How Should you Invest in China Now?

Friday, September 21, 2012 2:29

CNBC put up an article on their site this morning with Jim Chanos telling investors to head for the exits (if they are in China) or to stay away (if they are not yet in China):

“The chance of getting your money out of China is not a good one,” Jim Chanos, hedge fund titan and the head of Kynikos Associates, said in an interview. “The average investor should just avoid it.”

[...] One of his main gripes with the country — one often heard around the financial markets — is that China is notoriously inaccurate and indeed manipulative with its data, making it difficult for investors to believe anything relative to the economy there.

“There’s a huge change and it’s going to make the policy much harder to implement from Beijing when money’s not coming in but going out.” he said. “I would take issue with almost any corporate accounting in China. It is that bad.”

And while I normally would not highlight such an article, I have received three calls this week from investors overseas who are looking for a couple hours of time to understand what their plays are… and should be… give the recent spat with Japan, a missing leader, and a general awareness that China’s economy is more fragile now than it has been in recent years.

for me, this fear is a product of a few issues:

1) Low levels of “transparency” in China – Getting information out of China about where it stands is about as easy as trying to figure out just how many labor violations occur at Foxconn.  Statistics don’t add up.  Methodologies don’t make sense.  Critical information is always missing.  Request for clarification are ignored.

2) Lacking experience reduces contextual awareness – Investors who are based overseas and are not on the ground are often in a position where they find themselves unable to understand the statistics produced by the process above in the right context.  They see numbers that don’t add up, but are unable to identify the gaps and understand the significance of the gaps.  It is like having an Accounting 101 exam where you have to fill in missing data on the cash flow statement with a half a balance sheet and a third of an income statement… without knowing the formulas

3) “The Fear” – Which leads to a deer in the headlights feeling.  A fear of “China” that is less about China and more about the process that they have in place for finding and analyzing their data

Investors who are in China need to begin evaluating their positions and developing a sense of timing.  Because as Chanos mentions, getting your money out legally is damn difficult in China.  And for those outside of China, one needs to have a healthy respect for the facts on the ground.  D&B’s here come in a different form, and anyone who has worked in due diligence will tell you that what is on paper is often very different than what is on the shop floor.

Which ultimately is where I would agree with Chanos, and why when I am speaking with investors I often spend more time speaking to them about them than I do about China itself.  Because for me, it is not about “China”, it is about their understanding of China and how they are (can be positioned) for the changes that are going to take place over the near and long term.

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