Should I Invest In China? A Top Down And Bottoms Up Perspective

Chinese flag on a light poleThe Nikkei 225 (Japan’s major index) is up over 60% since the election of Prime Minister Shinzo Abe on September 26, 2012. Abe has vowed to re-inflate the lagging Japanese economy with a target inflation of 2% through aggressive quantitative easing, setting negative real interest rates, and aggressive fiscal stimulus. So far, investors are in full belief of “Abenomics.”

One of the key results of effective quantitative easing is a depreciation of the Yen. The Yen has depreciated by around 25% vs. the USD and other major currencies. A weaker Yen is exactly what Japanese ministers need to reinvigorate Japan’s enormous export economy.

It’s apparent at least here in the US that Japanese electronics have waned with the rise of South Korean products from Samsung, KIA, and Hyundai. You wouldn’t be caught dead in a Hyundai 15 years ago. Now everything seems alright. Heck, the most popular YouTube sensation is PSY, a Korean pop singer.

Japanese electronics have always been considered of superior quality with premium pricing to boot. Now the difference in quality seems negligible at best, so prices must come down to stay competitive. A depreciating Yen is doing exactly that, while allowing manufacturers to save face by not cutting prices.

But let’s forget about the South Koreans for a while since they aren’t the Asian superpower the United States are worried about. Let’s try and get into the minds of the Chinese.

WHAT WILL CHINA DO?

US-RMB

Continued appreciation of the Yuan

The Ren Min Bi (RMB) has a managed peg to the USD which currently stands at roughly RMB6.2:$1. The RMB has appreciated by a couple percentage points every year for the past decade and there are no signs of such appreciation abating. You know how I always write that everything is relative in finance? Well, the relativity of a massively depreciating Yen and a continued strengthening RMB has never become so apparent as it is today.

A weak Yen and a strong RMB pose a problem for China because Japan is its largest trading partner in the region at 7% of total exports. The largest export partners for China are the US at roughly 17%, the EU at 16%, and ASEAN at 10%. China has two main goals: 1) to ensure strong domestic economic growth to provide enough jobs for its 1.2 billion population which continuously migrates to urban centers from the countryside, and 2) to be taken seriously by the world. I cannot tell you how important respect is in eastern culture.

As a Communist country with millionaires and billionaires, managing social happiness is priority number one. Although an annual 7.7% GDP sounds wonderful compared to a 2% US GDP growth rate, such high levels of growth are necessary to prevent social unrest. Take what happened at the height of the Occupy Wall Street movement and multiply the anger by 100 to get an idea of the repercussions of a growing unemployed population that lives at home with their parents until marriage.

OLD ATTITUDES TOWARDS THE JAPANESE DIE HARD

Nikkei225

Huge rally in the Nikkei 225

When I studied abroad in Beijing for six months in 1997, I discovered an enormous hatred for the Japanese largely due to the horrific crimes of the Nanjing Massacre. What’s worse, Japanese history books have refused to acknowledge such atrocities occurred. It was only until 2005 did then Prime Minister Koizumi apologize to China for its WWII aggressions that killed at least 300,000 Chinese. Unfortunately, Japan was 68 years too late.

The friends I met in 1997 are all in their 30s and 40s now. I’ve kept in touch with a couple of them and their attitudes against the Japanese are still the same. The difference now is that they hold managerial positions whereas back then, we were all powerless students with only hope to contribute. There is a deep seated drive for so many Gen X Chinese to beat their Japanese counterparts in everything they do. I don’t think such hatred will disappear until a new generation grows up. Now imagine the hatred of the Japanese by those Chinese in their 50s and up. Things take time to change.

If Japan is working voodoo economics and benefitting at China’s expense, there is absolutely no way China will stand idle.

CHINA WILL BRING OUT THE CANONS TO INSURE GROWTH

USD-YEN

Depreciation of the Yen

There’s clearly been a slowing of the Chinese economy with the latest 1Q13 GDP reading coming in at 7.7% vs. 8% expected, and the HSBC PMI index coming in at 50 vs. expectations of 52. The stock market has reflected such a slowing with a 10% drop in 2013 so far based on the China ETF, FXI which holds the largest Chinese stocks that have a blended P/E average of around 9.

China down 10% while the US and Japan are up 15% and 20% year to date is embarrassing. The one thing investors should be able to count on is for the Chinese Central Government to more or less deliver on its economic promises because they cannot afford not to. One of the longest running jokes amongst economists who follow China is that China can manufacture any economic figure they want. For example, stated inflation is only around 5%-6% a year. Anybody who lives in China knows that the real rate of inflation for food, housing, and income is well into the double digits. The paradox is somewhat like here in the US, only many times worse.

If the Chinese stock markets begin cratering because investors are too fearful of collapsing home prices, the Chinese government will simply lower reserve requirement ratios for banks, speak to their local government heads to expedite infrastructure spending, and report to the market that everything is alright. Command economies are fantastic for getting things done efficiently. Why do you think there’s been such a difference in the pace of improvement between Communist China and Democratic India? The red tape and corruption in India is stifling to progress!

To ensure over 7.5% annual GDP growth to maintain social stability, China must simply manage fiscal and monetary spending. China has a current-account surplus of over $200 billion with foreign exchange reserves of some $100 billion dollars. These levels as a percentage of GDP have come down over the years, implying a more normalized economy, yet these figures are still enormous to allow for more supportive economic policy if needed.

There are no ridiculous stalemates in China like we have here in the US with Congress. If China wants to get something done, they will.

CHINESE STOCKS I’M BUYING

One of the biggest benefits of rolling over my 401(k) into a IRA is flexibility. With an IRA, I can buy whatever I want, and what I want to buy are Chinese securities at the moment.

My investing style: Aggressive, speculative, mispriced growth, risk-Loving, “no bet, no win” attitude.

Previous stance: Social media bubble will collapse, mentioned in my predictions post for 2012 written in 2011.

Current investor sentiment: Risk-on with fear of a pullback during the summer.

Central bank stance: Dovish, accommodative, willing to do whatever it takes.

Risks: Regulatory, accounting peculiarities, demographics, social unrest from a much sharper economic slowdown than expected, high local government debt, corruption, stocks are in a downtrend despite high GDP growth.

Experience: Lived in China, traveled to China many times, met with management, listened to their conference calls, met with analysts, and understand the internet and social media space.

Goal: Capital appreciation and to consistently beat the S&P 500 index for as long as possible.

Target List:

* Baidu (BIDU) – Often dubbed “The Google Of China,” Baidu is down roughly 45% in the past two years as competition in search heats up. Unlike Google, Baidu does not have the whole Android operating system. Baidu still commands roughly 80% of the total online PC engine market share, but competition is increasing with the likes of Qihoo who went from 0% to a 12.5% market share in just one year.

Non-gap operating margins fell to 39% in the latest quarterly results, a 7% QoQ decline as the company ramps up expenditure in mobile and software. The stock trades at roughly 17.5X trailing consensus estimates after trading as high as 99X in the past. Its competitors are trading at roughly 25X earnings.

With Baidu having just recently missed its latest quarterly revenue and earnings on 4/25, I’m a buyer because the company is still expected to grow earnings by 40% despite it investing heavily for the future. I like stocks that get punished for investing in future opportunities while holding lots of cash. Mobile is a huge and necessary expenditure, but at the cost of lower margins. I look at the growing percentage of traffic coming to Financial Samurai as proof of the necessary shift. Target: $110. Current price: $85. Downside: $70.

* Sina (SINA) – Sina is down roughly 60% from its highs as the euphoria over its Weibo platform (Chinese Twitter) dissipated. Sina is having a tough time monetizing Weibo just like Twitter is having a tough time monetizing its platform. That said, Alibaba (Chinese eBay/Amazon cross) announced a 18% stake for $586 million in Weibo, valuing the entire platform at $3.3 billion compared to Sina’s current market cap of around $3.7 billion. Alibaba has some 500 million users and such a tie-up could do wonders into monetizing Sina’s 45 million or so active daily users.

Sina’s main business is through advertising and is very much like Yahoo. With Twitter’s current valuations rumored at $8-10 billion (albeit with a much higher daily active user base), and talks of Twitter potentially going public end of this year or in 2014, I think the market will focus on Twitter-like companies like SINA. Target: $70. Current price: $55. Downside: $40.

* RenRen (RENN) – RenRen is very similar to Facebook and requires real name registered users unlike its competitors. The stock IPOed at $18 in May 2011 to much fanfare ahead of Facebook’s own IPO which turned out to be a dud. RenRen has since lost over 80% of its value as it continues to lose money every quarter. It’s getting hammered in gaming, video, and by other social networks like Tencent. We all know what happened to Friendster, MySpace, and Digg. If you aren’t first, you’re last in the social media space.

The good thing about RenRen is that it has $2.40 in cash per share. In other words, out of its estimated $1.08 billion market cap, $850 of that is in cash. The problem is the company used to have over $1 billion in cash after the IPO as it burns money to figure out how to finally make money. RenRen is my most speculative punt stock given the market cap and lack of earnings. It’s either going start making money after its two years of investments and acquisitions, or do a management leveraged buyout (MLBO) if it trades below cash value in my opinion. Target: $4. Current price: $2.75. Downside: $2.30.

* iShares FTSE China 25 Index Fund (FXI) – As mentioned previously, FXI is an ETF that tracks China’s largest, and most liquid names. FXI is a low cost way and less volatile way to get broad market exposure to the economy. Even though we are heading into a historically slow period for the equity markets between May-August, it’s clearly “RISK-ON” again for US investors at least. As a US investor, I’m looking for laggards. What happens in developed US, will be repeated in developing countries like China if regulation doesn’t get too much in the way.

I expect the Chinese economy to re-accelerate in the second half of the year as output catches up with domestic demand. Monetary policy will continue to be very accommodative and any type of real estate bubble scenario will be well managed. With China underperforming by a 25% spread vs US equities YTD 2013, buying FXI looks attractive. Target: $45. Current price: $37. Dowside: $32.

X-FACTOR: One thing that could become very beneficial for Chinese securities listed in the United States or anywhere outside of China is the opening up of domestic Chinese investors to overseas markets. Domestic Chinese investors can only invest in a volatile A-Share market, commodities, real estate, and bank deposits. The main reason for such restrictions is due to capital flight. China will slowly ease restrictions if it wants to continue to develop into a legitimate capital market and such a flood of Chinese money could find its way into Chinese ADRs listed here in the US or many of the H-share names listed in Hong Kong.

China FXI ETF Chart

FXI down about 10% in 2013 YTD and hasn’t gone anywhere in two years

INVEST IN WHAT YOU KNOW

In a “risk-on” environment, investors will naturally search for laggards. The collapse of the internet/social media space over the past couple years has come true and current levels look attractive. I’ve done all the due diligence I can as a retail investor. Furthermore, I understand the fundamentals of the internet and social media business as someone who intimately operates in the space. Even with writing this post, there is no guarantee that I will make money in my Chinese equities positions. This is the beauty of the markets!

INVESTMENT PLATFORM RECOMMENDATION

Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.

You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.

Updated on 12/1/2014. India and China have been the best performing markets in 2014. Use Motif Investing to gain broad based exposure through their dozens of China motifs.

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I’m curious, why do you use the S&P 500 as your benchmark when investing in foreign companies? Wouldn’t it make sense to use a Chinese index to compare against your Chinese investments?

      • says

        Let me know where I’m wrong, but it seems to me that if you’re comparing to the S&P 500, you can’t tell whether your picks are actually outperforming. If you want to invest in Chinese stocks, then your choices are either to a Chinese index fund or individual stocks. Comparing to the S&P 500 will give you a sense of whether China was a good bet over the US, but not whether your specific picks were good.

        • says

          I run my book on absolute performance and less so on relative performance.

          China has domestic A share, H share, and then US listed stocks. I could also pick an Internet index as well. It’s personal choice, but if you prefer me to compare FXI against FXI, that’s cool too.

          What are your thoughts on China? I’d love to hear the positives and negatives. Thx!

        • says

          Absolute performance towards your own goals is what really matters. Sounds cool.

          Honestly, I don’t have any thoughts on China. I don’t try to play different market sectors. I prefer to focus on earning more, saving a lot, diversifying, and enjoying other parts of my life. To each his own!

  2. Mike Hunt says

    I agree that Chinese companies are trading at a discount, perhaps because investors are skeptical of the oversight and reporting…?

    -Mike

  3. says

    RenRen and Sina seem to be good investments. Haven’t checked out Baidu but I do know that they are big in China. Some Chinese/Taiwanese/Hong Kongese/Singaporean investments might not hurt for one’s portfolio.

  4. says

    I haven’t invested directly into any Asian securities but i do have some exposure through an International fund. I have heard of SINA though as it’s a big name. It will be interesting to see how RenRen develops comparitively to Facebook. Facebook and sites like Twitter are actually blocked in China right?

    • says

      Correct. FB is blocked in China, and will likely stay blocked forever. Regulatory risk is huge in China, however in this case, regulatory risk is keeping the “foreign invaders” out as the gov’t controls propaganda and lets its domestic industries mature first.

  5. says

    25% of your net worth on BAIDU? Holy moly, that’s way too much for my risk appetite. I wouldn’t invest over 5% on anything except really safe bonds.
    I have 100 shares of SINA and rode it down quite a way. BAIDU sounds good though. I might get 100 shares or something like that. Keep us updated.

    • says

      To clarify, 25% of my IRA portfolio, or whatever portfolio I am trading with at the moment. I think the market is missing SINA’s potential with Weibo here. Alibaba isn’t, but the market is still quite skeptical. There is going to be so much fanfare when Twitter goes public, it seems logical to conclude any Twitter equivalent in a market 4X ours will garner investor attention.

  6. says

    I own a small stake in China Mobile (CHL) which is the only Chinese stock I own outside of exposure in certain ETFs.

    I’m not going to tell you you’re crazy because you’ve obviously put the time in to analyze and research the Chinese markets. If you’re confident in the Chinese market, the 3 picks you’ve made look like good ones. I’d tend to err towards the large market leaders in China because I just don’t know how much you can trust the numbers coming from some of the smaller companies over there.

    • says

      Ah yes, CHL. That used to be a great stock in the first years after its listing. I know that company very well.

      All I know is that China has gone nowhere for 2 years, and yet the economy has grown by 8% each year. There is a shaking out occurring, with fierce competition that is hurting everyone. The higher Japan and the US equities markets go, the cheaper China looks. It’s all relative.

  7. says

    Sam, is this a change in position? I thought you were risk adverse! Did I read that right? You are risking 25% of your stock portfolio in Chinese stocks? I have a roughly 25% international exposure, but not one country. In addition, it is invested in index mutual funds. My risk is spread over countries and diversified companies. Lower risk and I know lower, but safer return.

    • says

      I am risk adverse and risk loving. Dumbbell approach. My biggest regrets when I was younger was not taking more risk when I had the money.

      Again, I’ve compartmentalized the risk as this is all in my rollover IRA. Even though it has about 400K in it, I’ve written the amount off to zero and plan to swing for the fences with this account as I’ve got another 25 years until I can touch it. That said, I’ve got another article coming out which is a totally different strategy I will probably employ in 5-10 years time.

  8. JayCeezy says

    A lot of people don’t know this, but the charts for China stocks are read from right-to-left.{s_rimshot}

    Seriously, China is kind of perfect for the FS investing style. The only thing that might not be a fit is China’s lack of diversity.:-) A broader China index S&P/ASX 200 shows nominal prices at where they were in 2005. But it appears FS is going for a particular play with a bigger upside than a broader market.

    An anecdote: my former employer had a contract in China to build a complex highway interchange. The government agency with which the contract was negotiated requested a follow-on contract bid (more than US$120mm). When it was submitted, the agency representatives requested that it be resubmitted with a 40% increase in cost (constituting 28% of the overall cost). The agency representatives then requested a 40% kickback on the entire cost! This wiped out the profit for my former employer. The agency suggested cutting back on inspection and material cost. Long story short, my former employer couldn’t make it work, especially for the risk to reputation, and withdrew. This was in 2010, and somebody got that contract and did it for the deal proposed. I would not want to drive that highway.

  9. brandon says

    Hey Sam,
    How much power would the central government have over controlling a panic sell-off when the real estate bubble in China bursts? I travel to China pretty regularly– about 3 months of the year, and based on discussions with a few locals, a lot of new developments are unaffordable, even for highly skilled workers like factory managers or engineers. These properties are all being bought up by speculators betting on the future. If wages in China doubled, people could afford these accommodations, but would China still be as attractive for business in that case?

    I guess I’m wondering how bad would it have to get before your predictions are out the window?

    • says

      Property prices and affordability have been a concern for a long time. Just taking a $5,000US median per capita GDP can’t afford anything in the urban areas of China. It’s the wealthy who are buying up such property, not the factory workers. There is government housing. They use property as a way to park their wealth, not even needing to rent their properties out for income. What I’m expecting is for Chinese money to come to the US to buy property. US property is relatively cheap now.

      The Chinese gov’t will do anything to assure stability. Hence, they plan to engineer a managed price decline, and an increase in public housing imo. Do you have any Chinese investments?

  10. says

    Given your personal experience in China, I was hoping to get your opinion on the China “credit bubble.” Jim Chanos is short China and the Financial Times recently had an article about a Chinese accounting firm that pulled out of auditing local government bonds because local government debt is “out of control.”

    http://www.cnbc.com/id/100669030
    http://shanghaiist.com/2013/04/18/chinese_local_authority_debt_is_out_of_control_according_to_chinese_auditor.php

    If credit in China truly is growing as fast as Chanos suggests, why is economic growth slowing?

    • says

      Nice find on Chanos. This is exactly the counter argument I’m looking for to make sure I’m not missing anything. As a short seller fund, it must have been hard to make money for the past 4 years for him.

      The credit bubble and local government bubble has been discussed for years now, and yet nothing has happened. The point of my article is that in a command economy, so much can be engineered. New party leaders are in, and they aren’t going to implode the economy on their watch.

      Please share your thoughts on China and any positions you may have. Thanks!

      • says

        Yeah, Jim Chanos is a smart guy and I’ve found that the short sellers are much more thorough in their analyses, in general. However, Chanos tends to be very early with some of his ideas. He made a big deal of being short cable operators (Comcast, Time Warner Cable etc..) in 2008 because he thought people would drop cable and watch TV online. I suspect that he may eventually be correct in that thesis; however, those cable stocks have been some of the market’s best performers since then. The same thing could happen with his thesis on China.

        I don’t currently own any Chinese-specific stocks. I bought FXI in the mid-20s during the market implosion of 2009, but sold out in the low 40s in 2011. I do, however, keep my eye on U.S. companies that may do well in China over time (i.e. PM/YUM).

        I like your thought process though.

        • says

          I remember when the great Julian Robertson closed up his hedge fund in 1999 when his performance started to lag and he could not understand the internet craze. The market then burst and Julian turned out to be right in the end. Unfortunately, Julian was wrong at the time, and being wrong and right at the the time is all that matters

          You can be the luckiest and dumbest person on earth, but if you make money, you win. I would never want to live my life as a prolonged short seller.

  11. says

    So long as you realize that you’re speculating and are okay with the risks, then rock on.

    I’m more in the value investing camp. I can’t really trust any number coming out of China. Most companies will play accounting games to make things look better than they are, but China will just outright lie and fabricate numbers. They do it all the time with every other metric. Kind of makes it hard to really tell if a company is appropriately valued to invest in.

    • says

      This is exactly the consistent negative feedback I’m looking for: can’t trust anything out of China. This is what I consistently hear from the West. I wonder when the views will change. Perhaps when skeptics actually spend some time in China? Have you been there? Thx

      • says

        I spent a summer visiting businesses and business leaders in China as part of business school a few years ago, and every time after all the rah-rah speeches and Q&A, eventually would come the stories of guanxi and the corruption and kickbacks infesting business life in China, or at least in Beijing and Shanghai.

        Key takeaway from that experience: as a foreigner, don’t put any money in China you can’t afford to take a 100% loss on.

        • says

          Good advice, and one I can echo. Don’t invest money you don’t feel comfortable losing.

          I would shiver to invest in a private, illiquid investment if I don’t meet all parties and see what I’m investing in first.

  12. says

    I would recommend that you stick to the tech stocks as opposed to the broad ETF in this case if you are going to invest in China. Banks make up almost 40% of the FXI and loan growth in China has exploded in the past few years. The government is forcing the banks to lend to keep the economy humming (although they’ve reigned things in a bit recently).

    The credit bubble hasn’t been a huge problem yet, but it could be in the future. As we’ve seen, dealing with massive amounts of debt can be tricky.

  13. says

    RENN looks interesting as a NCAV play, for the “heads I win, tails I don’t lose much,” crowd. Hope you find that it has some upside and that it’s not just another melting ice cube of a balance sheet. Cash-rich companies scare me to death when they start talking acquisitions; it makes me feel like management just needs a reason to go to work and draw a salary so they end up buying any old crappy company on the shareholders’ dime. Not a bad gig if you can get it, I guess.

    RENN’s position sounds pretty similar to ZNGA. Similar economics in the trade there, too. Lots of cash and assets, earnings flux in and out of profitability, but there’s an option for big upside since the valuation on the company itself is basically zero. From the post it seems like they have a similar kind of story. Once hot, now not.

    Neither China nor tech are my thing, but RENN’s cash definitely caught my eye. I’ll add it to the “watch for fun” pile.

    • says

      It’ll be interesting as RENN reports on May 13 and it probably won’t be that good. The company is basically an orphan stock given its size. Few institutions are looking to accumulate as liquidity is a big issue. If the stock trades below $2.50 post call I am loading the boat.

  14. Shaun says

    I don’t know enough about these companies to say one way or another but something that always bugs me about chinese companies is the potential for govt manipulation and fraud which I feel is more prevalent in China.

    Exhibit A-Z is if you watched the chinese listed solar stocks collapse since the subsidies started drying up in 2008 and how both those companies and the Chinese govt responded.

    Did you catch the 60 minutes episode on the massive cities created in a real estate boom over there that nobody lives in yet? It’s pretty insane to see a brand new city that supposedly going to be the size of Manhatten that is completely empty. Things like that make me wonder if China is in the start of boom or a massive bust.

    • says

      Yep, I’ve seen these empty apartments myself. One light on at 7pm out of 20 apartments etc.

      The Chinese love to park their cash in real estate, b/c again, it is embedded in their culture that cash is not wealth, but paper that can easily be burned.

      • Shaun says

        Haha I’m glad they see it that way. I guess they’re not going to be upset at all when the bubble bursts :)

  15. wai guo ren says

    It’s a big topic. There are certainly opportunities in China, but probably at least as many on the down side as on the upside.

    I’ve been to China many times, go frequently, speak Mandarin, and married into a Chinese family. My first visit was before the great outsourcing boom of the mid-nineties, so I have seen many changes.

    First to know is that normal rules of business do not necessarily apply. Sometimes they do with some Western-educated managers, but overall much of the country and economy is run with other factors paramount, many of which have been mentioned: political reasons, respect, glory, collective ego, the need to keep people employed and busy, and many unseen and sometimes puzzling (to this Westerner) motivations. And not everything is very obvious. Government (and political) influence is pervasive and everywhere, including business direction and dealing etc. Decisions are often made for [what we might consider] non-business reasons in mind. The rule of law is very different in China, even business law. (Read some English-language blogs on people doing business there to get a feel for things. China Business Blog is a good one.)

    As far as the economy goes, the government maintains strict controls. Even a government official admitted a few years ago that the statistics they publish were “man-made.” So it is not easy to get a solid picture of things. Yes, things are booming compared to the US or Europe. Don’t forget that much information is not as freely available as in the West.

    I think the anecdote mentioned by JayCeezy in an earlier comment is very telling. Not unusual. Should be a very big red flag for any business person.

    Another story. A few years ago I saw a documentary on local Beijing TV about some professors at a local university who studied some high rise luxury apartment buildings to see how occupied they were. They camped out in front and counted how many people went in and out over for days, watched (and filmed) from afar how many apartments had lights that went on or off, went and knocked on doors, looked at electrical meters, and so on. The bottom line was that in many cases on about 50% or less were occupied. Most were purchased for investment.

    I am not trying to state that all that means that there is a housing bubble or not, or that means a crash is imminent or not. There is of course is a large imbalance in housing. An insatiable demand, and extremely high prices, an many empty new apartments. A recipe for… imbalance. Add to this that the cost of housing is astronomical compared to the average annual salary. Much higher than the US, even SF or NY (I can say so because I have lived in both). To purchase a new apartment in China for the average worker takes people saving their entire lives, even over multiple generations in some cases.

    So my point here is that is is just not another place to invest. It is a different world with its own culture, its own rules, and its own eco-system. And just because a company is listed on a US exchange does not make it immune. There have been many cases of Chinese companies getting listed (one way or the other) in the US which later have turned out to have “accounting irregularities” or downright fraud. Do a little web searching and you will find many stories. Doesn’t mean all companies are bad. It just means that many are beyond the reach of US rules and US regulators, at least in the short run.

    My point is not whether anyone should or should not invest in China. My point is that one needs to be very careful, very circumspect, and very nimble.

    In addition there are the usual factors. Currency risk is a big one. While the RMB has appreciated against the dollar, there is no guarantee that things will always go well or that it will be convertible when you need it.

    And of course it goes without saying that the tensions between the US and China will only grow worse in the coming years. I could easily see where the US and China could get into more political, financial, and even military confrontations sooner or later.

    That being said, if a person is happy as a risk-taker and is willing to bet big, then they could do what they feel need to do. If I could give any advice, it would be to keep on learning and reading and studying before making big decisions.

      • wai guo ren says

        My investment focus is on large multi-nationals, so while I know many of them do business in China, I don’t specifically look for Chinese companies per se.

        For learning, you did a major step already, you spend time in China. More than a tour.
        That’s good thing. Just remember, Google is your friend. Search read learn.
        Just realize that when in China, the same information is not as available as we are used to in the US. On the other hand, there is information in China about China that we do not get exposed to when not there.

        Some additional comments to give further flavor to understanding how different China is compared to the West. While one can purchase an apartment in China, the land upon which the building sits is not really owned by whoever purchased it; in reality the land is leased from the government. Land “ownership” (namely, leasing) lasts 90 years. After 90 years the land becomes state property again. (This is all emanates some socialist thinking about how the State owns the land.) So when you see real estate listings about apartments for sale, included is the year the 90-year clock started. From a western point of view, it complicate inheritance, asset planning, etc.

        All urban dwellers live in apartments, there are very very few (and very very expensive single family homes, which were banned in many cities a few years ago). People who do farming are considered very low class, no urban dweller wants to be caught dead on a farm. There is no suburbia…. just cities, industrial parks, and then farms. When I mentioned to a few Chinese that (when my wife and I are in the US) that my wife and I like to garden and grow some fruit trees and vegetables, the responses I got were something along the lines of “You mean, like peasants?”

  16. Jenny @ Frugal Guru Guide says

    I wouldn’t invest in Chinese stocks without being fluent in Chinese AND a skilled accountant. The level of fraud is astronomical there, never mind the absurd real estate bubble and the distortions that the govt is engaging in.

    I’ll believe in a Japanese recovery when they address their demographic collapse. Until then, there’s nothing they can do to make up for the shrinking of the working population.

  17. says

    Investing in China? Lots of luck.

    As one commenter said above, very common for private (and public) companies to keep two, maybe three sets of books. Even the numbers coming out of government bodies are dodgy and/or slanted.

    Guangxi is what you need to succeed, and that takes years to build up. Doing business with friends, family and associates is personal and reasonably effective. Defrauding consumers and investors is impersonal and widespread.

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