MoneyNews
Wednesday, June 15, 2005

1. China Mulls $15B Stock Market Bailout
2. Wilkinson's Analysis: OPEC is Impotent

1. China Mulls $15B Stock Market Bailout

Senior officials in China's government have confirmed the discussion of plans to provide $15 billion in aid to bail out the country's debilitated stock market, according to The New York Times.

A recent article claimed this would be the latest and largest in a round of efforts to prop up share prices and bring confidence back to the Chinese stock market, which is currently at an eight-year low.

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Though China's economy is burning hot at the moment, Communist leaders are desperate to repair a stock market that has been struggling for some time now.

China's two major exchanges, the Shanghai and the Shenzhen, retain listings of almost 1,400 state-owned companies. Both are down almost 50% from their 2001 highs.

But the government has tried to salvage the markets before – with minimal results. And many experts believe this latest effort is unlikely to spur growth within China's capital markets, either.

Analysts say the government feels it has no other choice.

After the market dropped so drastically in the last year, officials feel that a further decline could seriously injure future development in China's financial markets. And substantial investor losses could lead to serious social upset among millions of Chinese who bought shares in the early 1990s, when stock prices were on the rise.

Experts say that the problem of growth in the markets is directly linked to the fact that private companies are still banned from listing on China's stock exchanges.

"China needs a healthy capital market," said Zhou Chunsheng, a finance professor at Beijing University. "Traditionally, state-owned companies found it easy to get financing from state-owned banks. But now we have more small businesses and private businesses. And they have to find ways to get financing."

Whether or not the government actually takes action, the mere suggestion that it will has lifted share prices, creating one of the biggest one-day rallies in the last three years.

The proposed $15 billion government investment represents approximately one-tenth of the current value of the Chinese market's available tradable shares.

But numerous analysts warn that a bailout could spur many investors to sell off their remaining holdings, creating an even bigger problem for the markets.

In addition to the money, the government has taken other steps to salvage the situation: They have reduced stock transaction costs and welcomed investment from insurance companies and government pension programs.

They have also created new corporate governance rules and cracked down on fraudulent accounting, while shutting down a number of crooked and insolvent brokerage houses.
But none of these actions have produced any real results.

Recently, in what was considered a crushing blow, the Shanghai index dropped below 1,000 points for the first time in eight years.

But then the exchange rebounded dramatically on new rumors of a bailout.

"It's very hard to estimate the future of the stock market because the market is often interfered with by the government," said one analyst familiar with the situation.

"How often the government will take administrative measures and how effective these measures are will decide whether the stock index will rise or fall in the future."

But few see any reason for hope.

"In my view the stock market is still overvalued, even after falling 50%," said Joe Zhang, a UBS analyst.

"We were paying way too much for stocks back then. And we are now beginning to realize that what we bought was not BMW, it was Xiali automobile."

2. Andrew Wilkinson Analysis: OPEC is Impotent

The power of the cartel is hostage to refinery constraints.

There's an increasing fear in the oil trading pits in New York and London that it's not the amount of oil that producers pump out of the ground rather than how much can be refined that's causing the high oil prices.

Witness the jump in the price of crude oil back above $56 per barrel despite the promise by OPEC to raise the amount of oil that it pumps by 500,000 barrels per day now and perhaps the same later in the year.

That's an immediate 1.7% increase on current production levels.

The Qatari oil minister, Abdullah bin Hamad al –Attiyah said that "the world faces no shortage of supply of oil. It's a shortage of production of these [gasoline and diesel]...because of the limitations in refineries. How can we solve it? OPEC has no solution."

OPEC produces 40% of the world's oil supply and while it has a vested interest in a high price of oil, failure to maintain a 'fair price' could tip the global economy into recession.

In effect OPEC has to act as the judge by ensuring that the world economy has enough oil to grease the wheels of commerce on a sustainable basis.

But it has little if any control over what buyers do with it. While the west cries out for more oil, the middle-eastern dominated cartel is calling for increased investment in western refineries.

The US has not built a single new refinery in 30 years partly due to environmental concerns and local opposition.

Legendary investor and hedge fund manager Boone Pickens points out that OPEC is pumping too low a grade of oil to meet demand.

He derides its action stating that increased production is of, "undesirable oil that refineries won't want. It's unlikely that kind of oil will even go into the market. The last thing I'd do in this market would be short."

Having refined crude oil into gasoline, diesel and heating oil, refineries store these products until later in the year when they need them to satisfy demand.

That's why inventories have risen to record levels so far in 2005.

Traders in the oil markets are concerned that refineries won't be able to meet demand for heating oil in the winter months if stockpiles don't start to increase now.

Mr. Pickens forecasts that fourth quarter demand for heating oil will be 86 million barrels per day with producers able to meet only 84 million barrels.

According to the latest data from the DOE, oil refineries are increasingly close to refining as much as they can. The most recent data from the Department of Energy shows refineries operating at 96.7% of overall capacity.

At the same time the level of crude oil inventories fell by 1.783 million barrels on the previous week. Inventories of motor gas also fell some 905 million barrels.

The trader's reaction? They pushed up the price of crude by 1.6% to more than $56 per barrel.

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