It’s Not All Riches And Opportunities In China March 08 2006 - Australasian Investment Review – (AIR)
Billions of dollars are about to be lost on Chinese stocks according to one Chinese investment advisor. Robert Hsu was born in Taiwan and has made his fortune investing in China. Hsu spends most of his time travelling the country away from the major focal points. Says Hsu: "I go where my American friends don’t go, and I see what outsiders miss". What he does see is that China’s "blue-chip" listed companies are largely hollow state-owned enterprises operating in a culture of bribes, lies, kickbacks and – the revelation – "shattering losses". Of the 1400 companies listed on the Shanghai and Shenzhen exchanges as many as 1000 are frauds, says Hsu, and as many as 100 could about to be de-listed (taking investor money with them). "It is a stock exchange full of Enrons". Hsu believes 2006 will be the year the truth comes out, and that even the government is clueless. The government has just completed a census – attempting to count all the private businesses in the runaway train – and has found the economy is 16% bigger than originally thought. Hsu believes this is conservative. This won’t be a short sharp shock. Hsu suggests there will be years of companies hitting the wall, the clean-up will take decades, and it could be a generation before global investors deign to return to the Chinese stock market. US mutual funds, for one, have been investing heavily with the their blinkers on. That’s the bad news. The good news is that buried in amongst the Enrons are legitimate, truly entrepreneurial companies with real products that provide investors with a golden opportunity. Advertising company Focus Media, for example, is up 150% since September. Suntech Power is up 37% year-to-date and Netease, a web portal, was up 3000% in 2002-03. There are exceptions to the rule.
Hsu notes further that western companies such as Phelps Dodge, Motorola, BHP Billiton (BHP), and many others have risen 100-300% recently on the back of the "China miracle". These companies are not "flukes or bubbles", says Hsu. Last year AIR published "We Want the World and We Want It Now", an article which speculated on the potential consumer frenzy about to explode through China’s discovery of western delights – particularly from within the younger generation. Hsu refers to the "Chuppy", or Chinese yuppy. 60 million Chinese now earn in excess of US$100,000 a year, and they are buying mobile phones, eating at Pizza Hut (sea eel pizza anyone?), drinking Starbucks latte and listening to iPods. This will be the next big consumer drive, replacing the spent-out US consumer, who is mortgaged to the hilt and rapidly reigning in the budget. The consumer sector is the big explosion, but we’re all aware of the commodity boom that has preceded it. Hsu suggests commodities from here on will be mixed. For example, steel prices have been halved in China due to over-capacity. When China begins to export its building inventories, havoc will ensue. This will also bring down nickel and aluminium prices. Copper, on the other hand, is a different kettle of fish. Hsu notes a lack of an efficient electrical grid is crippling the Chinese industrial revolution. Blackouts are common place. China has responded by rushing to build two nuclear plants every year for the next 20 years. It has also responded with the massive Three Gorges Dam hydroelectric facility and Yangshan port for natural gas imports. China is also building shopping malls and office blocks, computer networks and neon signs. All of this requires the delivery of electricity, and the easiest way to do that, notes Hsu, is through copper wire – miles of the stuff. Thus Hsu’s call on China is investors could lose a fortune in the wrong companies, or make a fortune in the right ones – either Chinese or global.
