Let us create a 3D eBook for you!
Let us create a 3d Digital eBook for you! DigyCat.com

Chinas Great Missed Opportunity


While a U.S. Representative to the Asian Development Bank Executive Board of Directors during the first Bush Administration, I consistently called for China to "bite the bullet" and privatize its state-owned companies as soon as possible. Representatives from European and other Asian countries would just shake their heads and mutter about impatient Americans while counseling that China adopt a slow, incremental approach to privatization.

Here we are more than twelve years later and this bullet has turned into a time bomb that could derail China's impressive economic growth and a better life for its people. The fact that a majority of China's large companies are still owned and controlled by the Chinese government has three negative economic consequences.

First, it has stunted the growth of China's financial markets and prevented many companies from tapping equity capital markets. Almost 70% of the shares of China's 1,377 listed companies are substantially owned by the state and cannot be traded. This is the dreaded "overhang" which bedevils the Communist Party leadership and bureaucrats anxious for private Chinese shareholders to have share prices mirror economic growth. The Shanghai Composite Index recently dipped below 1,000 for the first time since 1997. The problem is that when the government sells these shares, private shareholders are diluted and share prices decline. The use of public funds to compensate private shareholders for this dilution has been considered and rejected as too expensive.

The Chinese government announced a $15 billion buyout fund to invest in state-owned companies but markets are deeply skeptical. My view is that only solution is auction off equity to private investors and de-list poor performers and let them struggle for survival.

Meanwhile private firms hungry for capital are denied a chance to list on these exchanges. The result is that private Chinese companies rely on banks for 99% of their financing! This lopsided dependence on bank financing is unhealthy and furthermore many Chinese banks are bogged down by mismanagement, bloated bureaucracies, corruption and saddled with politically motivated non-performing loans

In addition, China's stock market slump is putting its brokerage firms in intensive care. China's 114 brokerage firms that depend largely on stock trading commissions suffered a 45% decline in revenue in the first half of this year. Trading in the China A shares (for Chinese citizens only) market has virtually disappeared. The Shanghai Composite Index is down 15% this year. The Chinese government also has an unofficial moratorium on new listings.

Second, maintaining state ownership and control of so many Chinese companies leads to a lack of transparency and openness that is necessary for China to fully participate as a member of the global investment community. Foreign institutional investors tend to favor investing indirectly in China through the Hong Kong Stock Exchange to gain better disclosure and listing requirements. As an investment advisor, I recommend clients participate in Chinese growth primarily through investing in Hong Kong (EWH) Malaysia (EWM), Canada, (EWC) Australia (EWA), and other Asian countries. The issue of dysfunctional Chinese financial markets has also led to our recommendation to clients that India, not China, may be the best performing Asian stock market in the next ten or twenty years.

The recent announcements of Bank of America and HSBC to invest in two leading Chinese Banks is a welcome step but falls far short of the mark. Both are relatively small investments and both foreign investors will have little authority nor any meaningful management responsibilities. The Chinese want the publicity, the brand and the opportunity to learn but are clearly unwilling to relinquish any control.

Look at what Indonesia is doing to open its financial sector to international investment. International investors are now allowed majority and management control and just last week a large Singapore and Malaysian bank announced plans to make sizable investments in Indonesian banks. The Indonesia government is also drawing up a list of which of its 145 state-owned enterprises will be sold to investors. International investors have taken notice - the Indonesian stock market is doing well and our recommended Indonesia Fund (IF) is up 29% this year.

Third, as the recent high profile cases of Lenovo, Haier and CNOOC demonstrate, as state-owned Chinese companies seek to acquire or invest in foreign companies, the reaction is wariness, skepticism and outright political hostility. The Chinese leadership is trying to groom about 100 of its largest companies to go global in a big way and "brand hunting" of leading multinationals firms with its surplus cash ($700 billion in foreign exchange reserves) is the fastest way to achieve this objective. If you thought the Japanese spending spree during the 1980s was controversial in America - fasten your seat belt.

The U.S. Congress and other foreign governments will resist these bids since they have little interest in having a foreign government, especially an economic rival enjoying a $200 billion bi-lateral trade surplus, purchase its most prized companies. The issue of Chinese bidders using government financing is also a red flag. Then there is the issue of reciprocity - foreign companies can only obtain minority interests in Chinese state-owned companies and approval for even these minority stakes is not transparent and highly political.

Finally, there is the broad policy question as to the intent of the Chinese Communist leadership. The slow and grudging pace of privatization could reasonably be read as an indication that the Chinese government has no intention of relinquishing control of state-owned companies. This, in turn, has serious consequences as countries evaluate how to treat a rapidly growing authoritarian country that seeks to participate and benefit in the global economy by using state-owned and state-sponsored companies.

The Chinese adage of "crossing the river by feeling the stones" may be a wise policy at times but in this case a plunge into the river ten years ago would have been much better for the Chinese economy and people. It is by no means too late to take the plunge and the US should be ready to help in any way it can.

Find out more insights at http://www.chartwelladvisor.com

Copyright 2005 Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and is editor of the "Chartwell Advisor" and the "Asia Investor Intelligence" newsletters. He served on the Executive Board of Directors of the Asian Development Bank in Manila and is the author of The New Global Investor (iUniverse: 2005). For more information go to http://www.chartwelladvisor.com or call 877-221-1496.


MORE RESOURCES:

Investing - Google News

This RSS feed URL is deprecated

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news

Retailers consider investing in online 'Costco for millennials' - New York Post


New York Post

Retailers consider investing in online 'Costco for millennials'
New York Post
General Mills and Bed Bath & Beyond are weighing investments in Boxed.com, The Post has learned. Big Apple-based Boxed, dubbed the online “Costco for millennials,” is suddenly among the hottest tech startups in the country because its network of ...

City school agency broke law, lost money by not investing - New York Post


New York Post

City school agency broke law, lost money by not investing
New York Post
The city's School Construction Authority stashed $104 million in a low-interest checking account for two years — losing out on hundreds of thousands of dollars by not investing the money elsewhere, as required by law, according to an audit released ...

SEC Says Bitcoin Funds Raise 'Investor Protection Issues' - U.S. News & World Report


U.S. News & World Report

SEC Says Bitcoin Funds Raise 'Investor Protection Issues'
U.S. News & World Report
FILE PHOTO: A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration December 8, 2017. REUTERS/Benoit Tessier/Illustration/File Photo Reuters. By Trevor Hunnicutt and Kanishka Singh. (Reuters) - The U.S. securities ...

and more »

CVS Health Reminds Us That Investing Is 90% Half Common Sense - Seeking Alpha


Seeking Alpha

CVS Health Reminds Us That Investing Is 90% Half Common Sense
Seeking Alpha
If the speculation that Amazon is taking over the world is imminent, will the major airlines soon be ordering their new planes online with two-day free shipping as long as they have a Prime membership? In all seriousness, many of the Amazon competitive ...

and more »

Tim Cook: Apple investing billions in US thanks to tax cuts - Axios


Axios

Tim Cook: Apple investing billions in US thanks to tax cuts
Axios
Apple CEO Tim Cook told ABC on Wednesday that Apple will now be "paying $38 billion that we would not have paid" under the old tax system, but will be paying less over time, which is "one reason why we can... invest over $350 billion in the United ...

and more »

Millennial Investors Want Perks and ESG Investing - Planadviser.com


Millennial Investors Want Perks and ESG Investing
Planadviser.com
The latest Spectrem Group report, “Millennial and Generation X Investors,” suggests these two generations are significantly more attuned to socially responsible investing than their older counterparts. In fact, survey results show more than half of ...

and more »

How to Pick Stock Investments - NerdWallet (blog)


How to Pick Stock Investments
NerdWallet (blog)
It's a dilemma first-time investors and grizzled veterans alike encounter. There are seemingly endless possibilities: In the U.S., there are more than 4,000 publicly traded stocks, 9,000-plus mutual funds and more than 2,000 exchange-traded funds, not ...

and more »

Stock market worst to first: 'Dogs of the World' strategy works - CNBC


CNBC

Stock market worst to first: 'Dogs of the World' strategy works
CNBC
I back-test how I would have done if I invested in a range of global dog strategies — the 10-worst, five-worst, three-worst or single-worst country) in every year. If you invested in the bottom five annual performers from the previous year — every ...

Google is investing in Indonesia-based Uber rival Go-Jek ... - TechCrunch


TechCrunch

Google is investing in Indonesia-based Uber rival Go-Jek ...
TechCrunch
Google is back investing in ride-hailing companies. The U.S. search firm and China's Meituan-Dianping are among the tech giants set to invest in Go-Jek, the Indonesia-based rival to Grab and Uber, a source with knowledge of discussions told TechCrunch ...
Google, Temasek investing in Indonesia's Go-Jek as ride-hailing rivalry deepens-sources Yahoo Finance

all 10 news articles »

LargeFriends.com - the best dating site for plus-sized singles!
SuccessfulMatchCentral.com - the best dating site for plus-sized singles!

PreLaunchX

MyIdeal Domain Is For Sale - $8,000 For Enquiries eMail Us

© www.MyIdeal.biz - 2012

home | site map | links