Sunday, May 28, 2006

Asia's Enron

When you think of hot markets and rapid growth, what comes to mind but China?

But almost alone of emerging markets, Shanghai trades below its levels of 2001 and 2004.

Could the relative weakness stem from a glut of loans that threatens an already fragile banking system?

Could it be because many of those loans are non-performing and used for political purposes...whoops, no they're not.

Or maybe the market discounts those IPOs that have investors salivating and questions investor funds going to a banking organization that has no centralized computer system.

Alternatively, the market underperformance could reflect an awareness of a lack of intellectual property rights, which weakens the competitiveness of mainland firms.

Or maybe the problem is in the countryside, where rural loans have burdened the nation's second largest lender...

Or in Shanghai, where real estate prices are falling and controls on new mortgages are tightening.

Whatever the reason for market weakness, it doesn't seem to affect investors literally lining up to get shares in the new bank IPOs.

I don't think, however, that we'll see housing slaves line up for those shares.

Nor do I think that markets will be fooled in the long run when bad loans are moved from one state enterprise to another.

It didn't work in Houston, and I doubt it can work in Shanghai.