Prof Chan Yan Chong Commentary 17.06.11

President Obama took over the White House in November 2008 only to be confronted by the financial crisis, and it has been almost three years but the economic situation does not seem to have improved. In 2010, he almost tried to exit from the stimulus measures but was stopped by Fed Chairman Ben Bernanke, who launched the QE II when he the central bank chief realized that something was wrong with the economy. With less than one-and-a-half year to go before the presidential election, what can President Obama do?

When he took over as President of USA, the Democrats controlled the Senate as well as the House of Representatives but he failed to make use of this advantage to introduce economic reforms. Now that the Republicans share half of the Congress, it is much tougher for Obama to realize plans that he has.

Ben Bernanke must be credit for using lots of cash to bail out the financial institutions, but QE II has failed to reach the desire effects hence people are doubting if a QE III can do the trick.

When Bernanke gave a speech a fortnight ago, investors were disappointed that he failed to mention anything about a potential QE II. As a matter of fact, investors were not expecting a QE III immediately after a QE II because Bernanke had said that the second-half of this year will be better.

After more than six months, the QE II has had the impact of raising gold prices, stock prices but it has failed to prevent the weakening of the US Dollar and the labour market. Since many people are questioning the effectiveness of the QE II and a possible QE III, it is likely that Bernanke will sit by and do nothing while he watches how the US economy will unfold in a world without stimulus measures.

The stock markets are falling because there is not going to be a QE III and because bad news have overwhelmed the newspaper headlines. China will continue to tighten its monetary policy hence making it even harder for corporate and individual borrowers to get loans from banks.

Minister Khaw Boon Wan has called for more flats upon taking up his new portfolio while Hong Kong’s government, too, will double its land sales in the latter half of the year. This means that supply will increase and prices will start to fall. Bad news such as these are music to the ears of the speculators, who thrive on working on investors’ fears that often drives one into selling stock prices.

Lately, China’s Sino-Forest was accused by a company called Muddy water of falsifying accounts resulting in a huge correction in the share price of China companies listed in the US. Such reports create fear and speculators make use of this to drive and prices by selling short.

It may just be well that QE III is not forthcoming because China can relax on its tightening measures. Premier Wen pledged in early 2009 to lend out Rmb 5 trillion but ended up lending double this amount with more loans being approved in 2010. The move in 2009 was to rescue the economy but the huge liquidity in 2010 was brought about by QE II, as China had already started to tighten towards the middle of 2010. There was hot money flowing everywhere because of QE II and China would tighten even harder if there were a QE III.

The Hong Kong stock market has been falling like it has no tomorrow but property prices are climbing. The Centa-City Index, created in 1997 with 100 points as a base, had never crossed 100 points after 1997 but it reached 101.8 in June, which coincided with further measures by the Hong Kong government to curb price increases.

The Hong Kong government sold a plot of prime land on 9 June at a price of HK$11.65 billion, which is way below estimates despite the hype. It also failed to break the record of HK$11.82 billion created when a plot of land was sold in 1997.

Cheung Kong paid HK$11.65 billion, or HK$26,800 per square foot, for the plot of land while resale property prices in the same area are going at around HK$30,000 per square foot. Prime land in Hong Kong is limited and there are lots of Chinese buyers willing to contribute to the earnings of Cheung Kong, who bought the plot of land on the cheap.

China’s consumer price index jumped to a 34-month high of 5.5%, resulting in the Chinese government raising yet again the banks’ reserve requirement ratio. When will interest rate increase again?

The correction has caused some shares to plunge excessively. Those with a cool head will pick stocks that are oversold, especially those companies that have more cash per share than its share price value. These stocks will be the eventual winners.

Source/转贴/Extract/: www.sharesinv.com
Publish date:17/06/11