EP, <<It's just China boom I>>
... I think you are not wrong, I think the script is based on USA 1860. At some point we may have a 1929 and/or 1972, but we may also have 1960, 1982, etc. Chugs, Jay
P.S. But first, a bubble-let :0)
news.ft.com
HK investors queue to buy on margin
By Francesco Guerrera and Justine Lau
Published: December 9 2003 21:59 | Last Updated: December 9 2003 21:59
For the thousands of Hong Kong residents who queued for hours to register for new shares in a small Chinese carmaker and the millions set to apply for the listing of China's largest life assurer, Christmas has come early.
Lured by the prospect of a large profit on the first day of trading, the territory's retail investors have rushed to buy into initial public offerings, prompting fears of a new specul ative bubble.
Demand for shares in Great Wall Auto, the small car group, exceeded supply by more than 680 times, a level not seen since the dot.com mania of the late 1990s. And China Life has print ed 2.2m application forms - one for every three Hong Kong residents - in expectation of huge retail demand for its $2.5bn-$3bn IPO, the world's largest this year.
Such levels of oversubscription ensure sharp rises on the first day of trading, enabling companies to boast of a "successful IPO" and rewarding investors for the long hours spent queu ing.
But underneath the triumphalist statements and the quick profits lies a system that has cost retail investors dear in the past.
Most of the retail demand is fuelled by easy access to credit through "margin lending" provided by small brokers. Investors bet that a sharp rise in an IPO's share price in the first days of trading will enable them to sell the stock at a premium high enough to repay the loan with interest, and still net a profit - a practice known as "stagging".
Critics say brokers have an incentive to provide the funds, which are secured against the shares, as they earn commissions on share trading in the IPOs and receive interest on the loa n.
When a Financial Times reporter walked into Wocom Securities, a small firm in central Hong Kong, she was told she could borrow as much as HK$1m (US$128,000) to buy China Life shares b y putting up just HK$100,000.
The young broker said this 90 per cent margin lending - nearly five times the maximum allowed in the US - would be provided by simply showing a proof of identification and address. "Y ou don't need any [extra] collateral or proof of salary," he said.
At Phillip Securities, another small brokerage, the FT was told the money would be lent at an annual average rate of 2.5 per cent but there was no need to worry because the likely ris e in China Life's shares would be enough to repay loan and interest.
Critics say stagging is risky for investors and could hurt the share prices of new listed companies in the long term. As shown by the 1997/98 financial crisis, sudden changes in the m arket could lead to ruin for small investors who take on too much debt.
"It's a feast or famine effect," says David Webb, a director of the Hong Kong Stock Exchange and a prominent corporate governance activist. "This is a speculative bubble [like] other periodic manias for IPOs such as the 2000 internet bubble and the 1997 Red Chips [mainland Chinese-linked companies] bubble."
Unlike the US, where investors can only borrow up to 50 per cent of the value of the stock they want to buy, in Hong Kong there are no limits to the margin offered by brokers. The main constraint is given by the requirement for brokerage houses to maintain liquid capital of HK$3m with the Securities and Futures Commission, the Hong Kong financial regulator.
The SFC defends this practice, saying it was not charged with overseeing investors. "We regulate brokers, we don't really have much to say about how much investors put in [when tradin g on margin]," it says.
Brokers and investors may not be the only losers from the easy credit frenzy. Analysts also warn stagging encourages short-term share sales.
Share prices in the aftermath of an IPO can come under selling pressure, especially if a strong debut deters institutional investors from buying the shares. But, as long as offerings keep on rising on their debut, none of this is likely to trouble the investors patiently queuing around the block for the latest hot IPO. FINANCIAL TIMES
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