Why'd Buffett cleared all China Petroleum during Oct. 2007 ?

The days before and after the day of Warren Edward Buffett had cleared all China Petroleum (0857. HK) during Oct. 2007, what'd you had done, have been doing and will do ?

The below will tell you why Buffett cleared all China Petroleum during Oct. 2007 ?


China's export enterprises hav been facing multiple attacks in this year, that are the global economic slowdown , recession in the United States imports, labor costs, RMB appreciation and raw material prices, this "world factory" has been bleaking prospects increasingly.

China's high-cost factories have been unable to break

With low labor cost advantages, such as China's miraculous economic rise, bringing up to tens of thousands of manufacturing plants, but poor external economic environment, these are manufacturing exports has been playing the machine manufacturers to bring the operation of unprecedented crisis. The recent "Time" in a commentary to the days of Guangdong Tianji Wooden Products Co. To explore the object, described the true that China's factories have been facing the crisis .

Tianji annual exports 10 million U.S. dollars of children's toys and furniture, employ a total of 800 blood and sweat of workers. But good times never last, in the past two years, the annual cost of production increased by 30 %, in the highly competitive, simply can not arbitrarily raise prices. The company's chief executive Weilun Cheng said: "We are not a profit, if the next few months the situation is not changed, I will have to shutdown my plant ."

There are some changes, but more change is always more bad. Faced with high labor costs, RMB appreciation and soaring raw materials prices, the situation is bad enough. Coupled with the global economic slowdown and the United States almost full recession, caused an unprecedented test to low-end products manufacturing industry in China , much suffering, tens of thousands of factories may soon close down, hundreds of thousands of unemployed workers will face a dilemma.

Hong Kong-Asia Footwear Association Secretary-General Pan Li said that early in 2007, Huidong in Guangdong Province is home to 3,000 homemade shoe factory, but the past 15 months, as many as 500 closed . China National Textile and Garment Association tracking 44,200 textile factory and found that one-sixth of a loss last year, two-thirds just a draw. Pan Li said: "The manufacturing sector profits so low, just slightly packed, they should be closed down."

U.S. buy 19 % monthly average of about 90 billion U.S. dollars of China exports . But by the end of 2007, as the U.S. economy started to shake, China's export growth Fever (over the past few years the annual growth of 20% or higher) showed a clear slowdown. Compared with a year ago, in February fell 6.5 percent export growth, and economists expected a far cry from the 20%. The setback in exports mainly on the wind and snow caused power outages and traffic delays, but the weak U.S. demand are the worse results. February the total value export to U.S. also a rare decline 5.3%.

Over-investment bubble of the imminent construction

Although the world's second largest export country, China isn't like some other countries dependent on overseas trade. 2006 exports of China's GDP accounted for only 36.8 percent, lower than South Korea's 43.2 percent. But China has a very weak international demand, because too many new plans had been building in China in recent years . with getting the funds easily,China's economy roared ahead 10 digits each year, also got a large-scale expansion in heavy industry. For example, China's steel export value jumped 10 times from 2003 to 2007 , the output value increased from 5 billion U.S. dollars to 50 billion U.S. dollar.

In fact, the Chinese government has long aware of an investment bubble is forming. Therefore, in 2004, for economic and environmental factors, the Beijing authorities started to put pressure on the provincial and local officials, restrictions on aluminum, steel and cement factories of the expenditure; state-owned banks stop loans to industry. However, local officials often ignore the stop signal, more factories mean more jobs and more growth, which makes them good in front of their superiors. Not only that, local officials can obtain land for new building permits issued and often his partners ignore the enterprise risk , with the result that the construction of too many factories.

"Time " commented China's over-production as a metaphor for not braking the car. As long as the roads are still smooth, wild car can move forward. Once the run more than one hole in the road congestion, falling from a vehicle tyres will be. In recent years, the global economy thirst, factories have been expanding production capacity. For the period from 2004-07, can see the world's second strong record of economic growth, and strong demand import cheap products from China. But this era has been ending, and most economists have predicted that the global gross national product growth slowed down significantly in 2008. This slowdown, confirmed the Lehman Brothers companies economist Mingchun Sun forecast that this would "expose the Chinese overproduction." Asia Footwear Association Pan Li said : "Only such a big cake, when there are too many people want to eat, certainly some people to starve."

Cost is bound to rise again

In fact, some people have been starving, China's competitive advantage is cheap labour, but this advantage has been more passive. Over the past four years, was known as the "world factory" in China's southeastern provinces, labour costs increased by 50%, but the Beijing authorities passed a new labor law so that the situation only an added burden.
Hong Kong UBS economist Jonathan. Anderson said, China Southern manufacturers believe that the new law will increase labor costs driven by 10-25%. Among other things, the new law work every year of employment, laid off when there is a month of severance pay. Federation of Hong Kong Industries vice president Stanley Lau said: "In the export market continued to decline under the circumstances, if you wish to layoffs, then you will face many problems. Need to pay huge compensation."
The huge cost of raw materials can not be ignored. Although the RMB is slow, but has been keeping the appreciation against the US dollar, with comparing to 12 % appreciation in the passed 18 months , which makes China's exports to the world more expensive.

Factories crisis prognosticate social unrest

Layoffs may be a significant and serious consequences on the economy and society in China . Laid-off workers like the ghost of Legionella, roaming the streets looking for work is bound to make Beijing's economic decision-makers throughout the day worried about political consequences, and widespread social unrest. Lehman Brothers economist Sun said, Because the manufacturer was advanced nearby the cliff, China's stock market has been dropping sharply. Since many stock-listed companies, investing in stocks, stacked profits, Sun said: "A large dropping will make the low corporate profits and lead to a vicious circle."
China's fragile banks system, may be affected by loan delinquency, the impact of the closure of factories. Although the Bank of China in economy, the ability to reduce their accounts on the unusually high proportion of bad loans, but the reduced corporate profits will reduce the borrower's repayment ability. It is difficult to assess the entire banking sector and the manufacturing sector, but it is not difficult to imagine that when the manufacturing sector is unable to return the money ,the lender will been arrested at the situation, a Chinese-style credit crisis will come up.

China may be reborn after fired ?

Of course, the worst case scenario is not always true, the UBS Warburg's Jonathan Anderson may be too pessimistic, but he forecast China's export growth rate dropped by about 25% in 2008. He said: " manufacturers profitability may be facing the final test in 2008. if the manufacturing sector "Soft landing", China may be beneficial to the long run, because it will eliminate operators with low efficiency and promote China's productivity . All business cycle, "foundation time destruction" is inevitable, and now, China's economical policy-makers only can silently pray : " the future foundation will be greater than present the destruction."