From Shanghai, Tremors Heard Around the World (NYTimes, 2/28/07)

February 28, 2007
From Shanghai, Tremors Heard Around the World
By DAVID BARBOZA
SHANGHAI, Feb. 27 — In China’s wild cowboy stock market, record-breaking run-ups have been followed by mini-crashes that have been largely confined within this country’s borders.
But on Tuesday, China’s worst one-day tumble in a decade set off a tumult that rolled through markets around the globe, from Tokyo to Frankfurt to Brazil to Wall Street.
Speculative frenzy had lifted the Shanghai composite index above the 3,000-point milestone on Monday and then gave way to a tumultuous sell-off on Tuesday that sent shares plummeting nearly 9 percent.
The downturn shattered all sorts of records, and analysts said there was no clear reason for Tuesday’s severe drop in Shanghai, equivalent to a 1,100-point drop in the Dow Jones industrial average. But the Chinese stock market was rife with rumors that the government was considering new measures to tame the world’s hottest stock market before a bubble developed.
To many investors and analysts here, however, the extensive sell-off was just the latest indication that share prices in China had often become unhinged from the broader economy. Millions of everyday investors rushed blindly into stocks, emptying out their savings account to “play the market,” as many of them say.
Perhaps the most remarkable sign of the recent irrational exuberance underpinning China’s stock markets was that during the last year, when a company announced bad news, its stock price shot through the roof.
Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled.
Tuesday was different, though. With shares in Shanghai tumbling, stocks listed in Shenzhen also collapsed, falling 9.3 percent. In Hong Kong, the benchmark Hang Seng index fell 1.76 percent, and in Japan, the Nikkei dropped about half a point, to 18,119.92.
The volatility of Shanghai sometimes produced unusual results. Shares of the Industrial and Commercial Bank of China, which went public simultaneously on the Shanghai and Hong Kong stock markets last October, performed very differently on the two markets, for example. I.C.B.C. shares dropped 8 percent on Tuesday in Shanghai but just 1.8 percent in Hong Kong.
But with stocks in Hong Kong reacting on Wednesday morning to the global sell-off, I.C.B.C. shares dropped 3.7 percent on Wednesday morning in Hong Kong but rose two-tenths of a percent in Shanghai.
None of the world’s major stock markets have been as volatile as that of China, where people refer to the stock market as “dubo ji,” or the slot machine. The gyrations have become almost commonplace for a stock market that suffered through a five-year depression until 2006, when it rose more than 130 percent, the world’s best performance.
The Chinese government, however, is worried about an over-reaction that could produce a bubble and then a crash that could send bankrupt investors into the streets in protest.
Analysts say that at least in some cases, the stocks of tainted companies have risen because the companies were viewed as shedding old problems and starting anew. Still, some of those problems reflect deep cultural attitudes and are unlikely to be fixed overnight.
Analysts also argue that the market has been running up because of stronger fundamentals, rising profits, improved regulation and oversight by officials, and confidence in the market’s long-term prospects.
But in this current run of market mania, even corruption appears to be a buy signal. That was the case for the Shanghai Bailian Group, which reported on Dec. 29 that its chairman was under investigation for fraud. The company’s shares have climbed 45 percent since then.
Two weeks ago, after the chairman of the Shanghai Hai Niao Enterprise Development Company was detained, his company’s shares rose 15 percent.
“There’s just too much liquidity out there, too much,” says Chang Chun, a financial reform expert at the China Europe International Business School in Shanghai. “This is a psychological thing.”
China’s stock market system is still relatively immature, and trustworthy information about a company’s performance is still hard to come by. So the average investor does little or no research.
Just to find names of stocks to buy is a task for new investors. So if they see even a mention in the press, positive or negative, they start buying. If alert investors are lucky, they might get a tip. If state television mentions a company, it must be worth something, and if they don’t catch the full story, they at least have a name.
“If I hear a stock mentioned on the TV news I will pay attention to it,” says Xu Xiaochen, a 55-year-old retiree.
In any case, many investors here seem to believe that the secret to picking stocks is luck and confidence in the government, not the fundamentals of any particular company.
“I don’t know how to choose a stock,” says a 61-year-old retiree who gave her name as Miss Hou at a local brokerage house a few weeks ago. “But I trust those technology companies. Maybe the names of some companies sound lucky to me, so I choose to buy these stocks.”
Government officials began cautioning several weeks ago against “blind optimism” in the stock market. Banks were ordered to stop making loans to people who were speculating in the market. Trading volumes have been so high that the Shanghai Stock Exchange recently warned that the country’s electronic trading system could be destabilized.
Stock prices fell sharply for four straight days in early February as investors seemed to contemplate the possibility of an overheated market.
After a brief pause, they rushed in again. Foreign money is also piling in, according to JPMorgan, and hardly an analyst is willing to bet against the stock market.
“You can’t be a fundamental investor in China,” said Michael Pettis, a professor of finance at Peking University. “You can only speculate.”
Mr. Pettis, who has long been a market skeptic here, is now raising a fund to invest in Chinese stocks, based on his projections of the inflow that will push up prices.
“There’s a huge amount of money in the banking system with nowhere to go,” he said. “I think you’re going to see that money getting out of the banking system.”
Mutual funds are also helping some individual investors, while others are scrambling into initial offerings, which over the last year have had a strong opening-day track record.
Of the 15 companies that went public on the Shanghai Stock Exchange, 12 of them experienced opening-day rises of more than 10 percent.
Now, regulators are seeing a growing number of stock frauds directed at small investors. And Chinese officials worry that investors are still relying on a welfare state — which is increasingly disappearing — to take care of them.
As for the companies that are seeing their stock prices climb despite their troubles, they may be hard pressed for explanations, but nonetheless defend the phenomenon.
“The stock is the stock, and the C.E.O. is the C.E.O.,” said a woman working in the executive office at Shanghai Haixin Group after she acknowledged that the chief executive was under investigation. “As for our C.E.O.’s bad news, yes, it happened. But it is outdated and not newsworthy at all. As for the stock price, we don’t know either.”

Internet Boom in China Is Built on Virtual Fun(02/05/07, NYtimes)

February 5, 2007
Internet Boom in China Is Built on Virtual Fun
By DAVID BARBOZA
SHENZHEN, China — When Pony Ma, the 35-year-old co-founder of China’s hottest Internet company, sends a message to friends and colleagues, the image that pops up on their screens shows a spiky-haired youth wearing flashy jeans and dark sunglasses.
That is not how Mr. Ma actually looks or acts, but it is an image that fits well with the youthful, faintly rebellious nature of a company led by somebody who may be China’s closest approximation to Sergey Brin and Larry Page, the young founders of Google. In the two years since Mr. Ma’s company, Tencent, went public in Hong Kong, it has grown into a powerhouse that has crushed everyone else in the field.
No other Internet company in the world — not even Google — has achieved the kind of dominance in its home market that Tencent commands in China, where its all-in-one packaging of entertainment offerings and a mobile instant-messaging service, “QQ,” has reached more than 100 million users, or nearly 80 percent of the market.
“Everyone talks about eyeballs,” said William Bao Bean, an Internet analyst at Deutsche Bank Securities. “Well, they’ve got all the eyeballs in China. And now they’re beginning to cash in on that.”
But the rise of fast-growing companies like Tencent is also worrying the Chinese government, which strictly regulates the Internet and is wary of the Web’s ability to mobilize huge online political communities or perhaps to nurture underground economies.
A few weeks ago, China’s Central Bank — which oversees the country’s $2.6 trillion economy — even went so far as to issue a warning about Tencent’s virtual currency, Q-coins, which allow customers to shop online for games, music and even virtual furniture.
A Central Bank official said the agency was studying whether Tencent’s online tokens were a threat to China’s currency, the yuan or renminbi. He also said the authorities would crack down on the coins if they were used to engage in money laundering.
That is far from Tencent’s intention. Already one of China’s wealthiest entrepreneurs — worth an estimated $850 million — the soft-spoken Mr. Ma says he simply wants to let people in China use the Web the way they want.
“I think every Internet user likes personalization,” Mr. Ma said during an interview here. “In 2005 and 2006, we came up with a new strategy: ‘Online Lifestyle.’ ”
While America’s Internet users send e-mail messages and surf for information on their personal computers, young people in China are playing online games, downloading video and music into their cellphones and MP3 players and entering imaginary worlds where they can swap virtual goods and assume online personas. Tencent earns the bulk of its revenue from the entertainment services it sells through the Internet and mobile phones.
Another distinguishing feature is the youthful face of China’s online community. In the United States, roughly 70 percent of Internet users are over the age of 30; in China, it is the other way around — 70 percent of users here are under 30, according to the investment bank Morgan Stanley.
Because few people in China have credit cards or trust the Internet for financial transactions, e-commerce is emerging slowly. But instant messaging and game-playing are major obsessions, now central to Chinese culture. So is social networking, a natural fit in a country full of young people without siblings. Tencent combines aspects of the social networking site MySpace, the video sharing site YouTube and the online virtual world of Second Life.
“They have what I call the largest virtual park in China,” said Richard Ji, an analyst at Morgan Stanley. “And in China, the No. 1 priority for Internet users is entertainment; in the U.S., it’s information. That’s why Google is dominant in the U.S., but Tencent rules China.”
Tencent’s rapid rise is one reason America’s biggest Internet companies, like Yahoo, Google and eBay, have largely flopped in China. Analysts say the American companies struggle here partly because of regulatory restrictions that favor homegrown companies, but also because foreign companies often do not understand China’s Internet market, which is geared primarily to entertainment and mobile phones.
Google has lost market share to the search engine Baidu. Yahoo recently transferred its operations to a Chinese company, Alibaba.com. And eBay, even after buying one of its biggest competitors in China, has continued to lose ground; last December it handed its Chinese operations over to Tom.com, which is based in Hong Kong, in a joint venture.
Chinese youth prefer instant messages to e-mail messages; they play games, form communities and even adopt virtual personas, or avatars, which requires selecting an online image or personality and then buying that character virtual clothes, hairstyles, furniture and perhaps even a virtual pet that must be fed with virtual pet food.
It is a world that now dominates the life of Li Meixuan, a 21-year-old college student in Beijing who became hooked on Tencent’s QQ offerings in high school.
“I play with QQ about three to five hours a day,” said Ms. Li. “I usually play QQ games, buy game stuff from the QQ Game and buy decorations for my QQ show.”
Tencent will not release statistics on how its Q-coins are doing, but analysts say the currency is so popular that an underground economy in Q-coins has emerged, even though the coins are not redeemable for cash. Mr. Ma dismisses talk about the coins harming the Chinese currency.
“The media has misled the public,” he said. “A Central Bank official said that Q-coin did not affect the renminbi; it adds vibrancy to the economy. Our competitors raised this to intentionally cause panic.”
The controversy has done nothing to dim the company’s stock price, which has soared about 200 percent over the last year, giving the company a market value of roughly $7 billion. The rally was fueled by Tencent’s rising profit, which jumped 221 percent through the first three quarters of 2006, to $100 million.
Tencent was founded in 1998 by college buddies here in this southern China city, led by Ma Huateng, or Pony Ma, as he is known in English.
Mr. Ma has a boyish face and a quiet demeanor. But he is one of China’s most respected entrepreneurs. And when he shows up at Internet conferences in China he is mobbed by young people eager to have a picture taken with him or to shove their name cards into his pocket.
Mr. Ma earned a degree in computer science in 1993 from Shenzhen University, where his professors remember him as a diligent student who always stood out.
“He left a deep impression on me,” said Wang Jingli, the former chairman of the university’s computer science department. He recalled how he once assigned Mr. Ma to solve a classic chess problem called the eight queens puzzle. “He gave me all the answers in graphics, which was very rare among the students I taught.”
Later, Mr. Ma worked as a software developer for a paging and telecommunications company. But after making a lot of money trading stocks in his free time, he founded Tencent with his boyhood friend Zhang Zhidong. It was one of the first companies to offer instant messaging in China. But in the early days, profits were hard to come by.
“They didn’t really have a revenue model, and they didn’t know how they were going to make money,” said Shirley Yeung, who was among the first to invest in the company for PCCW, the Hong Kong telecom operator. “They were a bunch of young techies working in a crummy building but passionate about creating something new.”
In 2001, the company got a big infusion of capital from MIH, a division of a South African media company called Naspers. MIH paid $35 million to acquire about 50 percent of the company.
Tencent’s fortunes improved later that year when the company teamed up with China Mobile, the giant state-owned mobile operator, to forward Internet messaging to mobile phones.
“That was our first bucket of gold,” Mr. Ma said.
By 2004, Tencent was making a handsome profit on revenue of more than $130 million and Goldman Sachs was brought in to take the company public in Hong Kong, where Tencent’s offering raised $184 million in June 2004.
Since then, the company has been on a tear. Other big Chinese Internet companies, like Sina, Sohu, Netease and Baidu, are trying to keep pace. And so are the American Internet companies, like MySpace, which is looking to enter China’s market.
But Mr. Ma is not standing still. “There are a lot of opportunities in the market now,” he said. “The leader of the market today may not necessarily be the leader tomorrow.”