” what will become of it? And of us? How will it allow us to live?

    Posted by: Steve | November 12th, 2007 at 4:58 pm | Report this comment
    

30. DEAR GIDEON ,
    IMPRESSIVE ARTICALE

    AVIVA DAN[RACHMAN]

    Posted by: AVIVA DAN | November 12th, 2007 at 5:40 pm | Report this comment
    

31. It is important taking into account that China´s Budget amounts to just $482 billion (revenues) slightly less than SPAIN´s $495 billion (revenues) according to the CIA factbook (2006)…

    Posted by: Enrique | November 14th, 2007 at 11:53 pm | Report this comment
    

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