Dear China - It Aint Over Yet !

On this last day of the year 2011 it seems appropriate to write this blog

David Nealis in Shanghai

Dear Nation of China,

  Welcome to the world of (almost) free markets, your rapid double digit growth might be slowing now, but that doesn’t mean in the decades to come you will not see it again.

I say these things because I keep hearing very pessimistic statements coming out of China and I believe this is just the beginning of their long journey into a free market economy

Speaking at a briefing in mid December Yu Bin , Director General of the Department of Macroeconomics Research at the State Council’s Development Research Center said the days of double digit growth were “ Gone Forever"

Yu suggested that the government should increase “inflation tolerance” to provide more flexibility for further economic reform, the readjustment of China’s growth model and the liberalization of controlled prices for some resources. Yu stated that rising labor costs, state monopolies, asset bubbles, and rising commodity prices as the reasons behind long term inflation.

And in the short term I believe he is right, but China is a nation filled with very entrepreneurial people and their journey into the free markets has just begun.

Best Regards,

David Nealis

ROK Special Forces to patrol the Yellow Sea

This article featured in the South China Morning Post, shows us the escalating tensions in the Yellow Sea between South Korea and China can put the region into chaos if the Chinese do not control their fishing fleet. With 3000 Chinese boats fishing illegally in South Korean water per day and more than 475 Chinese boats seized by the South Koreans this year it is only a matter of time before there is another conflict.

Elite troops to patrol fisheries

Seoul outlines tough new measures to crack down on Yellow Sea poaching and protect coastguards after officer killed while boarding Chinese boat

South Korea plans to use armed military Special Forces to spearhead its battle against illegal fishing, officials announced yesterday following the killing of a coastguard officer by a Chinese boat captain. The coastguard was stabbed to death and a second was wounded on December 12 after they boarded a boat in the Yellow Sea's rich fishing grounds.

The death - the second of a coastguard at the hands of Chinese fishermen in less than four years - sparked widespread anger. Seoul urged Beijing to crack down harder on illegal fishing and lawmakers sought tougher punishment of violators.

The prime minister's office announced plans to spend 932 billion won (HK$6.3 billion) between 2012-15 on better equipping its forces as part of a crackdown on poaching. "Firearms that were provided to only two out of the eight crew on a high-speed vessel were given to everyone last Wednesday," said Lim Jong-ryong, the head of the prime minister's office.

Lim said guidelines would be simplified so that officers can use firearms whenever their lives are threatened. Military Special Forces would be recruited to serve on Special Sea Attack Teams and 191 new officers would supplement the 342 men currently on the teams. The office said up to 3,000 Chinese boats fished daily in South Korea's exclusive economic zone from April to May and October to December this year. Some 475 boats were seized so far this year compared with 370 in the whole of last year. When stopped, the crews often fight back with metal pipes and knives or lash their boats together to deter boarders.

The South's 18 high-speed ships patrolling the Yellow Sea are expected to be replaced by faster vessels. The number of larger ships will be increased to 27 from 18. Chinese crews seen as major offenders would have their catches and fishing equipment confiscated, in addition to being fined. The maximum fine will be doubled to 200 million won, and a repeat offender would face an even larger penalty.

In October, the coastguard said it used tear gas and rubber bullets to subdue Chinese fishermen wielding clubs and shovels. Twenty-one Chinese were detained and released after paying a fine.

Twelve months ago, a Chinese boat overturned and sank in the Yellow Sea after ramming a South Korean coastguard vessel. Two Chinese crewmen were killed. Three Chinese detained after that incident were freed following protests from Beijing. The Chinese skipper accused of the latest killing has reportedly admitted the offence and expressed regret. The incident escalated tensions between the two countries.

In Seoul, protestors demonstrated outside the Chinese embassy. The following day in Beijing, someone fired a small ball-bearing-like projectile at the South Korean embassy, damaging a window.

Is the Flight of Capital from China Aiding in QFII Approval ?

It seems that the flight of capital from China is putting pressure on government officials to grant more QFII (Qualified Foreign Institutional Investor) program approvals. 

The newly appointed Chairman of the China Securities Regulatory Commission (CSRC) Guo Shuqing said earlier this month that they would speed up approvals under the QFII program. The Chinese government has approved almost US$1 Billion in quotas for foreign institutions this year and in the month of December five foreign institutions were granted QFII status which is scene as a very fast approval rate. The QFII program was launched in 2003 to allow qualified foreigners to purchase Chinese stocks and bonds; the total combined quota for investment is only at 21.6 billion. 

Under the QFII program the CSRC grants licenses to qualified foreign intuitions but foreign exchange regulator SAFE grants the quotas.  

Some analyst believe that a fear of a hard landing in China by local officials has recently sped up the QFII approval process to attract capital into the market as well as produced new rules allowing the Hong Kong subsidiaries of mainland brokerages and fund houses to raise offshore RMB to invest the RQFII program (Renminbi Qualified Foreign Institutional Investor). 

The official program that allows outflows of capital from China; the QDII (Qualified Domestic Institutional Investor) has grown at a rapid pace. QDII quotas have reached US$ 74.9 Billion since the third week of December of this year a US$ 820 Million raise over 2010’s US$ 68.4 Billion.

David Nealis at the China Financial Futures Exchange

There are a variety of reasons for this flight of capital from China, for us foreign investors it is having some positive policy reactions by Beijing, but what risks lay a head for us? It seems like 2012 the Year of the Dragon is going to bring us an exciting year in China.

The Definition of an Offshore Oil Platform

In the coming year of 2012, I have decided to make some changes to my blog, I hope to have some interviews with industry professionals and also offer some educational blog entries in-between the typical blogs I post.

Often my blogs involve the energy industry so over the next few months I will be providing a series of educational blogs on terms & equipment used in the industry. This blog entry starts a series on off shore drilling platforms; I hope you find them useful.

 This is the definition from Wikipedia of an Offshore Oil Platform

Oil Platform P-51 off the Brazilian coast is a semi-submersible platform.

An oil platform, also referred to as an offshore platform or, somewhat incorrectly, oil rig, is a large structure with facilities to drill wells, to extract and process oil and natural gas, and to temporarily store product until it can be brought to shore for refining and marketing. In many cases, the platform contains facilities to house the workforce as well.

Depending on the circumstances, the platform may be fixed to the ocean floor, may consist of an artificial island, or may float.

Remote subsea wells may also be connected to a platform by flow lines and by umbilical connections; these subsea solutions may consist of single wells or of a manifold centre for multiple wells.

History

Around 1891 the first submerged oil wells were drilled from platforms built on piles in the fresh waters of the Grand Lake St. Marys (a.k.a. Mercer County Reservoir) in Ohio. The wide but shallow reservoir was built from 1837 to 1845 to provide water to the Miami and Erie Canal.

Around 1896 the first submerged oil wells in salt water were drilled in the portion of the Summerland field extending under the Santa Barbara Channel in California. The wells were drilled from piers extending from land out into the channel.

Other notable early submerged drilling activities occurred on the Canadian side of Lake Erie in the 1900s and Caddo Lake in Louisiana in the 1910s. Shortly thereafter, wells were drilled in tidal zones along the Gulf Coast of Texas and Louisiana. The Goose Creek field near Baytown, Texas is one such example. In the 1920s drilling was done from concrete platforms in Lake Maracaibo, Venezuela.

The oldest subsea well recorded in Infield's offshore database is the Bibi Eibat well which came on stream in 1923 in Azerbaijan. Landfill was used to raise shallow portions of the Caspian Sea.

In the early 1930s the Texas Company developed the first mobile steel barges for drilling in the brackish coastal areas of the gulf.

In 1937 Pure Oil Company (now part of Chevron Corporation) and its partner Superior Oil Company (now part of ExxonMobil Corporation) used a fixed platform to develop a field in 14 feet (4.3 m) of water, one mile (1.6 km) offshore of Calcasieu Parish, Louisiana.

In 1946, Magnolia Petroleum Company (now part of ExxonMobil) erected a drilling platform in 18 ft (5.5 m) of water, 18 miles off the coast of St. Mary Parish, Louisiana.

In early 1947 Superior Oil erected a drilling/production platform in 20 ft (6.1 m) of water some 18 miles off Vermilion Parish, Louisiana. But it was Kerr-McGee Oil Industries (now Anadarko Petroleum Corporation), as operator for partners Phillips Petroleum (ConocoPhillips) and Stanolind Oil & Gas (BP), that completed its historic Ship Shoal Block 32 well in October 1947, months before Superior actually drilled a discovery from their Vermilion platform farther offshore. In any case, that made Kerr-McGee's well the first oil discovery drilled out of sight of land.

The Thames Sea Forts of World War II are considered the direct predecessors of modern offshore platforms. Having been pre-constructed in a very short time, they were then floated to their location and placed on the shallow bottom of the Thames estuary.

Types

Larger lake- and sea-based offshore platforms and drilling rigs are some of the largest moveable man-made structures in the world. There are several types of oil platforms and rigs:1, 2) conventional fixed platforms; 3) compliant tower; 4, 5) vertically moored tension leg and mini-tension leg platform; 6) Spar ; 7,8) Semi-submersibles ; 9) Floating production, storage, and offloading facility; 10) sub-sea completion and tie-back to host facility.

 Particularly large examples of platforms

A 'Statfjord' Gravity base structure under construction in Norway. Almost all of the structure will end up submerged.

The Petronius Platform is a compliant tower in the Gulf of Mexico, which stands 2,000 feet (610 m) above the ocean floor. It is one of the world's tallest structures.

The Hibernia platform in Canada is the world's largest (in terms of weight) offshore platform, located on the Jeanne D'Arc basin, in the Atlantic Ocean off the coast of Newfoundland. This gravity base structure (GBS), which sits on the ocean floor, is 364 feet (111 m) high and has storage capacity for 1.3 million barrels (210,000 m³) of crude oil in its 278.8-foot (85.0 m) high caisson. The platform acts as a small concrete island with serrated outer edges designed to withstand the impact of an iceberg. The GBS contains production storage tanks and the remainder of the void space is filled with ballast with the entire structure weighing in at 1.2 million tons.

Royal Dutch Shell is currently developing the first Floating Liquefied Natural Gas (FLNG) facility, which will be situated approximately 200km off the coast of Western Australia and is due for completion around 2017.^[9] When finished, it will be the largest floating offshore facility. It is expected to be approximately 488m long and 74m wide with displacement of around 600,000t when fully ballasted.

Maintenance and supply

A typical oil production platform is self-sufficient in energy and water needs, housing electrical generation, water desalinators and all of the equipment necessary to process oil and gas such that it can be either delivered directly onshore by pipeline or to a floating platform or tanker loading facility, or both. Elements in the oil/gas production process include wellhead, production manifold, production separator, glycol process to dry gas, gas compressors, water injection pumps, oil/gas export metering and main oil line pumps.

Larger platforms assisted by smaller ESVs (emergency support vessels) like the British Iolair that are summoned when something has gone wrong, e.g. when a search and rescue operation is required. During normal operations, PSVs (platform supply vessels) keep the platforms provisioned and supplied, and AHTS vessels can also supply them, as well as tow them to location and serve as standby rescue and firefighting vessels.

Crew

Essential personnel

Not all of the following personnel are present on every platform. On smaller platforms, one worker can perform a number of different jobs. The following also are not names officially recognized in the industry:

·    OIM (offshore installation manager) who is the ultimate authority during his/her shift and makes the essential decisions regarding the operation of the platform;

·   operations team leader (OTL);

·  offshore operations engineer (OOE) who is the senior technical authority on the platform;

·  PSTL or operations coordinator for managing crew changes;

·   dynamic positioning operator, navigation, ship or vessel maneuvering (MODU), station keeping, fire and gas systems operations in the event of incident;

·    automation systems specialist, to configure, maintain and troubleshoot the process control systems (DCS), process safety systems, emergency support systems and vessel management systems;

·    second mate to meet manning requirements of flag state, operates fast rescue craft, cargo operations, fire team leader;

·    third mate to meet manning requirements of flag state, operate fast rescue craft, cargo operations, fire team leader;

·  ballast control operator to operate fire and gas systems;

·    crane operators to operate the cranes for lifting cargo around the platform and between boats;

·    scaffolders to rig up scaffolding for when it is required for workers to work at height;

·   coxswains to maintain the lifeboats and manning them if necessary;

·  control room operators, especially FPSO or production platforms;

·   catering crew, including people tasked with performing essential functions such as cooking, laundry and cleaning the accommodation;

· production techs to run the production plant;

·   helicopter pilot(s) living on some platforms that have a helicopter based offshore and transporting workers to other platforms or to shore on crew changes;

·   maintenance technicians (instrument, electrical or mechanical).

Incidental personnel

Drill crew will be on board if the installation is performing drilling operations. A drill crew will normally comprise:

·  Toolpusher

· Driller

·  Roughnecks

· Roustabouts

·Company man

·  Mud engineer

· Derrickhand

·Geologist

·Welders and Welder Helpers

Well services crew will be on board for well work. The crew will normally comprise:

·Well services supervisor

·Wireline or coiled tubing operators

· Pump operator

The next few educational blog enteries will dive deeper into the various types of Offshore Oil Platforms.

Shanghai Tang’s Mongolian Yurts

I like to occasionally write about great things that I see and I must write about Shanghai Tang’s solution to a problem that would have severely damaged most retail companies.

The executives at Shanghai Tang had a huge problem but they came up with a very clever way to solve that problem and I feel it is worth sharing with you.

Shanghai Tang lost some critical retail space before the Christmas season, they lost their flagship store in Central over 5 months ago and its Pedder Street store closed in October. For those not familiar with Hong Kong’s retail market; there is space and rental war going on due to the limited high end shopping space in this market.

The folks at Shanghai Tang came up with a temporary solution to their problem; they decided to have a tent sale at a prime location. But being the creative geniuses that they are this wasn’t any ordinary tent sale; they made designer Mongolian yurts and placed them on the top of Central Pier 4, creating a festive environment centered on the Mongolian yurts, where inside you could purchase Shanghai Tang merchandise. To give the experience an added edge they designed a limited edition Mongolian collection, the nomadic theme gave the shopping an exotic experience.

Shanghai Tang’s Mongolian yurts where an excellent example of their genius, from it they reaped huge amounts of free publicity and crowds of people shopping in the yurts.

Shanghai Tang is a company I enjoy very much; I look forward to their new flagship store in Central called Shanghai Tang Mansion which plans to open this March. I also look forward to this Chinese New Year’s design collection, for the Year of the Dragon.

Is Kazakhstan Starting to Crack?

Last Friday was the 20th anniversary of Kazakhstan's independence from the former Soviet Union; it was also the day Kazakh President Nursultan Nazarbayev declared a state of emergency in the western town of Zhanaozen, where a seven-month-long strike erupted into violence turning Kazakhstan's independence celebrations in chaos. 

Resource-rich Kazakhstan is Central Asia's largest and most successful economy it is the world's 18th largest oil producer. Over the last decade Kazakhstan has had the image of stability and openness to foreign investors. But the mainly Muslim nation of 17 million people has seen an increase this year in bombings and shootings, mostly blamed on Islamist extremists. 

This week, communications were restored with the oil city Zhanaozen. Rioters looted bank ATMs, set a blaze the mayor's office, a hotel and the offices of a Kazakh-Chinese joint venture company that had fired the workers last May. Officially 15 people were killed, 110 others wounded and 46 buildings were burned, opposition party members are saying the numbers are much higher.

In the short term, the riots have hurt Kazakhstan's image as an investor-friendly stable Central Asia nation and Kazakh President Nursultan Nazarbayev’s hard nose tactics against the rioters might make some investors nervous, but the Kazakh government is trying hard to defuse the situation by promising to find jobs for thousands of workers who have been on strike since last May.

Let’s hope the world's 18th largest oil producer and Western friendly nation finds a peaceful solution to their domestic unrest.

North Korea's Kim Jong Il is dead , now what?

Kim Jong Il

Kim Jong Il was an enigma, that western politicians could not truly understand, there are so many questions they didn’t have answers for; his place of birth, his age, his original name, why the North Korean propaganda machine says a swallow sang to the Koreans of his birth, there was a double rainbow over the mountain of his birthplace and why new star was born in the sky. Westerners also didn’t know him well enough to know when he said he would stop his nuclear program, that he wasn’t being honest with them. I am pretty confident that most western politicians also will not understand his son the twenty something year old new leader of the nation. Western leaders are already calling on him to make changes in the North, what they haven’t realized is he was chosen to lead because he is more like his father than his other siblings.

As I listen to analyst ponder the possible changes in the future of North Korea, it brings back memories of the days when I attended Yonsei University in Seoul South Korea 1990, my group of friends and I use to  debate the future of the Koreas while drinking soju, chewing on dry cuttlefish and smoking Korean cigarettes (the type with ginseng in them were my favorite, I thought it was healthier ha ha ha) as young foreign students we assumed this was apart of the Korean experience.

 

David Nealis in Seoul while attending Yonsei University 1990

Our debates would often go on late into the night, though we might have had different views on how the unification would happen, we all had high hopes that when Kim Il Sung passed on that his playboy son Kim Jong Il would fail and that unification would happen.

Flash forward 21 years and  Kim Jung Il has passed on as well, days later when the North Koreans released the news of his death the Kospi  fell about 5% and then closed  at -3.43%, minus any mischief from the North I believe it will quickly rebound to normal trading levels.

As Kim Jung-un solidifies his base of power it will be interesting to see which old guard North Korean generals suffer from the Pyongyang Flu this winter and what international incidents the North will cause to bribe the world into supplying them with aid.

There could be some exciting days ahead of us to trade the Korean Won and the Kospi.

My concern for the region is if Kim Jung-un is unable to keep control of the nation and that it will designate into chaos and the people of the North will suffer more than they have already.

It would be nice to fantasize about the unification of North and South Korea, but minus some catastrophic event, I do not see a reunification, actually I see the North becoming closer and closer to being a de facto semiautonomous zone of China.

In the months to come, I am sure that there will be more to blog about on this subject.

Lippo Centre Fung Shui

Lippo Centre

This morning in the South China Morning Post there was a very interesting article titled “Iconic HK buildings show money-making is cyclical” , I should point out that this is printed in the section labeled “fung shui” . What drew me most to the article is the image of my office building (The Lippo Centre) and a dollar sign with the words next to it saying “Byebye”, it was slightly alarming.

The section about the Lippo Centre of the article by Jin Peh the Fung Shui Master for the SCMP said:

“the main fung shui issue for the Lippo Centre is the running waterfall, whereby water seeps out along the staircase of the building- thereby, making it difficult for occupants to keep hold of their profits.
Be this as it may, this suits foreign companies that make money in Hong Kong –before sending their profits home.” 

I have admired this building since the very first time I came to Hong Kong back in 1991, back then it was called the Bond Center. People sometimes refer to this building as the “Koala Tree”, but I do not see 2 koalas climbing up a tree, I see 2 super charged cam shafts propelling a well made machine forward, it reminded me of childhood toys come to life, Micronauts or Transformers on display in the Hong Kong skyline.

I hope Jin Peh’s next article gives some fung shui tips on how to counter the effects of the Lippo Centre’s negative out flows, in the meantime the next time I see the water fountain turned off for repair I won’t complain as much. I wonder on Monday how full the suggestion box will be with suggestions to turn the waterfall into a rock garden.

On a bigger picture, this article is making me think;  is a good time to refocus on the USA market, has the USA hit the bottom, are we ready to start rebuilding America yet? And if so am I ready to return to the states? Until I know those answers I am going to just try to avoid falling into the water fall at the Lippo Centre.

What Are Dim Sum Bonds?

What Are Dim Sum Bonds?

Recently I posted a blog about “Dim Sum Bonds”

http://davidnealis.blogspot.com/2011/12/baosteel-issues-largest-corporate-dim.html

And I have had some reader feed back asking for more details on Dim Sum Bonds, so I am posting the definition from Investopedia with a link to their website for anyone who would like more information.

   

A business associate of mine, Alan Rohrbach and I were recently talking about Dim Sum Bonds and we jokingly came to the conclusion that Dim Sum Bonds are a sophisticated but light Hong Kong wrapping of an often delicious Mainland Chinese filling. Time will tell if this new delicacy continues to attract the palate of investors.

Definition of 'Dim Sum Bond'

A bond denominated in Chinese yuan and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to yuan-denominated assets, but are restricted by China's capital controls from investing in domestic Chinese debt. The issuers of dim sum bonds are largely entities based in China or Hong Kong, and occasionally foreign companies. The term is derived from the Chinese cuisine that involves serving a variety of small delicacies and is especially popular in Hong Kong.

Investopedia explains 'Dim Sum Bond'

The dim sum bond market is still in its infancy but is expected to grow rapidly over time. As of October 2010, only $1.46 billion of dim sum bonds had been issued for the year, amounting to about 1% of $145 billion of yuan-denominated debt issued in mainland China.

http://www.investopedia.com/terms/d/dim-sum-bond.asp#ixzz1ggO2kq6A

The Shanghai Stock Exchange is Ready for the World

David Nealis in Shanghai

Recently the Shanghai Stock Exchange stated it is “basically ready” to let foreign issuers sell stock, opening the door for companies like CAT, McDonalds, HSBC and Coke to list in the world’s second biggest equity market.

Xu Ming, executive vice president in charge of the international stocks board, said trading should start “as soon as possible when the time is ripe” in a Nov 11 interview at the Shanghai Stock Exchange. Xu went on to say while there’s no timetable that the exchange has finished work on technological and regulatory requirements.

Clearly they are interested in firms that have exposure to China “We favour companies of good quality, that are stable and are of fairly large scale,” Xu said. “We need to consider the protection of small investors and see if the operations of the companies carry risks.”

There has been quite a bit of positive feed back from industry professionals, the common thinking seems to be it will stimulate greater interest in the Greater China region.

I believe there is some value to global brands to list on the Shanghai Exchange;

First it gives international firms exposure to China’s 85 million individual investors who are restricted from buying shares abroad by China’s capital controls, firms would benefit from any gains in the value of the RMB, and this could be very good marketing for the firm’s products in the China market.

 The trading of foreign equities on the Shanghai Stock Exchange would be the big step forward for Shanghai’s drive to become a global financial center by 2020. Though in all honesty I would be much more excited if foreigners were able to trade in China (excluding QFII).

Chaoda Modern Agriculture (Holdings) Limited in the spot light

www.chaoda.com

Chaoda Modern Agriculture (Holdings) Limited (SEHK: 682) (OTCBB: CMGHF) is a leading grower of fruits and vegetables in China. The majority of their fruit and vegetable production is sold as fresh produce primarily in the People’s Republic of China.

Chaoda Modern Agriculture was established in 1994 by Kwok Ho, in Fuzhou, Fujian province, China and is now incorporated in the Cayman Islands, has been publicly traded on the Hong Kong Exchange since 2000 and is headquartered in Wanchai, Hong Kong.

According to their website Chaoda is integrated and in control the entire production chain from seeds to processing and marketing of their products, which include;

bell peppers, broccoli, carrot, cauliflower, various tomatoes, Chinese cabbage, Chinese radish, choi sum, cucumber, eggplant, various hot peppers, iceberg lettuce, loquat, various melons, mushrooms, onion, potato, pumpkin, various rice, sugar snaps, summer squash, sweet corn, sweet potato, tangerine, tea, timber, watermelon, and welsh onion.The company also breeds and sells livestock, including Boer goats, Dorper sheep, and dairy cattle.

 2011 has been a rough year for Chaoda; it has been the subject of a series of allegations of fraud and of insider trading by its executives, which have resulted in falls in its share price. Chaoda has been fighting the allegations and they have been taking the fight to the local media , recently Chairman Kwok Ho and finance director Andy Chan Chi-po stated that they “ do not accept” the charges against them.

Here are two articles relating to Chaoda’s resent corporate governance issues:

Financial Times - http://www.ft.com/intl/cms/s/2/3434c82a-e8c5-11e0-902c-00144feab49a.html#axzz1gOugKu8w

Bloomberg - http://www.businessweek.com/news/2011-09-26/chaoda-slumps-in-hong-kong-trading-on-misconduct-lawsuit.html 

Another issue the company is facing is a potential issue with bondholders after the company breached a covenant in its $200m of convertible bonds. Holders of the bonds , which are due to mature in 2015 can demand the company to repay them the principal on the bonds , if Chaod’s shares are suspended from trade for more than 60 consecutive days, which the time period for this has already passed.

As one might expect their rating has been downgraded, Moody’s downgraded Chaoda from Ba3 to B3, which is from “investment grade” to “junk”.

Chaoda is in a very exciting space, but it looks like there are some dark days a head of them and if they fall what other firms will go with them? It seems like we all will learn more over the next 6 months.