China Grapples With Epic Property Boom; A Bubble That Just Won't Burst; China's Red-Hot IPOs; Fraud, Fraud, Fraud; How Chinese Officials Hijacked My Company

Other than shorting a few obvious frauds when I was running a hedge fund (I wish I'd shorted more!), I've never invested in China. It's the Wild West of capitalism, and I know too many people who've been defrauded there (see articles below for more on this), so it remains in my "too hard" basket.

That said, I'm fascinated by China and read as much as I can about the country, its economy, and its people. Below are some of the most interesting articles I've read over the past couple of weeks:

1) There appear to be all sorts of bubbles in China, but anyone betting on them bursting has mostly gotten burned – so far, anyway. Here's a Wall Street Journal article about China's property bubble: The $52 Trillion Bubble: China Grapples With Epic Property Boom. Excerpt:

Even the coronavirus hasn't stopped the world's biggest asset bubble from getting bigger.

After a brief pause during coronavirus lockdowns in February, a Chinese property boom in some megacities that many thought was unsustainable has resumed its relentless upward climb, with prices rising higher and investors chasing deals despite millions of job losses and other economic problems...

The resulting asset bubble, many economists say, now eclipses the one in U.S. housing in the 2000s. At the peak of the U.S. property boom, about $900 billion a year was being invested in residential real estate. In the 12 months ended in June, about $1.4 trillion was invested in Chinese housing. More was invested last month in Chinese real estate than any other month on record.

The total value of Chinese homes and developers' inventory hit $52 trillion in 2019, according to Goldman Sachs Group Inc. (GS), twice the size of the U.S. residential market and outstripping even the entire U.S. bond market...

Home prices in some Chinese cities have reached levels comparable with some of the world's most expensive urban areas. Average home prices across China reached 9.3 times average income in 2018, according to the Chinese Academy of Social Sciences, compared with 8.4 in San Francisco.

2) Here's a companion WSJ "Heard on the Street" article: The Trouble With a Bubble That Just Won't Burst. Excerpt:

When the subject of China's endless housing boom is raised, investors sometimes wonder what the problem is. Unlike more strictly capitalist economies, prices will probably not be allowed to fall dramatically. So if the bubble is protected by the state, does it matter at all?

A growing field of research on the long-term effects of China's high levels of property investment suggests it does. Poorly allocated capital drags on productivity, a problem that burns more slowly than a crash, but with similarly deleterious effects.

The telltale signs of the bubble can be seen in China's low rental yields and its urban vacancy rates of more than a fifth. Apartments are purchased not because they produce an income, but because of expected continual price gains, as demonstrated by the surging share of families that own multiple homes.

Observers of Chinese markets joke that many companies are, or eventually become, plays on real estate. Chinese tobacco companies, weapons manufacturers and insurers have moved into the market.

3) As Bloomberg reports, this certainly smells like a bubble as well: China's Red-Hot IPOs Are Creating a New Billionaire Every Week. Excerpt:

Zhong Shanshan, whose schooling was interrupted during China's cultural revolution, worked in construction, as a reporter and in the bottled-water business. Today, he's worth $17 billion after his drug company went public in April and the shares surged 26-fold.

Known as Lone Wolf by the Chinese media, Zhong, 65, has a made-for-movie story, but it's far from unique in China. At least 24 people have become billionaires this year through June from the country's raging market for initial public offerings, including former teachers, accountants and software developers, according to data compiled by the Bloomberg Billionaires Index.

Selling shares to the public has long been a lucrative channel for company owners in China to grow their fortunes, but 2020 should have been different after the coronavirus pandemic shut down large parts of the economy and slowed growth. Instead, buoyed by an army of retail investors looking for quick returns, the stock-market euphoria has been more apparent in the Asian nation than anyplace else in the world, with the benchmark index recovering from the virus-fueled crash and becoming one of the best performers.

The 118 companies that went public in Shanghai and Shenzhen this year raised about $20 billion through June, more than double the amount in the first half of 2019, data compiled by Bloomberg show. Shanghai has become the world's No. 1 listing venue, beating New York and Hong Kong.

4) Here's a spot-on article in Institutional Investor: 'They'd Find Fraud, Fraud, Fraud.' Excerpt:

Not every Chinese company is a fraud, of course, but so many have been plagued by accounting questions that just being from China is a red flag.

Yet investors keep pumping in money. U.S. regulators who try to sniff out fraud are stymied by China's government and the difficulty of pursuing executives in a semi-closed nation halfway around the world. When all else fails, China has been known to simply throw critics of its companies in jail.

Some are still fighting to hold Chinese companies accountable, from Robert Seiden, a New York investigator who pursues shady Chinese companies as a court-appointed receiver empowered to seize their assets, to much-maligned short sellers like Carson Block of Muddy Waters Research, who came to prominence by alleging Chinese frauds.

U.S. officials are trying too. The Securities and Exchange Commission has ramped up its warnings to investors about the risks of investing in Chinese companies. And in May, the U.S. Senate passed a bill aimed at tackling a key part of the problem: China's refusal to allow U.S. regulators to scrutinize the work of audit firms that vet the finances of many Chinese companies.

But so far, the people trying to curb irregularities and alleged fraud at Chinese companies admit they've had limited success at best. Their experiences suggest that investors losing money in Chinese companies now have a rough road ahead — and may want to think twice before investing in the next highly touted Chinese stock that comes around...

Why does this keep happening? Why do these problems recur, even after investors should be on notice that Chinese companies can be risky and difficult to hold to account?

Part of it, some observers say, is that people have short memories, are eager for easy trading gains, and keep wanting to benefit from the opportunities China presents. China and its companies know that.

"Investors forgot" and "just needed to say no," Block says. China is "this environment where fairy tales are created because investors can't get enough."

5) Stories like this recent one in the WSJ are all too common... How Chinese Officials Hijacked My Company. Excerpt:

President Trump said last month that talks for a phase 2 trade agreement with China were on the back burner. If they resume, it is more important than ever that any deal protect American companies and their intellectual property from theft by China. My experience doing business in China shows the lengths to which the Chinese government will go to steal American intellectual property.

My story began in 2016, when I entered a joint venture with the government of Rugao, a city in Jiangsu province with a population of 1.4 million. Rugao needed expertise to start an automotive manufacturing company that would create jobs.

I would bring experience, design, engineering and related technologies developed over my 40-year career in the automotive industry building race cars and high-performance street cars. My contributions to the deal were valued at $800 million, and I would maintain a majority stake in the new company along with my American partners. Rugao would bring $500 million in capital and $600 million in subsidized loans over three years to fund manufacturing sites and operations, and receive a minority stake.

The deal was a sham. It was a trap designed to secure my intellectual property, then use intimidation tactics and lies to nullify the agreement and seize control.

Best regards,

Whitney