China Mobile (tkr: 941 HK) - Establishment of China Mobile Finance Company

Are Chinese banks and local governments still solvent?  Recent actions by China Mobile seem to carry an ominous answer.

China Mobile announced the setting up of China Mobile Finance, whose primary business is in the "provision of financial management services" (read here for full announcement).  The details are very intriguing:

• China Mobile will be contributing RMB4,600million in capital with CMCC (China Mobile's parent company) contributing RMB400million for a total of RMB5,000million in capital.
• Of the scope of businesses (ten listed out with a catch all "other businesses as approved by CBRC"), what caught my attention were: (1) provision of guarantees, (2) trust loan and trust investment services, and (3) inter-bank lending business.
• Rationale of the transaction: "to find a solution to further strengthen the internal funds management and better control liquidity risks, and to fully and better leverage the advantages on capital resources to improve the overall economic benefits of the Group" and "build a scientific and efficient funds management platform, strengthen the centralized management on internal
  funds and optimize the allocation of resources.  It is also expected that China Mobile Finance
  will be able to improve the cash flow position of the Group, control liquidity risks, reduce
  finance costs, increase capital efficiency and provide financial management services."
• Connected transaction not subject to independent shareholders' approval and entered into after arm’s length negotiation between China Mobile and CMCC

Putting aside the corporate governance implications (whether this is "arm's length" or not), here is my interpretation:

• The rationale does NOT make sense.  China Mobile has no business in financial services.  This does not "strengthen internal funds management", "control liquidity risks", or "reduce finance cost".  The whole statement is ludicrous.  The only truth is the last four words, which is: "to provide financial services".  Plain and simple, it has nothing to do with mobile communications.
• Given all the recent reports about excessive local government debt (here), regulation/clamp down of trust loans (here) and bad debt at Chinese banks (here), there has been much talk about a central government bailout of local government and banks.  Therefore it is particularly intriguing to see China Mobile Finance's scope of business include "inter-bank lending" (provide liquidity to banks?), "provision of guarantees" (guarantee local government debt?) and "trust loans and trust investment services" (provide liquidity to... whoever).
• Here is the key: The bureaucrats at China Mobile could not have come up with this, it is too far from their mandate and has too many political implications.  The decision to setup China Mobile Finance came straight from the top - Beijing / central government.  Liquidity constraint in the system has reached a breaking point and Beijing is acting!

What I don't understand is why use China Mobile as the financing vehicle?  Using a Hong Kong listed company makes the process cumbersome (regulatory scrutiny).  There ought to be an easier way of doing this.

In any case, this strikes me as a tip-off of things to come.

In Times of Volatility

In times of great market volatility, I find comfort in a quote from the sage:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success.  He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.  Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.  At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.  At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored.  If his quotation is uninteresting to you today, he will be back with a new one tomorrow.  Transactions are strictly at your option.  Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.  It is his pocketbook, not his wisdom, that you will find useful.  If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.  Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game.  As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

- Warren Buffett, 1987 BRK Annual Report

Happy investing.