Category Archives: China

delisting Chinese companies in the US

May 21, 2020 By in China, Chinese equities, Uncategorized Tags: , , Leave a comment

The Senate passed a bill that, as news reports have it, would require that any company traded on a domestic stock exchange establish that it is not controlled by a foreign government.  The bill is being framed as setting accounting standards to protect shareholders and guard against fraud.

My thoughts:

–most US investment disasters are home-grown.  Think Bernie Madoff, Enron, Michael Milken, Henry Blodget.  There are also cases like Moviepass or Blue Apron or Trump Hotels and Casino Resorts, where the major sin is ineptitude.

–the real intention is to deny China access to US capital markets, as well as to cast China as a villain, diverting attention from Trump’s tragic failure to deal with the coronavirus

–there’s a good chance the move will backfire.  The major effect of removing the US from the China equity equation will likely be to restore Hong Kong to front of mind for foreigners’ research and investment into the world’s larges economy.  Also, the more onerous US rules become, the more likely it will be that even investors of average means will begin to move funds abroad.

restricting portfolio investment in China

May 14, 2020 By in China, Uncategorized Tags: , Leave a comment

According to press reports, the Trump administration has ordered a government pension fund not to hold a non-US equity index fund, about 4% of whose value is Chinese stocks, on the grounds that the Chinese shares represent a national security threat.  Because the board of the fund has ignored this order in the past, Trump is asking Congress to remove a majority of its members and replace them with his loyalists.

If there is a conceptual argument for this action it is that buying shares in Chinese publicly-traded companies, albeit indirectly, potentially lowers the firms’ cost of capital, making it easier for them to expand–and that ultimately this expansion might be somehow bad for the US.  This is a real stretch.  As a practical matter, whether this fund owns the index the board figures is best for pensioners or one like it that excludes Chinese shares won’t make much difference, either to China or to the fund.  Why inject politics into the decision, then?

I see three possibilities:

Assuming Congress allows the change of board members, Trump can force the change he wants and has a talking point about taking action against China at a time when others are ignoring him.  Or, the idea may be to establish the principle that Trump can control the fund’s investment decisions.  Maybe then the fund would like to take over a hotel lease in Washington, or a golf club in Scotland, or pump money into an underground coal mine in West Virginia.  Or it could be this is a tiny first step in a plan toward barring all American investors from buying Chinese shares.  If this last, it would likely only result in Americans’ moving investment accounts to, say, Canada, losing Washington tax revenue.

 

 

Hong Kong riots

December 11, 2019 By in China, Hong Kong, macroeconomics, Strategy, Uncategorized Tags: , , , 1 Comment

a brief-ish history

During the first part of the 19th century the UK’s stores of gold and silver were being depleted (in effect contracting the country’s money supply) to pay for tea imported from China.  London suggested to Beijing that they barter opium from the British colony India instead.  Beijing sensibly refused.  So in 1841 the British army invaded China to force the change.  The UK seized Hong Kong to use as a staging area and kept it once China submitted to its demands.  During a second Opium War (1856-60), launched when China again balked at the mass shipment of narcotics into its territory, the UK seized more land.

In 1898, China granted the UK a 99-year lease over the area it occupied.  This legalized the status of Hong Kong, which remained under the practical control of the “hongs,” a newer form of the old British opium companies, for much of the 20th century.

In the late 1970s Deng Xiaoping made it clear that the lease would not be renewed but that Hong Kong would remain a Special Administrative Region, with substantial autonomy, for fifty years after its return to China on June 30, 1997.  (For its part, the UK parliament decided Hong Kongers would find the climate of the British Isles inhospitable.  So these soon-to-be-former British subjects would be issued identity cards but no other legal protections–citizenship, for example–within the Commonwealth on the handover.  This is a whole other story.)

Hong Kong’s importance today…

The conventional wisdom at that time was that while Hong Kong China’s main goal in triggering the return was to set the stage for the eventual reintegration of (much larger) Taiwan, where the armies of Chiang Kaishek fled after their defeat by Mao.

Today Hong Kong is much more important, in my view, than it was in the 1980s.  Due, ironically, to the sound, and well-understood worldwide, legal framework imposed by the UK, Hong Kong has become the main jumping-off point for multinationals investing in China.  It’s also an international banking center, a transportation hub and a major tourist destination.  Most important for investors, however, is that its equity market not only has greater integrity than Wall Street but is also the easiest venue to buy and sell Chinese stocks (Fidelity’s international brokerage service is the best in the US for online access, I think, even though the prices in my account are invariably a day–sometimes three–old).

…and tomorrow

Mr. Trump has begun to weaponize US-based finance by denying Chinese companies access to US capital markets, US portfolio investors and, ultimately, the dollar-based financial system.  China’s obvious response is accelerate its build up of Hong Kong as a viable alternative in all three areas.  As with the tariff wars, Trump’s ill thought out strategy will most likely galvanize these efforts.

the riots…

Hong Kong has 27 years left to go as an SAR.  For some reason, however, Xi seems to have decided earlier in 2019 to begin to exert mainland control today rather than adhering to the return agreement.  His trial balloon was legislation under which political protesters in Hong Kong whose statements/actions are legal there, but crimes elsewhere in China, could be arrested and extradited to the mainland for prosecution.  This sparked the rioting.  These protests do have deeper underlying causes which are similar to those affecting many areas in the US.

…continue to be an issue

The recent change in Hong Kong’s stock listing rules (to allow companies whose owners have special, super voting power shares) and the subsequent fund raising by Alibaba seem to me to show that Beijing wants Hong Kong to become the center for international capital-raising by Chinese companies.  From this perspective, Xi’s failure to minimize disruptive protests by withdrawing the extradition legislation quickly is hard to understand.

One might argue that Xi, like Trump, is trying to reestablish an older order, purely for the political advantage it gives.  In China’s case it entails reviving the Communist Party’s traditional power base, the dysfunctional state-owned enterprises that Deng began to marginalize in the late 1970s with his move toward a market-based economy (i.e., “Socialism with Chinese Characteristics”).   I find it hard to believe that Beijing is as impractical and dysfunctional as Washington, but who knows.

My bottom line:  I think the Hong Kong situation is worth monitoring carefully as a gauge of how aggressively China is going to exploit the opening Trump policies have haplessly given it to replace the US as the center of world commerce–sooner than anyone might have dreamed in 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing in an age of deglobalization

July 24, 2019 By in China, Strategy, Uncategorized Tags: , , , , 1 Comment

Rana Foroohar is one of my favorite Financial Times columnists.  The subtitle of her July 21st column about deglobalization is “The wisdom of relying on the equity of US multinationals is now suspect.”  Her conclusion is that in the years to come the real economic dynamism in the world is going to come from China and emerging markets.  The way for foreigners like us to participate is to own Chinese and other emerging markets equities themselves rather than use US multinationals as proxies.

I think Ms. Foroohar’s conclusion is correct, although I don’t think the reasons she gives are.  That’s a surprising departure from her usual incisiveness.  For what it’s worth, here’s my take:

–over the past thirty or forty years, economic expansions in the US and Europe were especially robust because they were fueled not only by reviving domestic demand but also by high-beta growth in international trade.  That period is now over.  The main reason, in my opinion, is that the large, relatively open, stable economies in the Pacific have already been fully penetrated by multinationals, so there’s no extra cyclical oomph to be had.  In addition, the developed world has also become more protectionist.  And the increasingly overt racism of the administration in the US is making American goods and services things to be avoided rather than aspirationally purchased.

–the 1980s-style argument of US investment managers with no knowledge of foreign markets and no inclination to learn is that US-based multinationals are an adequate substitute.  By and large, this has been incorrect, although there have been periods, like the 1990s, when Japan was collapsing and the US was king.

–Ms. Foroohar cites Warren Buffett, a holder of American Express, Proctor and Gamble, Kraft Heinz and Coca-Cola, as an advocate of the approach in the paragraph above–and as a case study of why buying US-based multinationals no longer works.  But as I see it, these are all names with sclerotic corporate managements who have been pretending that Millennials and the internet don’t exist.  Add IBM, a former big Buffett holding, to that pile.   Multinationals like Google, Microsoft, Amazon and Disney haven’t had the same issues.  Note, too, that both MSFT and DIS had to toss out backward-looking managements before achieving their recent success.

–I do think that China should be a key element of any long-term-oriented stock portfolio.  In addition to the secular growth story, the current Washington strategy of forcing US-based multinationals to move low-end manufacturing out of China will likely end up giving China a substantial economic boost.  Similarly, the use of the dollar as a political weapon–the arrest of the Huawei founder’s daughter on money laundering charges, for example–creates a big incentive for China to speed development of its domestic capital markets, making finance easier to obtain for fledging firms there.

However, as with any other foreign market, there is a price to be paid for entry.  The rules of the investing game–the investment preferences of locals, the reliability of accounting statements and regulatory filings–are likely different from those in the home market.  All this needs to be learned.  My approach with China far has been to stick with Hong Kong-listed names, where these risks are lower.  Nevertheless, it seems clear to me that there will be greater opportunities for knowledgeable investors on mainland exchanges.  Sooner or later we’ll all have to teach ourselves, or find an expert manager to rely on.

 

 

Trump on trade: unintended consequences?

February 5, 2019 By in Asian economic development, China, economic problems in emerging countries, economics, government economic policy, Uncategorized Tags: , , , , , 1 Comment

A straightforward analysis of what Mr. Trump is doing would be:

–tariffs slow overall growth and rearrange it to favor protected industries.  There’s no reason I can see to believe something different might happen in the US

–apart from the third world, protected industries tend to have domestic political clout but to be in economic trouble.  In my experience, these woes come more from bad management than from foreigners’ actions

–the go-it-alone approach is a weak one, since it provides ample scope for a target country to shop tariffed goods through an intermediary

–the apparently arbitrary way the administration is acting will cause both domestic and foreign corporations to reconsider future capital investment in the US.

 

There are, however, two other issues that I think have long-term implications but which aren’t discussed much.

–tariffs may cause industries that have moved abroad to retain labor-intensive work practices (and continue to use dated industrial machinery) in a lower labor-cost environment to return to the home country.  If such firms come back to the US, it won’t be with the old machinery.  New operations will be very highly mechanized. In other words, one likely response to the Trump tariffs will be to accelerate the replacement of humans with robots in the US.

–as I see it, China is at the key stage of economic development where, to grow, it must leave behind labor-intensive work and develop higher value-added industries.  This is very hard to do.  The owners of low value-added enterprises have become very wealthy and powerful.  They employ lots of people.  They have considerable political influence.   And they strongly favor the status quo.  The result is typically that the economy in question plateaus as labor-intensive industries block progress.  In the case of China, however, the threat that the US will effectively deny such firms access to a major market will kickstart progress and deflect blame from Beijing.

 

If I’m correct, the effect of trying to restore WWII-era industry in the US will, ironically, achieve the opposite.  It will accelerate domestic change in the nature of work away from manual labor.  And it will run interference against the status quo in China, allowing Beijing’s efforts to become a cutting-edge industrial power to gather speed.