Issue Wrap No. 518, May 9, 2010

Highlights from the EO print edition, Issue Wrap No. 518, May 9, 2010

China Stocks Take a Killing
News, cover
~ Chinese companies listed on US stock markets have come under intense scrutiny over recent months, with 16 of the enterprises that entered the U.S. market via reverse mergers having
their shares suspended by the SEC, this has lead to a serious crisis of credibility for many listed Chinese companies.
~ In 2010, more than 50 enterprises entered the US market via reverse takeovers. However, since the SEC introduced tighter rules to regulate reverse takeovers at the end of 2010, those who once made a fortune by offering services to companies looking for a quick way to list, started looking for a new line of business.
~ As these intermediaries understood the weaknesses of many of the enterprises that they had help list through this back door method, inspired by the example of China MediaExpress Holdings Inc, a listed Chinese company whose shares were halted on March 11 after serious allegations of fraud were aired by Muddy Water's Research, a company founded by Carson Block, some decided to follow Mr. Block's lead and start up research companies devoted to revealing irregularities at listed Chinese companies.
http://www.muddywatersresearch.com/
~ By shorting the stock on which they plan to release a critical report, these research companies can profit from their knowledge of the weak points of all these companies that listed through reverse mergers.
Original article: [Chinese]

Why Chinese Steel Firms Are Not Investing in Domestic Iron Ore Mines
News, page 6
~ Despite a rich workable reserves of almost 18.9 billion tons of iron ore, 20 times last year's demand for the mineral that's a vital ingredient for making steel, China continues to pay high prices for iron ore imported from abroad.
~ Since 2005, China's large steel firms have invested in 27 overseas iron ore mines, it's estimated that these mines will be capable of producing 150 million tons of iron ore for the Chinese market each year.
~ At the same time, steel firms have only invested in the development of 15 dometic mines which are expected to ship 98.5 million tons of iron ore annually. Although with the recent spike in international iron ore prices, steel companies are now competing for access to domestic mines.
~ However, given the way China's mining industry developed, regional protectionism puts the brakes on large-scale investment in domestic iron ore mines, as local governments are often persuaded to give smaller steel firms, with which they have close relationships, access to the vital resource.
~ In addition, larger investments are required to develop domestic mines as most of the reserves consist of low-quality ore that is difficult to extract.
~ All this means that China's steel firms are still able to buy iron ore from abroad at cheaper prices, despite the transportation and other associated costs.
~ Zou Jian, a consultant of Metallurgical Mines Association of China, said that local governments should be more willing to deal with the big steel companies, he also advocates the introduction of a special mining board that could help to attract and channel venture capital into the mining sector.
Original article: [Chinese]

Debating China's One Child Policy
Nation, page 7
~ With the publication of initial data from China's 6th census, questions are beginning to be asked about whether it is time to adjust the country's strict one child policy.
~ Some signs show that alternative policy measures are being considered, though it's likely that there will only be minor adjustments rather than a shift to a two-child policy.
~ One of the reasons that those who support the current restricitions often use is that China's natural environment is already suffering the effects of a huge population.
~ Those advocating change point to the serious economic implications of an aging society and what that means in terms of the size of the country's work force.
Original article: [Chinese]

What Next for ChiNext?
Market, page 17
~ The first week of May saw ChiNext, China's new growth enterprise board, striving to stay above the 900 point mark. At the end of April, the board's index dropped 9.15%, falling below the 1,000 point mark.
~ April also saw 80 percent of the stocks listed on ChiNext fall below their initial offering price.
~ The board's index reached a peak of 1239.6 on Dec 20 last year, since then it's fallen 26.37%.
~ Li Chi, the manager of Shenzhen Co-Power Venture Capital Co., predicts that the index will have a hard time of getting above 1,000 points any time in the next 10 years.
~ Other fund managers also expressed similar concerns, though they think that Li Chi's prediction of 10 years of stasis is unlikely.
~ Since it was first establshed, stocks on the PE ratio of stocks on the board has been very high, and these are likely to come down somewhat.
Original article: [Chinese]