Tuesday, June 26, 2007

HK yuan bond sale hailed as milestone

The first issuance of China's yuan- denominated bonds in Hong Kong by China Development Bank will be available for retail subscription starting today with the minimum investment set at HK$20,000.

As the coupon of the bonds is set at 3 percent - much higher than the typical 0.8 percent rate offered by local banks on yuan deposits - the response is expected to be robust. The retail order book will be closed on July 6.

Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said after the launch ceremony Tuesday that the second issuance of yuan bonds may come soon.

"The management arrangement for issuing yuan bonds in Hong Kong by mainland financial institutions is already in place. There is actually nothing to stop them from coming," Yam told reporters.

The Export-Import Bank of China, a fully government-owned policy bank under the direct leadership of the State Council, is believed to be the second mainland financial institution preparing to issue yuan bonds in Hong Kong. The bank said earlier its board had approved the issuance, and will proceed with the sale here after obtaining approval from the People's Bank of China.

China Development Bank's two- year yuan bonds were capped at a total size of 5 billion yuan (HK$5.12 billion). The offer will be available for both institutional and individual investors, with a minimum of 1 billion yuan worth already set aside for retail subscriptions.

"If there is demand, the retail portion may increase further," China Development Bank governor Chen Yuan said. "The funds raised from this bond issue in Hong Kong will be used to finance China's fundamental key infrastructure projects."

ICBC (Asia) executive director Stanley Wong Yuen-fai said: "The bond issue aims to attract the 25.5 billion yuan deposits in local banks." Since this is the first yuan bond issue, retail investors will hopefully be given priority, Wong added.

Bank of China (Hong Kong) (2388) chief executive He Guangbei said if the response is overwhelming, it may be hard to match each subscription with one lot. In that case, the allotment will take the form of a lucky draw.

"The issuance of yuan bonds in Hong Kong will broaden the scope of yuan assets of Hong Kong banks and add a new investment tool to Hong Kong's financial market," said People's Bank of China assistant governor Ma Delun. "It also offers a new channel for yuan to flow back to the mainland."

Financial Secretary Henry Tang Ying-yen said the successful issuance of the first lot of yuan bonds in the city is turning a new page for Hong Kong.

"This is a very significant milestone for Hong Kong being the country's international financial center," Tang said.

"It signifies further consolidation and development of the complementarity, as well as cooperation between Hong Kong and the mainland."

Development of the yuan business will continue to proceed gradually.

Yam said the the yuan bond market may not be very active in the early stages. But if there are transactions in yuan bonds between local banks, market activity will heat up.

NPC to vote on reducing interest tax

The National People's Congress is scheduled to decide Friday whether to reduce or remove the tax on interest income, in another attempt by mainland authorities to cool the country's overheated stock market, the China Daily reported.

Tax on interest income stands at 20 percent, but is expected to be cut by at least half, Li Zhikun, an analyst with China Jianyin Investment Securities, told the newspaper.

Canceling the tax would be equivalent to hiking the interest rate by 76.5 basis points, Li said.

However, JPMorgan economist Grace Ng said cancellation of the tax was unlikely. "There is no clear sign that the tax on interest income will be completely eliminated. It's not what the market is expecting either," Ng told The Standard. She called the tax reduction simply a "substitute to an interest rate hike."

A tax reduction would likely prompt mainland investors to stockpile their money in bank savings accounts and curb the surge of liquidity in the stock market. The move would follow previous tightening measures such as raising the benchmark deposit and lending rates, and increasing stamp duty on share trading.

This time, however, the State Council decided to put its tax reduction proposal through the NPC, a switch from its previous practice of surprising the market with abrupt policy changes, which often resulted in much market volatility and public outcry.

"The Chinese government is clearly increasing the transparency of its policymaking process," Ng said, adding that such preemptive measures are deemed useful in managing market expectations and minimizing volatility. "The impact [of tax reduction] should be relatively moderate," she said.

The Shanghai Composite Index, which tracks large-cap A and B shares, has jumped 46.3 percent, or 1,257.95 points, year to date, raising concerns about an asset bubble in the equity market and accelerating inflation.

However, previous tightening measures did not seem to dampen investors' enthusiasm, as reflected by the continued migration of deposits.

Data released by the People's Bank of China showed that total household savings declined sharply by 278.4 billion yuan (HK$285.4 billion), or 9.7 percent, last month. Also, according to a recent report released by Shenyin Wanguo Securities, between May 2006 and April 2007 the Shanghai Composite Index was pushed up one point for every 423 million yuan of household deposit migration into the stock market. In other words, the market had absorbed 61 percent of deposit loss in that period.

If the NPC votes to reduce the tax on interest income, such migration of deposits is expected to slow down.

The Shanghai Composite Index rose 0.82 percent, or 32.29 points, Tuesday to close at 3,973.37.

Internal cash flow set to finance Hang Lung mainland projects

Developer Hang Lung Properties (0101) is likely to finance its planned US$5 billion worth (HK$39 billion) of projects in the mainland with internal cash flow, rather than go to capital markets, chairman Ronnie Chan Chi- chung said Tuesday.

The 18 projects are also likely to generate investment returns of 18 to 20 percent per year upon completion, the same rate of return it is seeing from its finished projects in Shanghai, he said.

Its portfolio of mainland properties should grow to account for 50 percent of Hang Lung's rental revenues in five years, up from just 30 percent now, Chan said.

The increased rental income, combined with the sales proceeds from its residential projects in Hong Kong, are likely to be enough to finance the project over the coming years.

"I can do all 18 projects with no borrowing, potentially I can do that. Of course, I don't know when I'm going to sell all my Hong Kong residential development projects," he said.

"If the market conditions are such that it makes sense for me to drag it out a little, then the cash inflow will be a bit slower. In which case I may borrow some, but it is unlikely."

Shares in Hang Lung have risen almost 37 percent this year, beating a 7percent rise in Cheung Kong (Holdings) (0001), and a 5 percent gain by Sun Hung Kai Properties (0016), its larger rivals. The blue-chip Hang Seng Index has risen about 9 percent. Hang Lung shares gained 0.2 percent Tuesday to HK$27.10.

Hang Lung, Hong Kong's No3 real estate firm by market value, currently has about half of the 18 projects it hopes to complete in the mainland under way, with budgets for these projected at about HK$24 billion, Chan said.

These include commercial complexes in cities including Shenyang, Tianjin, Jinan, Changsha and Wuxi.

While mainland authorities have attempted to cool price gains in major markets with administrative measures, Chan noted these were targeting the residential sector, while Hang Lung's focus was on commercial properties, such as malls and offices.

The company recently raised the number of targeted projects in the mainland to 18 from 12. Chan said that for the time being he was not ready to commit his China team beyond this.

"I'd be happy to do more. The only thing is I don't want to write a check that is too big and [that I] cannot deliver," he said.

The real estate executive expects to fund a large portion of the expansion into the mainland with sales of completed luxury residential developments in Hong Kong. Chan said the sales were likely to happen over the next three years and raise at least HK$20 billion.

With an effectively debt-free balance sheet, Hang Lung is in no rush to sell the properties, he said. But he noted the firm had sold more than 90 percent of the units in its AquaMarine development and about a quarter of the properties in its Harbourside project. But the firm has not sold a single one of the 1,800 units in its Long Beach project.

"I'm not capital-constrained ... the likelihood of the high end property market going up is higher than the likelihood of the market going down. So why bother to sell them so fast?" he said.

Chan said it made sense to then put that capital into the mainland, noting its Shanghai projects were earning 18 to 20 percent annual returns now that they were up and running.

Cheung Kong, meanwhile, expects China to account for a third of its property earnings by 2010, with one executive saying asset price bubbles are encouraging middle class homebuyers.

Bear Puts Bailout at $1.6 Billion

NEW YORK (Map, News) - Investors following the near-collapse of two hedge funds managed by Bear Stearns Cos. (BSC, News) might be a little bit like a homeowner watching the house down the block catch fire.

It is far enough away to think there's no immediate threat - but you still need to care about what the embers could do to your own roof. The worry is the same on Wall Street, where bankers are anxiously watching to see if the hemorrhaging at Bear Stearns will spread elsewhere.

Right now, individual investors are not yet seeing an impact in their 401Ks and stock portfolios. But, the situation might have wider implications as the nation's biggest financial institutions determine if their own hedge funds are at risk - and as U.S. regulators remain on high alert for a contagion that could rattle the economy.

"The investors in the hedge fund that goes down can be those ordinary Joes on the block," said Harvey J. Goldschmid, a former commissioner with the Securities and Exchange Commission who now is the Dwight Professor of Law at Columbia Law School.
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"In theory, hedge funds are about wealthy people investing," he said. "But, by practice, pension funds, endowments, and other financial institutions invest in them, and a few big hedge funds going down can spread an awful lot of harm among real people."

Indeed, pension funds and other endowments had about $1 of every $10 sunk into alternative investments last year, such as hedge funds and private-equity funds, according to consulting firm Greenwich Associates. Similarly, large hedge funds get about 24 percent of their investments from endowments, foundations, and pension funds.

That might not sound much until you put it in perspective - hedge funds manage about $1.5 trillion of assets, if not more, analysts said. And that has given the matter a sense of urgency for Wall Street's top players.

James Cayne, the longtime chairman and chief executive of Bear Stearns, is trying to stem the losses at the nation's fifth-largest investment bank. He has scrambled to salvage the two hedge funds, which were dragged down by investments tied to subprime mortgage debt.

He plans to pump in $1.6 billion to revive the healthier of the two funds. Cayne said the firm does not expect to rescue the second fund, where investors' money has been cut by more than half.

The bailout by Bear Stearns is one of the largest such moves since Wall Street's investment banks bailed out Long-Term Capital Management in 1998 to avoid a collapse of the broader financial markets.

It is not alone in facing risk from its own hedge fund portfolio, either. Major financial institutions like Goldman Sachs Group Inc. (GS, News), JPMorgan Chase & Co. (JPM, News), and Citigroup Inc. (C, News) also manage tens of billions of dollars in hedge funds, according to Moody's Investors Service.

On Monday, researchers at Citigroup said subprime mortgage bonds issued last year by Goldman were being downgraded by rating agencies at a faster pace than any other issuer.

Defaults on mortgages to risky borrowers have risen to an all-time high, and that's done more than just hurt the long-suffering housing market. It has hurt the ability of banks to package mortgage loans as securities that can be traded - which is something many borrowers don't realize their lender even does.

"This is an unfolding story," said Dick Bove, an analyst with Punk Ziegel. "It might take months to see the effects on a whole range of areas. For banks, it means they'll be less likely to write loans, borrowing costs go up, and ultimately stocks could fall. It's like a wave crashing."

Beyond the effects on Wall Street proper, the economy could be set up for a shock if hedge funds begin to collapse. Without some kind of government intervention, a worsening environment for big investors could eventually trickle down to the little guy.

Though any real shakeup in the hedge fund world might be months or years away, some believe it might be a good thing for investors in the long run.

There has been continued criticism by regulators and politicians that hedge funds might be too leveraged to begin with - and perhaps a shake-up will flush out the riskiest funds.

It also could accelerate a push on Capitol Hill for tougher regulation of hedge funds and private equity. But that might not happen until Wall Street feels the kind of squeeze that would hurt individual investors as well.

"If there's a downturn for a group of hedge funds, then there could be dramatic effects for the markets in general," Columbia's Goldschmid said.

SK Telekom set to swap US$1b Unicom bonds

China Unicom's (0762) strategic partner SK Telecom, the largest mobile operator in South Korea, said Tuesday it may exchange US$1 billion (HK$7.8 billion) worth of convertible bonds from the Chinese operator into shares of the company.

"It is reasonable for the company to convert the bonds at this time," said DBS Vickers analyst Steven Liu. "China Unicom may be broken up in the near future."

SK Telecom can convert the bonds into shares starting July 5.

"We think it's not negative to convert the bonds into shares, given the stock's rise," Dow Jones Newswires quoted an SK Telecom spokeswoman as saying. "Any concrete decision [on the conversion] will be made at the right time."

Once the bonds are converted, SK Telecom will have a 6.7 percent stake in China Unicom.

The Chinese government has said it will offer third-generation mobile services in time for the 2008 Beijing Olympics. Analysts expect China Unicom, which runs two mobile networks, will sell off each to a fixed-line operator in China as a precursor to any introduction of 3G services.

"There's not much time left for the government to make a decision on the industry restructuring," said Liu. "So, I think maybe it's the best time for SK to convert the bond."

The conversion of the bond should be neutral or slightly positive for China Unicom's share price, according to China Everbright Securities analyst Wong Chi-man.

"Most of the investors when they calculate the EPS [earnings per share], I think most of them have assumed the conversion of the CB," Wong said.

SK Telecom will probably hold on to the shares after the conversion, Liu said, as the South Korean operator wants to use its partnership to gain access to the China market.

China Unicom shares rose 1.1 percent Tuesday to close at HK$13.30.

Asian Bank Endorses Clean Energy

BANGKOK, Thailand (Map, News) - Asian governments must promote clean energy such as wind and solar power to maintain their booming economies and reduce greenhouse gas emissions in coming decades, the Asian Development Bank said Tuesday.

Environment groups have criticized the Asia bank and other institutional lenders in recent years for funding conventional energy projects like coal-fired power plants while largely ignoring renewable energy.

The bank increased its annual spending on clean energy to $1 billion this year.

"Asia faces a particularly daunting challenge in securing the energy it needs to support growth and poverty reduction in a responsible, sustainable manner," Bank President Haruhiko Kuroda said in a speech opening a three-day clean energy forum at the bank's headquarters in Manila.
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"Clean energy, including energy efficiency and renewable energy, needs to be actively promoted," he said.

"Developing countries should be encouraged to explore possibilities for renewable energy sources, such as wind, solar, and biofuels."

Delegates at the conference, co-sponsored by the United States Agency for International Development, are expected to discuss how to promote and roll out clean energy projects in Asia. They will also address how to finance clean energy projects, including establishing carbon trading schemes, which are relatively unknown in Asia.

Philippine Energy Secretary Raphael Lotilla said the challenge many developing countries like his face is funding renewable energy projects, which he said are often up to three times more costly than conventional sources.

Despite Philippine requirements that 5 percent of fuels come from ethanol by 2008 and a draft bill that would mandate up to 10 percent of energy come from renewable sources, the Philippines still is struggling to boost energy from renewables, Lotilla said.

The meeting comes two months after the Intergovernmental Panel on Climate Change, a United Nations network of 2,000 scientists, said the world has to make significant cuts to its greenhouse gas emissions.

The bank estimates the Asian region will need at least $4 trillion in new energy infrastructure before 2030, with much of that being directed toward electricity supplied by coal-fired power plants.

----

Asian Bank Endorses Clean Energy

BANGKOK, Thailand (Map, News) - Asian governments must promote clean energy such as wind and solar power to maintain their booming economies and reduce greenhouse gas emissions in coming decades, the Asian Development Bank said Tuesday.

Environment groups have criticized the Asia bank and other institutional lenders in recent years for funding conventional energy projects like coal-fired power plants while largely ignoring renewable energy.

The bank increased its annual spending on clean energy to $1 billion this year.

"Asia faces a particularly daunting challenge in securing the energy it needs to support growth and poverty reduction in a responsible, sustainable manner," Bank President Haruhiko Kuroda said in a speech opening a three-day clean energy forum at the bank's headquarters in Manila.
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"Clean energy, including energy efficiency and renewable energy, needs to be actively promoted," he said.

"Developing countries should be encouraged to explore possibilities for renewable energy sources, such as wind, solar, and biofuels."

Delegates at the conference, co-sponsored by the United States Agency for International Development, are expected to discuss how to promote and roll out clean energy projects in Asia. They will also address how to finance clean energy projects, including establishing carbon trading schemes, which are relatively unknown in Asia.

Philippine Energy Secretary Raphael Lotilla said the challenge many developing countries like his face is funding renewable energy projects, which he said are often up to three times more costly than conventional sources.

Despite Philippine requirements that 5 percent of fuels come from ethanol by 2008 and a draft bill that would mandate up to 10 percent of energy come from renewable sources, the Philippines still is struggling to boost energy from renewables, Lotilla said.

The meeting comes two months after the Intergovernmental Panel on Climate Change, a United Nations network of 2,000 scientists, said the world has to make significant cuts to its greenhouse gas emissions.

The bank estimates the Asian region will need at least $4 trillion in new energy infrastructure before 2030, with much of that being directed toward electricity supplied by coal-fired power plants.

Romney finds funds to pull ahead in Republican race

BEING a Mormon from Democrat-leaning Massachusetts would normally be a handicap for a Republican with presidential ambitions, yet Mitt Romney has broken through as a serious contender for his party's nomination with another massive fundraising haul.

The former Massachusetts governor, who outstripped his rivals unexpectedly in the first-quarter fundraising race, is set to unveil an equally impressive money haul this week.

This success is now being reflected in the latest polling.

After spending $US4million ($4.7million) since February on carefully targeted advertising, Mr Romney leads the Republican field in the crucial early caucus and primary states of Iowa and New Hampshire.

Rival campaigns have been forced to concede that he has become a top-tier candidate.

"There's a long way to go, but to date he's running the most logical, thought-out, structured campaign," said Scott Reed, who managed Bob Dole's 1996 presidential campaign. "He's raising the money, he's spending it wiser and he seems to be on track."

Mr Romney's aides admit that it is early days in the unpredictable Republican race.

He has yet to win over evangelicals, a key constituency in the party's primary electorate. Many distrust his recent reversals on issues such as abortion and gay marriage, and his Mormonism.

The official entry later this week of Fred Thompson, the Law and Order star and a conservative southerner, also throws up another significant hurdle.

Although leading in the early states, Mr Romney lags behind Mr Thompson, John McCain and Rudy Giuliani in national polls.

But Mr Romney's aides, and rival campaigns, say his slow, methodical approach has exceeded expectations.

That strategy, laid out by Romney staff last winter, was to pour resources and time into Iowa and New Hampshire, to give him the momentum into Florida and South Carolina the following week, and from there on to the multi-state "Tsunami Tuesday" on February 5 that will probably determine the nominee.

"The campaign is proceeding as we planned it," senior aide Vin Weber said. "The good news is when people see him they like him. There's no reason to think that what has happened in Iowa and New Hampshire won't be repeated when we introduce him to the rest of the country."

A key to the success of the Romney plan has been his fundraising prowess.

Between January and March he topped the Republican field, raising $US21million, against the $US16million taken in by Mr Giuliani and the $US13million reported by Senator McCain.

Senator McCain's campaign is being forced again to play down expectations for the second-quarter total after what is believed to have been another disappointing fundraising period.

But leading in Iowa is a double-edged sword. Should Mr Romney fail to win there, it could deal his campaign a fatal blow.

Carry-trade warnings spur yen rise

The yen rose for a second day Tuesday, rebounding from recent multi-year lows against the dollar and euro, after Japan's finance minister cautioned about the weakness of the country's currency.

Koji Omi said it was important to be aware of the risks of making one-way currency bets, echoing warnings from the Group of Seven.

Foreign exchange officials from South Korea and New Zealand also said they were worried about the harm caused by the yen's weakness, compounding concerns about carry trades, in which funds are borrowed in a low- yielding currency such as the yen to invest in higher-yielding currencies.

In mid-morning New York trade, the dollar was down 0.5 percent at 123.11 yen. It was the best day for the yen against the dollar since mid-April.

The euro was down almost 0.5 percent against the yen at 165.66, well off a record high hit last week.

In the United States, purchases of new homes dropped in May, signaling demand is still faltering in the second year of the housing slowdown.

Sales fell 1.6 percent to an annual pace of 915,000 last month from a revised 930,000 rate the prior month that was lower than previously estimated, the Commerce Department said in Washington. The supply of unsold homes at the current sales pace rose.

A jump in mortgage rates this month and a glut of unsold properties on the market will continue to discourage home construction, economists said. The housing slump, already the worst since 1991, will restrain the economy for the rest of the year and potentially into next.

"The deep slump in the housing sector is continuing," David Resler, chief economist at Nomura Securities International in New York, said. "Home construction is likely to remain a drag on overall economic growth through the summer and beyond."

Home prices in 20 metropolitan areas dropped 2.1 percent in the year ended April, the biggest year-over-year decline since record keeping began in January 2001, according to a report from S&P/Case-Shiller. The decline was led by a 9.3 percent drop in Detroit and a 6.7 percent fall in San Diego.

Sales of new homes were down 16 percent from the same time last year.

US consumer confidence fell further than expected in June, to a 10-month low, as Americans grew anxious about jobs and the business climate.

The Conference Board said its index of consumer sentiment slid to 103.9 in June, the lowest since August 2006, from an upwardly revised 108.5 in May.

US stocks gained after concerns eased that losses tied to subprime mortgages will hurt financial company earnings and bond yields held near a three- week low.

The Dow Jones Industrial Average gained 0.1 percent, to 13,363.02 mid- morning. The Nasdaq Composite Index rose 0.1 percent to 2579.82. In commodities, oil prices fell as investors weighed ample fuel stocks in the United States and the potential for higher Nigerian crude exports.

London Brent crude dropped US$1.04 to US$70.32 (HK$548.49) a barrel mid-afternoon. US crude slid US$1.05 cents to US$68.13.

Lead tumbled more than 5 percent as investors sought to cash in profits, traders said.

Lead for three-months delivery on the London Metal Exchange fell to US$2,570 a tonne, down 5.2 percent or US$140 from its close Monday.

Copper for delivery in three months was at US$7,415 a tonne, down 1 percent from Monday, when it rallied on news about strikes in Peru and Chile.

In corporate news, Blackstone Group units tumbled more than 6 percent in morning trade, falling below the US$31 price the private equity giant fetched in its initial public offering last week.

Analysts said the second-day decline was partly tied to investor concern that the private equity market may have run out of steam. Others have also pointed to concerns about Blackstone's lofty valuation and a bill in Congress that would raise the tax rate on private equity firms' profits to 35 percent from the current 15 percent. AGENCIES