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CFD or Contract for Difference

Just receive this 'China stock market will crash' article from my stockbroker. Written by Mr Andy Xie - the ex-Morgan Stanley economist that was sacked for making lousy comments about Singapore Dec World Bank meeting here. Office Email kana hijacked and distributed. He become doomsday cult chief now! Guess he didn't predict his sacking. Or maybe can short my Saxo STI index CFD now?

For those who want to read, here it is:

Wednesday, April 18, 2007

Fit to burst

ANDY XIE

China's stock market is now a full-blown financial mania. If left unchecked, it could mushroom massively in the coming months. Its subsequent bursting may destabilise the society and complicate economic development. Government should intervene to cool the market by cracking down on market manipulation, increasing leveraging cost, and imposing tax on short-term capital gains. College students are putting their tuition money and living expenses into the market. White-collar workers trade until the market close and then begin to work for their paying job. Stroke-stricken retirees get wheeled into branches of securities firms to trade. Some even mortgage their apartments to put money into the market. From 18-year-olds to 80-year-olds, from doctors to janitors, it seems that everyone is playing the market.

As making money in the stock market appears so easy, many companies are abandoning their core businesses for financial games. Businessmen who have become rich in the economic boom are putting their working capital into the market. Market valuation is getting out of control. Most stocks appear to trade above 40 times earnings. Further, earnings are exaggerated by the stock market itself. Banks make money from selling funds. Insurance companies book capital gains. Regular companies are also making big profits playing their own capital. A stock-market bubble usually gets into trouble when it trades above 60 times earnings. China's is getting close. When the bubble bursts, there are serious social consequences. College students who lose their tuition money will certainly cause social instability.

Pensioners who have lost everything will add to the social welfare burden. As the bubble is a redistribution game, the losers are sure to resent the winners who usually have inside information. China is bubble-prone for two structural reasons and one cyclical. First, it is experiencing capital surplus. Its one-child policy is a major reason for the high savings rate. This factor will keep China bubble-prone for another 20 years until the baby-boomers born before the one-child policy are mostly retired. Second, China's public psychology is very buoyant due to rapid industrialisation and urbanisation that generate rapid productivity growth. The visibility of the cake expanding leads to greed and speculative  fervour. Third, and cyclically, appreciation expectation for China's currency is keeping local money at home and foreign money flowing in. The hoarding of China's currency is keeping interest rate and, hence, speculation cost low.

The mainland's economic development is far from over. It cannot afford to waste the energy of its best and brightest in financial speculation. The private sector is woefully underdeveloped. Despite three decades of economic boom, China does not have one world-conquering company. The service sector is yet to combine quality and scale efficiently, which is the foundation for a modern service economy. China needs her best and brightest to build the corporate sector first, and not to waste all the energy playing asset markets.

China's per capita income is only US$2,000 and it is not in a position to experience prolonged stagnation. When the cake stops expanding for a few years, social instability is likely. This is why China cannot let the bubble run its own course.

In the long run, there is an alternative to asset speculation. The surplus liquidity could be channelled into creating and building new companies. Because of China's size, almost anything can be scaled up to improve efficiency and create value. China could encourage money to flow into venture capital or direct investment to fund startups or expansion of small companies. In that regard, China must build up its own venture capital and direct investment funds. The foreign funds that dominate the scene at present are too faddish in their investment approach. Their piling-in becomes another factor in inflating the bubble. As the mainland economy becomes diversified, business creation opportunities become too complicated for fly-in types to understand. The country urgently needs its local investment professionals who can raise local money to fund local businesses for local demands. The first policy action is to pass laws that allow qualified financial professionals to set up funds to raise local money for direct investment. While opening alternatives to excess liquidity is a solution, it takes time to work. The government should take action now to contain the bubble as a stop-gap measure. First and foremost, the government must crack down on market manipulators who take advantage of the bullish sentiment and suck public money into worthless stocks. When the bubble bursts, these stocks can easily drop by 90 per cent. As with the property tightening, the stock market tightening should start with fraud investigations.

Second, the government must stop bank loans being diverted into the market. Securities firms appear to be returning to the market with their own money again. They were mostly bankrupt a couple of years ago but bank lending kept them afloat. Even though they have made some money in this bull market, many are doing the same again by stir-frying selected stocks. Such practices benefit insiders and, when the bubble bursts, leave bad debts. Listed companies that invest their working capital should also be investigated. The government has already ruled against this practice, but the compliance is still uncertain. If a company is private and invests its own money, the government does not have to intervene. However, if companies borrow from banks in the name of funding real business activities but speculate in the stock market instead, it endangers banks. Third, the government already has a 20 per cent capital gains tax and should enforce it for short-term trading gains. Stocks that are bought and sold within a month are a case in point. The full 20 per cent should apply.

If the holding period is longer than two years, the tax could be exempt. Such a policy would slow the market down, cool short-term speculation and force the market to become more long-term and value-oriented. The time for action is now. The market is in a frenzy and the bubble can mushroom quickly. The longer the government waits, the bigger the disturbance to social stability when the inevitable burst comes.

Andy Xie is an independent economist.

Published in the South China Morning Post.

 

 

iPunter,

I am also a sufferer of  this "a broker makes you broke". Fortunately we all learned the painful lesson at some time in our life. So we write off  and then move on.

I am very glad to discover the SJ forum. Many wisdoms available, many good tips.

Also, fortunately, the technological advances happened over many years have enable us to trade on-line for stocks in Singapore, HK, USA, UK, etc.. That gaves investors a lot of exposure. 

I hope the spirit of SJ would continue, for everyone's benefit.

Cheers and thanks


 

 

One of my buddies once said in jest...

"A broker makes you broke"....

But seriosuly... brokers are brokers and not all are analysts.

Better to get in touch with Singaporegal, Elfin, Victorian, etc. etc. for example, and get them if possible to analyse your favourite stock/s for you... :) 

 

As Warren Buffett famously said, "Never ask a barber if you need a haircut." So avoid asking broker on investing & trading advice. Anyway, I signed up Saxo CFD trading account with NFG Capital Partners. They give me a online trader account and a broker phone number. But cheaper to trade online. Transaction cost is important in trading.

 

problem is during office hour, there is usually no enough time to check the internet, and companies are monitoring web access and internet email. Hence, we still need to rely on broker. Broker also has a better feel of the market and can give good advice.

 

 

Since PEOMS is discuss here, may I know how is the ProTrader platform especially on the speed and whether any hang-ups?

Thanks in advance for response.

 

 

 

The level of service rendered by the broker actually depends if you are a big account. Have you met one that ask you to consider trading via internet rather than calling the broker??. 

 

Hi, i just applied for an account with POEMS. glad to hear some positive feedbacks :P

 

Yup... that's exactly what I meant by good service,

Though I also trade with a couple of other brokers too, I find POEMS excellent.

 

I have no problems with Poems service too. In fact there was one time I accidentally sold more shares than I did and my broker was so nice that he covered it for me.

That's great service!

 

 

In my experience, I found POEMS customer service to be excellent, though sometimes it's difficult to get through the phone at peak periods... 

 

Yes, it's better to shop around and compare them...

Then stick to one... :)

 

I have a horrible trading experiences with Philip Securities dealer. Poor back office support. :O(

Using DBS Vickers for stock now. So better sign up with Saxo Bank for stock CFD...

 

 

I think NFG Capital Partners is a wholesale online broker distributing financial products online. The email stated 5% off Saxo Capital Markets trading commission of 0.2% on STI stocks. Just sign up with Saxo Capital Markets with the broker code and I should enjoy the rebate from NFG.

I have a Phillip Securities poem account but their CFD have a 30days contra period. Not worth it and more restrictive. But plenty of write up there.

 

 

HeokBS, how much discount is NFG Capital Partners giving for trading CFD with them?. How does it work?.

 

CFD is a kind of leverage giving you 5x Your Cash Deposit. Risks are inherent. Read this link from POEMS website for a better understanding.

http://www.poems.com.sg/cfd/

Cheers.

 

Actually CFD is a simplified version of an Equity Swap!! It was created by Smith New Court in the 90s.

Regards, goldcarps

 

CFD gives you leverage .... allows you to hold large positions with little money. But then you can also lose big big!