TO THE POINT: U.S. financial turmoil has sailed across the Pacific, landed on the Chinese mainland and relentlessly stabbed at the hearts of investors. One of the qualified domestic institutional investor (QDII) products the nation was once proud of lost half its value and was forced off the list. China Pacific Insurance became the first to fall below its IPO price amid the mainland market downturn, probably signaling the era of the bear market. The mainland stock market kept nosediving, ignoring the large profit growth of listed companies, which in turn slashed investors' confidence. The prospects of the financial market remained bleak. By LIU YUNYUN

QDII Entrapped

The mainland qualified QDII scheme confronted with its first defeat in the gloomy international capital market.

One of Minsheng Bank's QDII products was automatically delisted as its net value per unit was halved after investing in the Baring Hong Kong China Fund for just four months, eight months before its planned maturity.

The cleared QDII was created in October last year with an investment cycle of one year. The bank said if the net value of the product was above 118 percent or 50 percent below, the transaction would be automatically cleared. March 19 marked the day when the net value per unit dropped to 50 percent.

Angry investors wanted to sue the bank, but they could hardly win the case as the bank did not promise any profits.

The Minsheng QDII product might be just the tip of an iceberg, as QDII products of other financial institutions are now beset with plummeting net values. The QDIIs managed by mutual funds on average lost 30 percent of their value, while the losses of those managed by banks such as Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) were between 15 percent to over 40 percent. The poor performance of QDIIs was largely caused by unrest in the global financial market, which feared a possible U.S. economic recession might drag down the world economy.

Lin Jiang, professor with China Youth University, contended the failure of this Minsheng QDII did not mean the bank had no sense of risk control, because the global market was undergoing a structural downturn.

Bear Tracks Sighted?

The mainland stock market downturn has been saddling investors for almost half a year now. Though some still held onto the bull-run legend, an insurance giant has a different story to tell.

China Pacific Insurance (Group) Co. Ltd., the second biggest property insurer on the mainland, saw its share price drop below its initial public offering (IPO) price of 30 yuan ($4.26). It closed at 27.98 yuan ($3.97) on March 26, making the company the first to break an IPO price after the split share reform in 2005.

It was widely suspected that China Pacific Insurance's share price meltdown signaled the end of the bull market and the beginning of a bear one.

At present, mainland investors are very sensitive to the refinancing and tradable share plans, and any such announcements could crash their flimsy confidence.

China Pacific Insurance made its 300 million restricted shares tradable on March 26. Investors were infuriated and dumped the company shares relentlessly, totally disregarding the company's quintupling profits for 2007.

Wang Yan, analyst with Tianxiang Investment Consulting, warned that breaking an IPO price did not mean the company was worth investing in when factoring in market diffidence. China Pacific Insurance's plan to list in Hong Kong might be postponed due to global stock market turmoil.

Withstanding the Subprime Fallout

Two major banks in China heavily involved in U.S. mortgage-backed assets shrugged off the influence of the subprime crisis and made significant profits in 2007.

BOC, the biggest holder of U.S. subprime-related assets among all mainland banks, reported 56.25 billion yuan ($8 billion) in net profit for 2007, a year-on-year increase of 31.33 percent.

BOC cut its investment in subprime-related assets to $5 billion by the end of last year, accounting for 2.13 percent of its total investment securities, as stated in its annual report. It said the rest of the U.S. securities it holds has high credit ratings, with 71.23 percent rated AAA and 25.93 percent AA.

ICBC, the biggest bank on the mainland by market value, posted an even stronger profit growth of 65 percent in 2007, driven by strong growth in fee income and improved margins. Currently, it holds $1.2 billion worth of subprime-related assets, and has already made a provision of $400 million to cover the losses.

Top managers of the two banks showed their strong confidence in the growth potential of the banks and believed the profit gains would continue this year.

To date, mainland banks had all reported stunning profit growth in 2007. For instance, China Merchants Bank was up 124 percent, Industrial Bank was up 126 percent, and CCB was up 48 percent.

In spite of the remarkable growth, the banks' share prices are generally at a low level. BOC's share is almost the cheapest in the mainland market, with two ST shares being the lowest by March 26.

Wu Yonggang, chief analyst with Guotai Jun'an Securities Co. Ltd., noted the banks' performances did not show any signs of a downturn and that they were worth investing in. However, "the fragile market and crumbling confidence of investors have forced investors to sell their stocks, making it hard for the share price to rise," said Wu.

Hot Money: A Blessing or Curse?

Throughout 2007, newspapers, television programs and radio stations had been complaining about international speculative hot money for propping up mainland assets, including real estate and stocks, and creating bubbles in the economy.

This year, however, confronted with the global economic downturn, some have worried that the sudden withdrawal of hot money might paralyze the deteriorating mainland stock market. The benchmark Shanghai Composite Index has lost 40 percent since its peak in October, dropping the most compared with the United States, EU nations, Japan and Hong Kong. The sharp drop has made the mainland stock market less attractive to hot money, which moves swiftly for more lucrative businesses.

Currently, the weakening U.S. dollar has jacked up international crude oil, commodity, and gold prices. So far this year, the crude oil futures have surged 15 percent and gold prices have climbed about 20 percent. Analysts believe that hot money was the biggest propellant. They contended that hot money might transfer to international commodity futures to make more profit.

It is hard to calculate how much hot money is in China. Last year, excluding trade surplus and foreign direct investment, newly-added foreign reserves under the balance of international payment's "other" category soared 20 times to $132 billion than that of 2006, accounting for 28.6 percent of the total of newly added foreign reserves in 2007. Experts were increasingly concerned about the outflow of hot money, which might hit the property and stock markets severely.

Stabilizing Oil Prices

PetroChina and Sinopec, the two largest mainland oil products, pledged to keep oil prices stable and said there was no schedule for an increase.

Provinces in south China have suffered the most from the recent oil crunch. Drivers queued up in front of gas stations, and some private gas stations were even closed due to a shortage of supply. The south, after being hit by the worst snowfall in half a century at the beginning of 2008, needed more oil to fuel its rehabilitation work. This was considered an exceptional trigger to the oil shortage.

The two oil giants have strived to refine more oil and import more from the overseas market. Oil sufficiency remained at a relatively high level. In the first two months, the refined oil output rose 10.5 percent; the refined oil inventory grew 28 percent and diesel oil was up 46 percent. The two companies ruled out the possibility of an oil crunch similar to what happed last November and December.

China News Press reported that oil station gas lines stemmed from people's expectations of higher prices in the future as international crude oil futures prices have been climbing.

Domestic refined oil prices are fixed by the government and are much lower than international crude oil prices. The government has vowed to compensate the two giants for the losses in refining business.

Numbers of the Week

651.4 million

The net profit of China's fourth biggest air carrier Hainan Airlines almost quadrupled in 2007 over that of 2006, soaring to 651.4 million yuan ($92.4 million).

94.8%

China Life, a leading insurance giant on the mainland, reported a net profit of 38.88 billion yuan ($5.5 billion) for 2007, growing a robust 94.8 percent year on year due to increasing premiums and investment returns.