RightSide Commentary -Internationals

 The theory that China would act to boost local stock markets post-Olympics did not last long, and Shanghai stocks have fallen back today. The slaughter, as always, is greatest among the best known big Chinese names. We tend to favor smaller, entrepreneurial Chinese ADR companies which rise and fall on their merits. Many are not listed in China at all although our picks too can suffer from a general market malaise.

    According to analysts, having hosted an Olympics tends to boost stock markets afterwards, by about 17% in the following year, without there having to be any government measures. And intervention can hardly be important to what is after all a Communist country.

    What may boost China too is the increasing globalization of its stock markets. The latest wrinkle in Hong Kong is the creation of Depositary Receipts there, allowing international firms to offer their stock on the local market. Citigroup has taken the lead in creating an HDR (Hong Kong Depositary Receipts) facility.

    But the real payback will come if Shanghai follows suit. Back in the 1930s, before the Japanese invasion and Mao, Shanghai was a world-class market where top world companies' stocks traded. If a new depositary receipts facility wins over the masters of Beijing, you will probably find several Hong Kong companies listing there, along with some old-timers like AIG and Hongkong and Shanghai Bank, which are American and British these days.

    Without a facility for creating Shanghai Depositary Receipts, SDRS, or whatever they get called, foreign stocks cannot trade in Shanghai because they would move solely based on Chinese demand. Exchange controls would stop the creation and dissolution of "SDRs" based on local demand. There would be no access to the underlying U.S. or British stock.

    If China combines liberalized access for foreign companies with some stock market boosting measures, it can avoid the risk of overheating and inflation. These risks are why the mythical market stimulus isn't now happening.

    Your editor has to admit to being totally flummoxed by the Georgia invasion. We vaguely met Mikhiel Saakashvili when he was a NY-based international lawyer, as he got involved in the U.N. investigation of the Rwanda genocide. He struck us as a lightweight. But then, so too did Binyamin Netayahu, so you don't want to take our impressions too seriously.

     Putin is a different matter. Although he is obviously much more educated and much less thuggish, he reminds me of Nikita Kkrushchev. First of all he does not give much of a hoot about international opinion, even if he would never bang his shoe on the desk at the U.N. Secondly, he is obsessed with Russia's standing in the world, and how other nations perceive its power. He is willing to be very brutal in exercising it.

     Moreover, Putin is a gambler, willing to test Western reactions by extremely dangerous moves. While not quite up to placing nuclear weapons in Cuba, as Khrushchev authorized, the attack on an independent Georgia is high-risk. (I have been reading a biography of Nikita by my Bronx High School of Science classmate Bill Taubman, who won a Pulitzer Prize for it, and that may have made me aware of the parallels.) 

     The Russian stock market is probably also not a major concern of the regime, so I do not think it will halt the bogeyman tactics. Nor will the falling ruble (which has been allowed to rise mainly to offset the risk of even higher Russian inflation.)

     A couple of corrections are in order here. First of all I wrote last week from Paris that the Nabucco gas pipeline had been cut by the Russian invading force. In fact, Nabucco is not built yet. The pipeline and ports being blocked are another system linking Azerbaijan to the Black Sea via Georgia (and avoiding Armenia.)

     Also I wrote yesterday that closed-end fund discounts had fallen because of higher stock prices and lower net-asset value levels. This would increase the discounts. What we are in fact seeing is stock prices which have fallen more sharply than the decline in NAV would warrant. Thanks to a reader for pointing them out.