China Stocks

Posted on October 3, 2005 , filed under Business Gossip, Stocks | Print This Post

So you hear China is the next big thing? Well I believe you’re half right. Proponents of China stocks will cite the enormous population of the country and the vast potential of the country’s economy. What the majority haven’t done is step into the country with their own feet. It’s one thing to read and hear about something and another to experience it. The .com crash is a perfect example. Wall Street is busy breeding another group of eager investment bankers and day traders who have no memory of the i’ll effects of the crash. They hear stories of the crash without actually having witnessed the fortunes of so many being decimated.

The eagerness of some people to invest in China has come at a premium. Proper due diligence is difficult to perform on Chinese companies due to tight government regulation and a proliferation of questionable local companies tied to international auditing company’s. Investors in America are used to scandals that have shaken up corporate record keeping and reporting policies. Investors in America have come to expect a proper dotting of the i’s and crossing of the t’s.

Imaging a country where the word relationship, “Guanxi”, pronounced “Guh wong she”, is on the forefront tip of the tongue of almost any businessman in China, before the word performance. It’s widely known among local businessmen that relationships can open doors to job’s, opportunities and cut through layers of governmental red tape. Losing these relationships means more to Chinese businessmen than to American businessmen. For Chinese businessmen without relationships, they often have little or next to nothing in the Communist run country. To a Chinese businessman, relationships can create rapid performance.

Ask any seasoned investors, far older than I, to describe the investment climate in the 1980 and you’ll often hear comparisons to the wild wild west. They describe a stock market and banking community riddled with hostile takeovers, backstabbing, corporate eavesdropping, and scandal. I believe that China is 20 years behind America and now experiencing their version of the 1980’s wild wild west. Everything is up for grabs and the Chinese sense it. America is simply fueling the rush by Chinese businessmen to capitalize on America’s fascination with the countries population. Take a good company and attach the word China and you suddenly have a great company. Analysts like Mary Meeker of Morgan Stanley fuel the rush by publishing bullish reports on small and mid-cap sized China companies. These same analysts lead the creation and the fall of the .com days.

To avoid another .com sized bust for long investors in China stocks, I suggest investing, in companies that enjoy the public spotlight like NTES Netease or large-cap companies like SNP, China Petroleum & Chemical Corp. and CHA, China Telecom Corp. Ltd. that would be difficult for the government to overly police.

There are a number of small speculative companies to be excited about, CMED, CNTF and SNDA are among a few that I watch. However, these companies represent an extraordinarily large risk for individual investors. Small Chinese run companies can be taken down with one swoop of a government official’s hand. The Chinese government can take away business as fast as they can grant it. It seems kind of odd that the same people ballyhooing the .com stocks are now doing the same to China stocks. I wonder if investors are oblivious to the 1980’s or the .com days. Do we simply forget the lessons we’ve learned so quickly?

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