Africa frenzy feeds China
stock bubble 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.
While the government is encouraging the
development of the capital market, it is concerned
that share prices are increasing so fast that a
bubble could emerge soon. February 27 saw the
Shanghai Stock Composite Index fall by 268.8
points, with 1 trillion yuan of market value
evaporating. The market tumble has taught the
authorities that a go-go market could cause a
damaging adjustment.
Authorities have
promised to crack down on stock-related crime, and
the investigation into Hangxiao Steel may herald a
wide-ranging campaign against insider trading,
industry sources said.
So far the
crackdown targets false disclosure, spreading
counterfeit information, insider trading and price
manipulation.
"Given a stable big board,
if big money is thrown on some stocks and their
prices rapidly grow, regulatory officials will
contact the companies and consult with senior
executives," a CSRC official said.
Usually
the stock exchanges track volume and information
disclosure and the CSRC checks the substance and
effectiveness of disclosure.
The Hangxiao
Steel event casts light on China's commitment to
developing African countries. Sino-African trade
reached $55.5 billion last year, according to
official Chinese figures. At a historic summit
last November that brought leaders from 48 African
nations to Beijing, China pledged to double its
aid to the continent and to offer $5 billion in
loans and credits by 2009.
The CIF has a
vast array of construction businesses in Africa.
In the spotlight are deals with the Angolan
government to build a series of public-housing
projects over five years.
The CIF is the
construction business arm of Beiya International
Development Ltd, parent company of China Angola
Oil Stock Holding Ltd, which imports oil from
Angola to China.
In 2006, Angola was the
No 1 crude-oil exporter to China, beating out
Saudi Arabia. Chinese oil giant Sinopec bought
stakes in three more offshore oilfields alongside
the Angolan state-owned Sonangol Group, in
addition to its existing share in a BP-operated
block.
Premier Wen Jiabao traveled to the
country in last summer. In exchange for reliable
crude-oil supplies, China made a $3 billion credit
line available to repair Angola's war-ravaged
infrastructure.
Business media in mainland
China report that Xu Jinghua, board chairman of
Beiya International Development, controls both oil
trading and infrastructure construction operations
in Angola.
Xu, a Hong Kong resident,
boasted that the 34.4 billion yuan contract with
Hangxiao Steel is no more than a slice of his big
Angola construction business pie, which could be
worth as much as $30 billion.
His cozy
relationship with the Angolan government, military
circles in particular, helped him to obtain 12 big
projects including an airport, railways, roads and
housing.
According to sources familiar
with his business, he earned a great deal of money
from his oil business in exchange for his
commitment to rebuilding the war-torn country's
infrastructure.
Among mainland Chinese
construction companies, the CIF is well known for
cajoling contractors into taking part in projects
in Angola. So far half a dozen contractors have
had unpleasant experiences with the CIF, which
stands accused of routinely delaying payment for
completed work and keeping rates as low as
possible.
Hangxiao Steel told China
Business News, a leading business newspaper based
in Shanghai, that it is aware of the risk of
arrears and will hedge it by asking the CIF to pay
up front before the work starts. Maybe the
contract is legitimate, but it can't be as sweet
as it appears.
Zhou Jiangong is
a Shanghai-based analyst on China's economic,
political and foreign affairs.
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