An interesting article from the Asia Times online, republished on Dust in My Eyes‘ blog.
Africa Frenzy Feeds China Stock Bubble
Asia Times Online: China Business News
China’s stock bubble can be traced to Angola
Mar 27, 2007
By Zhou Jiangong
SHANGHAI – In recent years, many Chinese enterprises, including listed companies, have flocked to Africa in the hope of “digging up gold” in this “uncultivated continent”. However, some of the huge investment projects may be too good to be true.
Hangxiao Steel Structure, a Shanghai-listed construction company based in Zhejiang province, is being scrutinized by investors and regulatory authorities because of its huge 34.4 billion yuan (US$4.4 billion) contract with the China International Fund (CIF), a Hong Kong company, for a housing-development project called Residents’ Heaven in the southwest African nation of Angola.
Emerging from the shadow of the “Black Tuesday” slump on February 27, China’s stock market is well back on track. Hangxiao Steel, with its African investment project, has poured a little fuel on the flaming market. It says the contract for providing steel construction products and services to Angola for the public-housing project is worth 34.4 billion yuan.
However, before the company made a public announcement on March 13 of the share-price-sensitive information, its shares soared past the 10% ceiling for six days (Chinese law restricts the price of a share from going up or down by more than 10% in a trading day). The stock remained buoyant for another four days before it was suspended from trading on March 16. A couple of big money players bought millions of shares.
Analysts, investors and, eventually, the government watchdog began to doubt the authenticity of Hangxiao Steel’s Angola contract. Indeed, to a small firm like Hangxiao Steel with annual revenue of 3 billion yuan, it sounds too good to be true: according to the contract, the sale of steel construction products is worth 24.8 billion yuan ($3.2 billion) and the company will be paid another 9.6 billion yuan for its construction services in 12 cities in the African country.
Hangxiao Steel, a construction company specializing in steel structures for shopping malls, stadiums, theaters and museums, does not seem to be capable of taking on such a huge project within two years.
The amount of Hangxiao Steel’s contract, 34.4 billion yuan, is equivalent to 4.1% of the gross domestic product of Angola for 2005. But the Chinese Embassy in Angola said it had no knowledge of the Hangxiao deal.
The China Securities Regulatory Commission (CSRC) has ordered the Shanghai Stock Exchange and Zhejiang provincial securities regulatory authority to investigate suspected stock-price manipulation and insider trading. So far the company has denied that its senior executives have bought or sold its stocks.
Rumors are flying about company restructuring, mergers and acquisitions. Even loss-making companies are said to become vehicles to accommodate new assets. Such talk can trigger wild jumps in value. Some market analysts even deliberately spread false information to project rosy profit pictures for those companies whose share prices are dominated by big market players.
Read the full article here.