By Andrew Galbraith
July 3rd, 2009
Damn the torpedoes and the long-term threat to the economy posed by a non-performing loan crisis! We're back in the market, and we hope it's full speed ahead for our purchase: Jiangsu Expressway (600377.SH), operator of, well, expressways. We bought 200 shares today at RMB6.63 (US$0.97) each.Why this target and why this moment? Jiangsu's H-shares (0177.HK) were recently the subject of an upgrade by Citi, which cited the company's relatively weak performance to date this year. That's certainly true compared to Sichuan Expressway (0107.HK, and soon to list in Shanghai), which has seen its Hong Kong-traded shares rise more than 125% this year; Jiangsu's H-shares are up slightly more than 1% since January. The company's A-shares have done rather better, rising more than 22% this year, but that's not terribly surprising in and of itself.
But it's not about underperformance to date. The company has a strong balance sheet that is being de-leveraged, capital expenditures are likely to be small (the company finished its major reconstruction projects some time ago) and earnings growth is expected to be positive.
Furthermore, we expect Jiangsu to benefit from the effects of overall investment in infrastructure, not to mention the huge growth in auto sales. Granted, those are not all new drivers - sales have been boosted by government subsidies encouraging people to upgrade their cars - but many of them are.
We also hope to take advantage of potential excitement around Sichuan Expressway's expected Shanghai listing.
All in all, we're glad to be back in the market. The Capitalist Roader is down 32.9% since we first bought in on June 3, 2008; the Shanghai Composite Index is down 10.3%. We've got a long fight ahead if we hope to beat the index again, but at least we're back in the ring.
By John Bishop
July 3rd, 2009
The cover story for China Economic Review’s newly published July issue, focuses on Chinese strategies for outbound investment in oil and gas. However, throughout the reporting of the story, CER staffers conducted interviews with analysts and insiders regarding outbound investment in a broad range of natural resources. Much of what analysts said was beyond the purview of our story, but interesting nonetheless.
China’s hunt for minerals and mining assets, particularly in Australia, has received a lot of press in the past months, culminating in the failed Chinalco bid to take an 18% stake in Rio Tinto. With a bid price of US$19.5 billion, the Chinalco deal would have been big news indeed.
But headline grabbing, multi-billion dollar deals are only part of the story, according to Jennifer Richmond, director of China analysis for STRATFOR, a Texas-based global intelligence company.
“The biggest [strategic] difference that we see for energy acquisitions has been in the mining and mineral sector. What we’ve seen is a new influx of small but flexible private equity companies that have been recently put together to take advantage of less visible, under the radar, smaller stakes,” she said.
One such homegrown PE firm is the China Mining United Fund, formed in May by about 300 mining entrepreneurs with capital of roughly US$73.3 million. This is hardly a jaw-dropping amount of money. Nonetheless, the fund’s government ties are clear, as you can tell by comments the fund’s chairman made to Reuters in early June. As the Reuters story makes clear, China Mining United is just one of several investment funds that have been launched with a mandate to invest in resources ranging from uranium to aviation fuel.
Richmond said that these funds demonstrate that China is shifting step and taking a broad approach when it comes to acquiring global resources.
“If [the government’s] goal is to operate small investments across the globe in a 401K-like investment strategy, this is financially smart and they should continue to seek these small minority shares and a diversity of projects around the globe,” she said.
However, these small PE firms are unlikely to make many acquisitions of crude or natural gas assets, as most of the world’s remaining supply is held by large national oil companies. But, in a broad sense, these small investment funds could eventually turn into the big story for Chinese outbound investment.
By Andrew Galbraith
June 26th, 2009
Will the Shanghai Composite Index crack 3,000? Having closed today at 2,928.21 (meaning the index is up more than 60% this year), that is looking like a real possibility. While the People's Bank of China has added its voice to the chorus of those calling the present time a "critical moment" for China's economy, the market has continued to indicate overall optimism. We'll refrain - somewhat - from our standard role as market Cassandras this week. Our skepticism about the market rally has been mentioned many times before (and may still be correct) but it hasn't proven very profitable. Our arch-rival, the Red Dragon Fund has been taking better advantage of the market, capitalizing on quick gains enjoyed by PetroChina this week.
As we mentioned in our last post, we are considering getting back into the market, too. After all, our mission is not to pursue a wise investment strategy so much as one that generates interesting copy while beating the market. We can't do that as a cash-only fund, so expect some action early next week.
By John Bishop
June 26th, 2009
No matter what one thinks of Michael Jackson's troubled life, no one can argue his status as a global icon, and as such his death has touched fans across the globe, including in China. Check out the always helfpul ChinaSmack here for an interesting cross-section of netizen reactions to his death.
Nightclubs are also planning to send the singer off in style with celebrations in his honor. Here are some of the first, but expect to see more of this in the coming days and weeks.
Without doubt, his music will be getting play in dance halls and KTVs this weekend.
By John Bishop
June 18th, 2009
The World Bank raised its 2009 GDP growth estimate for China to 7.2%, from its previous estimate of 6.5%, largely due to a larger-than-expected knock-on effect from China's US$586 billion stimulus package and bank lending. Nonetheless, while government-influenced investment has been a major driver for economic growth this year – and government-influenced expenditure is expected to contribute a full 6 percentage points to GDP growth – market-based investment has lagged this year.
"There are limits to how much and how long China's growth can diverge from global growth based on government-influenced spending," said Ardo Hansson, the World Bank's lead economist for China, speaking in Beijing.
While the stimulus package has been effective in shoring up economic growth this year, its effects will not carry over much into 2010, according to the World Bank's senior economist Louis Kuijs, who estimates China's GDP will grow by 7.7% in 2010. China's economic growth next year will be driven less by government measures, as exports are unlikely to fall further in 2010.
Given these factors, it is "not necessary and probably not appropriate" for China to enact any new stimulus measures in 2009, and rather save its remaining "fiscal firepower" for next year, Kuijs said.
This relatively strong economic position gives China the breathing room to implement changes to its economic model that would improve its long-term strength. The bank advocated for continued liberalization of China's service sectors, as well as the creation of a more robust public finance system and social safety net. Permanent urbanization – in which families move to urban centers rather than send remittances back to the countryside – would be assisted by reforms to the hukou system and inter-governmental fiscal systems that would allow local governments to provide public services to migrants.
Hansson expressed surprise at media reports of new "Buy China" rules that will require stimulus package funds to be spent on Chinese goods and services. He said that China had earned an "enormous amount of goodwill” in leading the global charge against protectionism.
“That leadership reflected an understanding that China, relative to many other economies, has a lot more to lose from protectionism,” he said, adding that China's import figures do not suggest a massive influx of foreign-made goods to the country.
By John Bishop
June 17th, 2009
Timothy Geithner and Wang Qishan will likely have to dispense with the small talk at their next bilateral economic dialogue. Indeed, while there have been some relatively low-level trade disagreements between the two countries since the Obama administration came to power, it does seem as though the tinder is getting ready to spark into real trade friction in the G2 relationship.
The latest is Beijing’s new “Buy Chinese” rules, which require that economic stimulus money be spent on Chinese goods and services “apart from engineering goods or service [sic] that cannot be obtained under reasonable business conditions inside China.” This trade protectionism is sure to raise the hackles of some in Washington who are inclined to cry foul at every Chinese action. And make no mistake, this is protectionism. But the Obama administration is going to find it difficult to rail against China, given its history with “Buy American” provisions in its own stimulus package.
More tantalizing, perhaps, is this recent report by BusinessWeek that says that the WTO has found against China in a complaint filed by the George W. Bush administration over Chinese restrictions of American DVDs, CDs, books and computer software. The WTO will reportedly inform the two parties on Friday of the ruling. China has also opened an anti-dumping investigation against US steel, which was in response to a similar suit filed by US steelmakers against China in April. So back and forth we go. Of course, it’s hard to know whether all of this is going to result in a gathering storm or a larger-than-usual kerfuffle.
Given what most expect to be a grim jobs situation in both the US and China in 2009 and 2010, neither side is going to want to be perceived as backing down to the other on trade issues. After that, the US elections season will start up again, and no American politician wants to be seen as a friend to China during that period. They say that all relationships take work, and none are easy to maintain. But this one will be put to the test in the next few years.
By John Bishop
June 16th, 2009
I should make clear from the outset that neither I nor any of my brave comrades at China Economic Review are advocating censorship, which is what’s really at the heart of this story. Despite government claims that Green Dam was meant to weed out pornography and violence, it’s fair to assume that other so-called “sensitive” information would have been blocked by the software, and that this was by design and not just a happy accident. That said, if the goverment had truly wanted to make Green Dam a success, they could have gone about it in a savvier way.
First and foremost, the MIIT should have brought PC makers into the fold from the start. Notable in some of the the initial reporting of Green Dam were off-the-record comments from PC makers who said the government had not consulted them prior to making the decision. Had the government reached out to PC makers early on, they could have worked together to iron out the technological issues and also presented a united front in a coordinated announcement. Sure it would have delayed the process, but at least the government would have been saving face instead of wiping egg off of it. And to anyone who doubts that the likes of Dell or HP would have fallen in line with the government in exchange for continued access to the China market amidst a global economic crisis: I find your trusting ways both refreshing and cute.
A public relations campaign replete with examples of the grossest internet violence, or for example, with statistics on how viewing such violence affects children, could have also helped make the government’s case. Dare we say a focus group or two might have helped shape the message in a more palatable way?
Oh, and having a software that actually works, and is free of allegations of IP theft, would have been nice.
Would all of this have saved the MIIT from being savaged by netizens or rights groups? Probably not. And maybe they did have a master strategy for the rollout which was then thwarted by our pals at the Wall Street Journal who broke the story. We’ll never know, and frankly, we should be glad the government botched this one.
By Andrew Galbraith
June 16th, 2009
Iranian authorities seem to be trying to block access to Twitter and frequently used web proxies, but this has clearly met with little success. The follies of China's Net Nanny and other censorship efforts aside – consider the backlash the Ministry of Industry and Information Technology (MIIT) has faced over its leaky Green Dam Youth Escort web filtering software – China's online censorship regime is comparatively effective. Part of that is due to its unpredictability, designed to instill a kind of learned helplessness. Trying to control the world's largest internet population has given China unsurpassed experience in censoring online content.
That makes me wonder if MIIT might consider marketing its home-grown system overseas. China does not have many claims to leadership in advanced technology, but in internet censorship, it is the uncontested champion. Yes, China's system is built upon hardware made by foreign firms like Cisco systems, but the know-how China has gained puts it in a perfect position to act as a censorship consultant to foreign governments. Maybe a technology transfer to sweeten future energy deals with countries such as Iran and Saudi Arabia? Yes, it's cynical bordering on paranoid, but it must have crossed the minds of at least a few entrepreneurial-minded MIIT officials.
By Andrew Galbraith
June 12th, 2009
The Capitalist Roader Fund is getting stir-crazy. We've been a cash-only fund since February, when we sold Anhui Conch Cement (600585.SH) at RMB32.90. Excitement about infrastructure and government spending pushed Conch up to around RMB45 in early May, but its performance has been distinctly lackluster since then. It closed today at RMB39.84.In considering what kind of move we might make, we are naturally looking at what sectors are going to benefit from the government-led investment that is keeping the economy going. Property is one option, but we would be late to the party. Developer Gemdale Corp (600383.SH) is up 166.4% this year, making China Vanke's (200002.SZ) 70.57% year-to-date performance look shoddy in comparison.
Other potential moves include another infrastructure play, in this case one more tied to specific projects. Shenzhen Expressway Company (600548.SH) is one option, its recent acquisition of the Jihe East Expressway likely to have a positive effect on the company's finances. Beijing's health care reform has also created opportunities, specifically in health care-related IT firms.
The fund remains down 33.1% since June 3, 2008. The Shanghai Composite Index is down 20.1%.
By John Guise
June 5th, 2009
If China had chosen not to silence discussion of Tiananmen, it would probably only be remembered by a few activists inside the country and commemorated by some token news stories. There wouldn't have been a week of media coverage in the runup up to anniversary detailing the ways Beijing was cracking down on dissent, or about undercover police officers blocking foreign cameramen in Tiananmen Square -- thereby making it sound like a bigger deal than it already was.
Instead, if Beijing allowed free discussion of the anniversary, or even a small registered protest in the square, the narrative in the international media would be that China is recognizing the dark parts in its past and openly allowing discussion about them.
Few in China today really care about the events in Tiananmen Square. China has changed significantly since 1989. Levels of personal income have risen significantly and people increasingly look not towards the government, but to commerce and their jobs to enrich their lives. A good portion of young people know about the protests, but they just don't hold much significance for the younger generation. They have a better life than those who protested on the square and therefore they're less likely to make a fight for greater rights today.
But it's probably not the people that wish to remember the events of June 4, 1989 that Beijing is worried about. It's the protests over factory closures, the forced relocations and local corruption that are happening right now across the country. Those protests signal a high level of instability and policymakers don't like instability. It appears their logic is that should anyone with a grievance against the government witness protests on the anniversary of Tiananmen, they might get ideas. But I don't think those "ideas" have their source in the protests of 1989. The protests of 1989 were over different issues and in a different China. They're not something that can lead to protests today.
