Ever since my first visit to China in the early 1990s – a real eye-opener – I’ve been shorting Chinese stocks more frequently than I’ve been buying them.
Having said that, China has been a difficult investing experience for most investors, professional and non-professional alike.
Fund Manager, John Paulson, found that out last year when his bad bet on Sino Forest allegedly lost hundreds of millions of dollars thanks to supposed fraud on the part of the company.
In my new book, Where in the World Should I Invest?, I explore the reasons why this emerging markets behemoth is such a tough place to make money. And why China always seems to appear better on the surface.
Here is an excerpt from the book. It documents my first journey to the Middle Kingdom, and how it has affected my investing advice for the region in the years after. Enjoy!
Tour of the Steel Mill
The next morning, I was ready for the tour of the steel mill that we were scheduled to visit. The mill used to be owned by the state and was now privatized and owned by a Hong Kong-listed company. Bicycles – I have never seen so many. Cars? I have never seen so few.
As we navigated through crowded streets, it was apparent that China would have to do a lot more than a few hundred billion in trade to get up to speed as a First World country. All around us, poverty made its sometimes-pungent presence known fully and completely. A chicken in every pot? How about just a pot first?
We reached the steel mill and were greeted by a huge turnout of employees and staff all wearing their Sunday best and smiling. They could smell the profits reeking from our First World clothes.
The Chinese had a weird sense of fashion. The up and comers wore Western suits – with the labels still showing – the sign of prosperity. We were led around the factory, given a tour of the smelter, offered bamboo hard hats (I still have mine) and warned of the dangerous environment. Apparently the amputees had the day off for this tour.
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As we toured the facility, many of the upper-level executives who spoke very good English began to cozy up with us. The plant was spectacular, no? It was now the lowest-cost producer of steel in China – ever since the state let go.
We were now on our way to see the local communist party head that agreed to give a little speech to mark our visit. We entered a building that was set up like a small amphitheatre. The officials welcomed us with smiles and nods. I held on tight to my wallet.
The head “Red” said nothing of significance or worth remembering. But as he wiped his hair back, I noticed that he was wearing a real Rolex watch. (As a one-time watch enthusiast, I can spot the real thing from a mile away – it’s all in the magnification.) I asked myself how a Communist Party official could afford such a luxury on barely $20 a month for a salary. Then I remembered that I asked myself the same questions in 1982 when I visited Russia as a younger, more naïve young man. He must have gotten rid of the Manila envelope by now.
The meeting ended. We were invited to a party with the party. At the party, the officials and executives were getting very friendly and anxious. They began extolling the virtues of the steel mill, its huge profitability and the capitalist changes taking place in China. No one was biting.
They loosened their ties and announced that it was time for some “woolong yuye” (not to be confused with “falun gong”). It was barely 2pm and out of nowhere appeared a bevy of beauties with bottles and glasses. The beauties, as I learned later were also a freebie.
What I learned at this meeting, and about the steel mill, absolutely floored me. In the book I explain the scheme in detail. Needless to say, it’s enlightening and set the premise for all my future investing in China. To get a copy, click here.
Ahead of the tape,