The short position

by **Cals** Sat 27 Jun 2015, 23:14

The short position

Saturday, 27 June 2015

China stock market correction
FOR months now, there has been speculation of a Chinese stock market bubble.
The Shanghai A-share index, heavy with state-owned giants, has risen nearly 60% since the beginning of the year to June 12, while the Shenzhen exchange, which has younger companies listed in comparison, has leaped 122% in the same period.
Both exchanges have been on a roller coaster ride since June 12, the highest point since the heady days of 2007 when Chinese stocks soared to stratospheric heights on double-digit economic growth. Both have fallen since June 12, by 19% for the A-share index and by over 20% for the Shenzhen index.
Many have noted that the Chinese markets bear no relation to economic growth, but that is normal when markets are liberalising, which means that asset prices can often move ahead of fundamentals. Here, China is no exception, as many mom-and-pop investors have bought into shares on hearsay and what they read from the news.
Conventionally, stock markets move in anticipation of growth, but the outlook for China this year is for growth of 7%, the slowest in 25 years. In fact, growth has slowed in recent years, as the economy undergoes a restructuring with less reliance on foreign investments and more on domestic consumption.
Can we read more into what has happened to Chinese stocks since last week? Well, Chinese retail investors, many of whom have put their savings on the line by piling into stocks because deposit rates remain low, are now unwinding their positions.
Does June 12 mark the high point of Chinese stocks, as JP Morgan warned its clients? Are Chinese stocks in a bubble as other foreign brokerages have warned? Or will Beijing step in with measures that will stabilise the markets? Following yesterday’s slump, the Chinese stock-exchange regulator said the recent volatility, coming after excessive gains, required that “all sides treat it rationally”.
An official said the regulator will continue to clamp down on irregularities in margin-trading, perhaps signalling that more volatility is ahead as it seeks to rein in punters.
Is Uber here to stay?
Uber, the smartphone app that connects cab passengers to drivers, has been launched in Penang.
This amid the global issues that surround the San Francisco-based company, which has since its launch in 2010, managed to spread its wings to more than 300 cities in 58 countries.
In Indonesia, The Financial Times reported that police in Jakarta recently launched an investigation into the company after local taxi companies filed a complaint against it, in what the financial paper said “was the latest regulatory battle to blight the company’s expansion plans in Asia”.
Local competitors are now questioning the legality of Uber’s operations there.
In China, there was a police raid on Uber’s Guangzhou office in April, whereas in India, the service was temporarily suspended following an alleged rape case involving an Uber driver.
Elsewhere, in France, Bloomberg reported that French taxi drivers “staged a violent protest against Uber on Thursday, blocking access to Paris’ airports and burning tires outside the city”.
On top of these, a ruling by the US authorities recently suggested that Uber may eventually have to consider its drivers as employees instead of “freelance” workers, piling up costs on its current asset-light business model.
Still, Uber enjoys the privilege of being the US tech company which has managed to raise the highest amount of funding at US$10bil, en route to a public listing this year.
There must be a lot to the company, if financing is pouring in for it in such a manner. More expansion plans are afoot. There is even a plan to go into the food delivery business in the US.
Only time will tell if the app does well here or face the challenges that its predecessors have had to grapple with.
Powerless delay
One year on, the Project 4A power plant is still in limbo.
Not only is the shareholders’ agreement between the conglomerate partners of the project - Tenaga Nasional Bhd (TNB) and SIPP Energy Sdn Bhd – still pending, but the Energy Commission (EC) has also twice rejected the proposed tariffs for the project.
The EC, in a written reply to StarBizWeek, said that the proposals from the TNB-SIPP consortium did not comply with the requirement of the conditional letter of award for Project 4A. Project 4A is a new 1,000MW-1,400MW combined cycle gas turbine power plant to be built in Johor.
It is understood that TNB-SIPP is trying to push for tariffs higher than the benchmark 34.7 sen per kilowatt hour (kWh). It is likely that the rates first stipulated for Project 4A during its award last year are no longer economical, as the weak ringgit has resulted in higher costs.
But then, to allow tariffs to go higher than the benchmark, the Government will have to contend with public sentiment, considering tariff hikes will eventually result in higher rates for consumers.
Recall, while the acceptable tariffs for Project 4A had never been disclosed, the EC has stated that the project award was conditional upon a “comparable” levelised tariff.
Project 4A was not awarded based on a competitive tender but through a direct award. The reason given then was that the power was needed urgently.
But now there is a delay.
The last tender exercise by the Government of a power plant of similar specifications was the 1,071MW Prai power plant. TNB won that project in 2012 at a tendered rate of 34.7 sen per kWh. So, that rate has been used as the comparable levelised tariff, which, in turn, was at a level that seemingly assuaged public concerns over any likelihood of unreasonable rates.
Still, the fact that Project 4A was awarded on a direct negotiation basis instead of a competitive tender process was contentious from the start.
The criticism on the manner in which Project 4A was awarded led to the withdrawal of YTL Power International Bhd, leaving TNB and SIPP as the two remaining partners in the consortium.
The direct award of Project 4A last year came with the intent of fast-tracking the project so that the plant could be operational by June 2018.
But with so much time already wasted, and so many basic issues unresolved, the EC could well have stuck with its reform agenda from the start and ensured the project was awarded through a competitive bidding exercise. If the project was awarded on an open tender, then perhaps there would have been a more effective mechanism to determine what the viable tariffs should be for Project 4A.