In my June 3 post “Think China’s bear market is a buying opportunity? Here’s one way to tell when to get in” https://jubakpicks.com/2010/06/03/think-chinas-bear-market-is-a-buying-opportunity-heres-one-way-to-tell-when-to-get-in/ I said watch the proposed $30 billion Agricultural Bank of China IPO (initial public offering) set for July.
If the offer goes on schedule, I opined, it was a sign that China’s banks would be able to raise the capital they needed–$ 24 billion to $4 billion above the $30 billion in the Agricultural Bank IPO—in 2010. That would be a huge load off investors’ minds and could be an all clear to put money in Chinese equities. If the offering didn’t go, it was a signal that the China’s financial markets were weaker than optimists hoped and we might be in for another leg down in stock prices.
Well, it doesn’t look like reading this indicator is going to be quite that binary.
Analysts and bankers close to the deal, the Financial Times reports this morning, June7, say that the deal will go on schedule but for less money than anticipated. The IPO is likely to raise $20 billion rather than $30 billion. That would make this the second largest IPO ever—not the world’s largest ever—to the $22 billion IPO of Industrial and Commercial Bank of China in 2006.
The problem seems to be that while there is enough demand to soak up the 56.3 billion new shares (17% of the bank) to be offered in the IPO, buyers are balking at the price asked for shares in the IPO. Agricultural Bank of China is the last of China’s big state-controlled banks to go public and it is widely regarded as the weakest bank in the group. Initially the deal was priced at a 1.94 price to book value ratio. That has struck IPO buyers as extremely rich and they’ve argued for a 1.2 price to book ratio. Sources have told the Financial Times that the final price is likely to be 1.3 to 1.5 times book value.
So how do you interpret that?
I’d say that the bank’s ability to raise even $20 billion in a financial market like this is good sign for Chinese stocks going forward. If the IPO went at that price, it would indicate to me that China’s banks are going to be able to raise the capital they need to keep on lending—essential for China’s economic growth—and to meet tougher capital requirements from the government. (For more on why China’s banks need to do both, se my post “Move over Charles Ponzi and Bernie Madoff—China is running history’s largest financial scam” https://jubakpicks.com/2010/06/01/4106/
But the lower price for the IPO would make me more cautious about what I’d pay for shares in a Chinese company.
southof8,
So those who benefit the most should pay the most?
Let’s start with Social Security. Who benefits the most? That would be the elderly. But I guess you can’t have them pay more to receive what they get, so that’s a wash.
How about Medicare? That would be the old and sick. I guess they should go out and get a job to pay for that health care they’re receiving, huh?
Having said that, your statement about the wealth transfer isn’t inaccurate, but it has nothing to do with taxes or spending (although TARP was an egregious example of how government spending can benefit the wealthy). The wealth transfer has been mostly aided by the faulty Keynesian theory of a little inflation being a good thing for growth. As run by our Federal Reserve, this ongoing policy leaves the wealthy in an easy position to stay ahead of the inflation curve while the rest of the country fights to catch up. This is why you see the wealth disparity keep growing in good economic times.
Art Laffer basically stated a truism: At a certain point, people will do anything to avoid paying taxes. Before you call his thinking flawed, consider: If the government was taking 99% of your income, would you just happily pay it? While this is an extreme example, most people wouldn’t wait until 99% before trying to find a way to keep more of what they earned.
And “earning” is the key. A person works and makes money. They EARN it. Yet, the government wants to take away the fruits of THEIR labor. You resent the fact that they want to keep what THEY earned. Mind you, not all wealthy people are leeches on society. Some of them actually provide benefits to us through their innovative thinking, creations, and services. They earn their money, and society pays them for what they have provided to us. But because they have money, they suddenly become evil. I don’t buy that.
If you want to target people who use their political connections to enrich themselves, I’m ok with finding a way to keep them from doing so. But let’s not target people who have actually worked and succeeded for everything they have. We need to encourage successful innovation, not punish it. And punitive taxation doesn’t distinguish between the good or the evil.
no I don’t. I just find it inevitable, so think those that benefit the most should pay the most. The wealth transfer from the middle class to the wealthy over the last 30 years is obscene and indefensible. And Art Laffer provided the supposed intellectual underpinning for the great sucking sound that was the middle class watching its wealth get sucked out (actually, he’s the first to admit the “curve” is not his idea- but he was the dope pusher that got the nation addicted to tax cuts on the supposed theory that the coffers would swell with receipts. But it didn’t…).
Ed I agree with you and your point. Seems like the rest of the group must be govt. workers, they always love to spend others money.
southof8,
I certainly have heard of federal block grants. They are just another way for the federal government to bribe the states with their own money.
As for the national debt, I assume you are familiar with a thing called “spending”. The national debt is created when our genius politicians spend more than they get from tax revenue. This is called “deficit spending”. The Laffer Curve is about tax revenue, NOT deficit spending. And if you think raising taxes is just going to magically solve our national debt problem, then you are completely ignoring the spending problem we have. Or do you assume that all federal spending is good by default?
Ed, perhaps you’ve heard of federal block grants to states? Taxes don’t grow government. Societal development and demographic change do. Taxes just pay for it. If laffer is such a genious, why has the national debt exploded since his koolaid became the national beverage? Or does your assessment only look at half the picture?
rolfer1,
All those things you mentioned we got in the U.S. without the federal government’s assistance. Of course, if you’d prefer we go back to an Ancient Roman model of government for the U.S., we are certainly well on our way…
GlassWizard – well said. Ed, you and your ilk remind me of lines from Monty Pythons “Life of Brian” — What did the Romans ever do for us? Clean water, sanitation, education, roads and infrastructure…we;;, ok BESIDES clean water, education, sanitation, roads and infrastructure, what did the Romans ever do for us? (BTW – all from tax receipts.)
GlassWizard,
Taxes don’t grow an economy. They grow the government.
In fact, I was reading recently (sorry I don’t have a link) how tax revenues NEVER exceed 20% of GDP. You can raise your tax rates to 99% and you still won’t get more than 20% of your GDP in revenue.
By raising taxes to obscene levels, you get multiple reactions from people. For some people, it becomes more economically feasible to pay tax accountants to find ways for them to avoid paying taxes. For other people, they just cheat on their taxes. Still other people move their money to overseas tax havens. Finally, people on the borderline of higher progressive tax rates find it more economically feasible to work less.
There is also the factor of removing money from the economy, which leaves less capital available for business creation and expansion.
The simple fact is the government can NEVER afford the “moon and stars” promises they make, because they can never finance them by taxation. Calling for more taxation is the same as asking your spouse to work a third job to pay for your lifestyle. Let me know how that works for you…
My question is this, maybehte tax receipts wetn up but as we see most of that growth was due to a bubble and now we are paying in full for all of it (or would if they were not busy trying to re-inflate the bubble) The bottom line is it is a cherry picking view to say that cutting taxes is the only way companies invest and grow. You invest to make money, you only pay taxes on PROFITS!!! I have never been tax if I didn’t make anything, so yes it does suck handing over money to the tax man I will the first to admit it, but hey if I own a dividend stock and all I did to make the money is hold the stock and I have to give 20% (.20) in tax, I still get 80% (.80) for doing nothing other than owning a stock and hopefully the stock is also going up in value so Imake even more. Not meaning to be a problem, just want to point out that I have never held off on making an investing decsion in stock or partnering in a start up due to tax concerns, can I make money is my main thought, not that I only get to keep a certain amount and the rest goes up in taxes. So becasue of the tax issues I won’t invest just never enters my mind.
Hey Ed,
Really? I believe that to be a very narrow view of the data. When you factor the Bush (or Reagan) deficit spending and public debt increases (cheered by Greenspan) the miraculous tax cut figures don’t add up.
Taxes aren’t a pestilence to the economic tree of GDP. They are the pruning shears, removing from the upper most branches so the sunlight of economic prosperity can nourish the whole tree. It’s only when we apply the manure of trickle down, laissez-faire policy that we find a misshapen abomination of massive leaves supported by weak spindles ready to snap.
You have no argument from me that there should be serious dialog on how taxes are spent, but taxes in and of themselves are not evil. They are essential to the health of our tree and it’s sustained growth.
This just proves that the Chinese stock market is quite fixed.
I usually don’t take advice on stocks from a bond guy, even if it’s PIMCO.
GlassWizard,
When it comes to tax discussions, I give Laffer the benefit of the doubt.
For all the complaints about the Bush tax cuts, government tax revenue hit new all-time highs under Bush. That was outstanding evidence of the truth behind the Laffer Curve (look it up if you’re not familiar with it).
Granted the economy was stronger when the tax revenues were at their highest under Bush. But the historical evidence does bear out Laffer’s point.
As for why the economy could fail in 2011, your point is certainly valid. But I wouldn’t be so quick to dismiss Laffer’s point either. Higher taxes don’t help a struggling economy.
Arthur Laffer is a duck.
When someone, be they economist, scientist, cleric, or psychic, portend causality with carefully poached data out of the spectra available, skepticism is required. Why would he leave out the Bush cuts from the “Greatness of Tax Cut” results? And is the claim that all of the tax free states are the fastest growing a joke? It’s hard to believe that FL-NV-SD-TN-NH-WY could beg people to move there (unless independently wealthy). To be fair, the data may be more compelling for WA-AK-TX.
If the markets fail and the economy double dips in 2011, will it be because of taxes? Or will it be because those who desperately want the bubble to re-inflate (we aging BBers who can only glimpse the ass end of their retirement camel as it gallops over the horizon) suddenly realize that all of the debt that led to the bust hasn’t gone anywhere; it has simply shifted to the government or been given a lavish coat of wishful whitewash in fantasy accounting land.
What we really need to know: “When doom quacks, does the herd listen?” Regardless of how bent the data or skewed the analysis, fact and truth cannot stand against the thundering herd of belief.
Yes, Ed.
He’s not the only one. See this from a little different angle from a PIMCO manager:
http://www.cnbc.com/id/37555786
If you think I’m bearish, here’s some real doom and gloom from economist Arthur Laffer:
http://online.wsj.com/article/SB10001424052748704113504575264513748386610.html
Free-market capitalism appears moribund around the world, and never was born in China. So “market signals” these days are automatically suspicious, maybe even treacherous. Politicians of every stripe are trying to “whistle past the graveyard” of equity and bond markets everywhere.
Preserve capital. Wait for the epic “fat pitch” coming.