11.20.07
Betting the House
Frederik Balfour at Businessweek writes about China’s “sky high” gambling sector stock market and makes an excellent point:
The conventional wisdom is that China’s greenhorn individual investors will take the hit, while corporate China—the companies that make shirts, build ships, and run utilities—won’t feel much at all. The real economy these companies operate in is far too strong to be affected by stock wobbles, goes the argument. The price of corporate shares may fall, but underlying earnings will power on.
That line of argument, though, is looking suspect for the simple reason that companies big and small are now playing the markets with abandon, using corporate funds to invest in each other’s initial public offerings and bolster their bottom lines. Although figures are hard to pin down, Morgan Stanley figures a third of reported corporate earnings in China stem from investments outside companies’ core businesses—which in almost all cases means plowing money into stocks. “It’s quite dangerous for these Chinese companies because these gains have no cash basis,” says Ding Yuan, a professor of accounting at China Europe International Business School in Shanghai. “It’s really frightening.”
It has been fascinating to watch how quickly Chinese companies and individuals have jumped into the world of investing over past few years, first in real estate and now in stocks. I do admit feeling a bit envious when I hear how easily some people are making money in China today. (I’m a fairly conservative investor myself, and I don’t have the money for any significant investments anyway.) Part of me secretly hopes the market tanks, but at the same time articles like this remind me just how bad things could get. Even though I have lived in China most of my adult life, I have no financial attachments here. If need be, I can catch the next flight back to the States and stay there for good. I’m pretty confident I can find interesting and well-paying work here in China even if the current growth fizzles.
I worked at a Chinese company for several years and often wondered just where the hell the money was coming from. The simplest answer is probably “wherever it was easiest to get”. What little we knew about the company’s domestic business included illegally buying and selling insider information, paying kickbacks to secure contracts, and other typical “alternative” business strategies common in China. Once or twice a year at least half of the employees would leave in a mass exodus, usually just after receiving (or not receiving) a Chinese New Year bonus. The company sits in a 300 square meter new office in Beijing’s central business district. As far as I can tell, they’re not really getting any business or doing any work. Yet someone continues to make payments on the RMB 6 million office. It wouldn’t surprise me at all if the boss has taken whatever cash he could scrape together and kept the whole thing afloat by riding the stock market for the last two years.
I get the feeling that thousands of other “successful” businesses are taking similar risks. And while I have seen a few people come out well (including a well-known former classmate), I think most are headed for some serious pain.
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