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Dragons and Lions, Oh My!

Written by Brian Hicks
Posted December 23, 2005

Banking in China can be confusing. Staying this summer in the western province of Qinghai, I did not have access to more than one bank that could change U.S. dollars or make a withdrawal from my bank account using my check card.

Not that I'm complaining - the fact that one can draw on American bank from China at all is pretty incredible - but my quest for the right bank name in Qinghai's capital city, Xining, was Arthurian in its length and in the resolve it required of me.

There was the Industrial and Commercial Bank of China, People's Bank of China, China Construction Bank, Agricultural Bank of China, and oh yeah, the Bank of China.

The Bank of China was the one I was needed, and so I was directed to find "the second set of dragons on the right." These instructions soon became moot, as right became left and I was thrown the unexpected curveball of not only statuary dragons but lions as well.

At long last, and after piecing together broken English and broken Chinese with several tellers shocked to see a Caucasian face, I found the right one.

Unleashed Abroad

The upswing in the Chinese housing market has had an astronomical trajectory. I myself have cited the rise of Shanghai skyscrapers as proof of China's boom. But sometimes booms go bad.

The price of a prime Shanghai condominium is now 55x the Chinese yearly median household income. The British, by comparison, have a housing market where most homes cost 5.5x household income. That amounts to a balloon, if not a bubble, and wealthy Chinese are starting to realize the absurdity of the situation, refusing to pay so much.

For China Construction Bank and many others whose vaults finance developments from Harbin to Guangzhou, this means they should be worried about getting their money back as thousands of units will sit empty without tenants and once starry-eyed builders stare down the barrel of bankruptcy.

China Construction Bank, not by coincidence, was the largest Asian IPO ever listed by a non-Japanese party when it went up on the Hong Kong exchange this year. Bank of China plans to file this month, and now Morgan Stanley and its ilk are grooming CCB and others for American listings.

CCB's opening price was listed at almost twice book value, but it was extremely successful due to investor optimism and desire to get in on the back end of the Chinese boom.

I tell you now, as I told Brent Clanton on Biz Radio Network this week, that I encourage investors to put their money in the front end. That means investing in ideas and the products that will help China build worldwide brands and competitive, home-grown technology for its own markets and overseas.

Nevertheless, the finance industry in China has a huge role to play as the Chinese economy proves itself to be legitimate. This means cleaning up the sector, decreasing the number of defaulted loans (and not only by sweeping them under the rug into holding companies), and successfully managing the country's whopping foreign reserve holdings, which could hit 1 trillion USD by the end of 2006.

Stay tuned for more on the Chinese banking industry's transition from multi-headed state-run sugar daddy to hard-nosed competition.

But first, an AMD update..

 

AMD Chart

 

 

As you can see here, since I first recommended AMD early this November, the spunky chipmaker has been taking its Flintstones vitamins.

At that time, AMD had 39 cents of earnings per share. Analysts hoped for double that, $.78 per share, by late 2006. Today we already see 68 cents per share, meaning that AMD is speeding past even the most optimistic estimates.

If you bought AMD at my first mention, at 24 bucks, you've experienced a $6 per share return already. That's a 25% return in just over a month and a half!

Also, AMD has recently spun off its Spansion flash memory division into an IPO, teaming up with Fujitsu to set free a money-loser that AMD thinks can do better on its own. This was a smart move, trimming some fat and leaving the company to worry about processors alone.

I consider AMD's major asset to be the fact that it is NOT Intel. As the other major player in the processor business, AMD has successfully cast Intel (which, by the way, is foundering and now priced below AMD) as the Microsoft-Goliath of its industry. Intel's management is big on verbally disparaging competitors and quietly boxing them out of consumer markets.

On December 16, a Japanese court ruled in favor of AMD that Japan's Fair Trade Commission must release Intel-related documents as part of AMD's charge that Intel has waged "a pervasive, global scheme to coerce Intel customers from freely dealing with AMD to the detriment of customers and consumers worldwide."

Investors don't like a company that has gotten too big for its britches, and they also don't like chip designers whose advances are based entirely on groundwork that is inherently flawed. That's what techies worldwide say about Intel's core technology when compared with AMD.

Asia will be the battleground of the next generation of microprocessor industry growth, and AMD and Intel should both expect a good fight. It's time to choose sides, and many are lining up with AMD -- not least because it has doubled its China market share within a year! I believe that AMD has the vision, the credibility, and the funds to sustain growth like we've already seen.

- Sam Hopkins


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