Shanghai to defy sub-prime worry

Three of China's biggest blue-chip companies will probably press ahead with domestic stock market listings which could raise a combined $17 billion.

China Mobile, China Construction Bank (CCB) and PetroChina are all examining share offerings on the Shanghai Stock Exchange, each of which individually would rank as the world's largest so far this year.

Last week's slump in the world's markets had little effect on Shanghai. It appears the three companies will continue to monitor market conditions and perhaps delay the IPOs if need be.

Preparations for the flotations come amid a debate about China's exposure to the sub-prime mortgage crisis that has helped trigger the contagion in international stock markets in recent days. So what is the sub-prime crisis and how did it happen? What follows is a step-by step description.

It starts in the United States and has a knock-on effect elsewhere. The question will be how far it will go. This crisis was caused in a series of linked stages. This is it, stage by stage:

In the US millions of sub-prime mortgages were granted to borrowers with poor credit records. These mortgages were sold aggressively, not wisely granted.

Major US banks then packaged them into new instruments called CDOs which sliced up the risk and these were sold in pieces to investors around the world.

Big buyers are hedge funds which see these as low risk investments.
Investment banks set up off-balance sheet vehicles - it does not show on their accounts - called structured investment vehicles which buy into the CDOs.

That is the pyramid. Now the first part collapses. Home owners, who have lousy credit records, start defaulting on their loans. Which makes the constructed investment vehicles high instead of low risk instruments.
Hedge funds, caught between a rock and a hard place, go bust. Banks get the serious wobbles. Suddenly there is a liquidity freeze.

Confidence is eroded and this spreads from the United States to Europe and Japan. Emergency funds are used to maintain liquidity.

As companies go to the wall there is a worry that this is the start of a global recession.

This may mean in many places that property markets will crash in the United States, and perhaps Europe, as liquidity dries up.

Media reports in Hong Kong quoted Yi Xianrong, a finance expert at the Chinese Academy of Social Sciences, as saying the underlying quality of home loans in China was worse than in the United States.

There seems no doubt the effect in China will be far, far less than in, say, the United States.

Lan Xue, an analyst at Citi in Hong Kong, said fears China would be heavily impacted were overblown. He said: 'China is growing in importance globally, but its economic growth is still heavily dependent on domestic factors. We believe the US sub-prime crisis will have only a limited impact on China's economy.'

Last week's slump in markets around the world seems to have had little effect on Shanghai. So it is all a worry but the knock-on effect in China will probably be very small.