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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7 Responses to “How Should you Invest in China Now?”

  1. Chris Devonshire-Ellis says:

    September 21st, 2012 at 8:17 am

    Getting money out of China legally is difficult? Rubbish. You have your company accounts audited, pay the corporate income tax due, apply to SAFE to transfer overseas, pay any tax that may be due on profits repatriation (5-10% based on any applicable DTA) and arrange it through your bank. I do this procedure between 3-4 times a year with our own firm and many, many times when assisting our clients, and it has never been a problem, ever. If you want to get money out of China, you need to have done four things:
    1) Set up your business properly,
    2) Paid your taxes properly,
    3) Get a good accountant,
    4) Go through the audit process.

    It’s simple, works, and should absolutely not be a problem for legitimate businesses operating in compliance in China. Suggesting otherwise is misleading. – Chris

  2. Rich says:

    September 21st, 2012 at 9:15 am

    Chris.

    Sorry. Couple of things as I did not intend to mislead, but did not clearly define the context that should have been provided:

    Where I agree with Chanos in getting money out legally has a couple of streams in my mind:
    1) If the shit hits the fan, the rules may change to make it more difficult to get money out. That could be paying more tax, it could mean more paperwork, etc.
    2) Investors who do not have presence on the ground, those he was warning away, could mean getting into China to unwind assets could be more difficult.
    3) Investors who do not have presence on the ground, those he was warning away, could mean getting into China to unwind assets could be more difficult.

    So, you are correct – those that are structured through corporate entity have a process.

    For myself, I was looking at a different group. Not to mean they were undercover, but more like those who were more exposed.

    R

  3. Chris Devonshire-Ellis says:

    September 21st, 2012 at 2:57 pm

    Changing the regulatory environment to prevent companies moving money out would be time consuming, politically difficult and would create uproar in the perception that China was unfriendly to foreign investment. I think that scenario is unlikely to occur.

    More likely to happen should the Chinese wish to delay repatriation of monies from China would be the deliberate introduction of problems at the systematic level. In fact, China had balance of payment problems about 15 years ago and at that time, SAFE delayed the conversion of RMB to foreign currency at times for months. Such issues could in fact be specifically targeted, even at companies from a particular nation. However I feel that if it were intended to make a big statement, China would need to create systematic or procedural problems that interfered with it’s larger trading partners, and this, while it could be a short term measure put in place to demonstrate political annoyance, I don’t think could become a practical, on-going issue.

    To summarize, I think Chandos is mistaken and I doubt there will be any sustainable barriers to any company operating legitimately in China when wishing to repatriate their profits.

    If China does wish to keep foreign invested dollars in China, then they would be better off introducing incentives, rather than problems, to do so. Some in fact already exist in the form of business tax rebates and so on, if these were to be expanded China would then perhaps see an increase in profit retention in China and at the same time expect to be lauded at the same time. They’re not stupid, and I’d suspect that any desire to limit the level of repatriated profit from China would be met by incentivisation rather than deliberate provocation. – Chris

  4. Rich says:

    September 21st, 2012 at 8:23 pm

    Chris.

    Separate from corporate money, what about the large investors who are working through QFII or other large investment platforms? Say the shit hits the fan in a big way economically… do you think SAFE is going to work hard to get money out?

    I ask because I don’t think Chanos is concerned with corporate money, or about repatriating profits. the way I read it, he is focused on funds and retail investors who are putting money into stock market, angel fund investments, etc.

    R

    R

  5. Chris Devonshire-Ellis says:

    September 22nd, 2012 at 7:48 am

    Yes, but such funds are well aware that China does not have an open capital account. The reason from the Chinese perspective is that they don’t want hot money flowing in and out all the time based on political reactions – and China heavily politicizes it’s commerce. Consequently the capital account is rather rigid in China. But surely any investor in China knows that. It would be naive in the extreme for any fund not to be aware that money is locked into China until you retract it through paying tax. – Chris

  6. Tim says:

    September 24th, 2012 at 12:14 am

    Just to add to Chris’ point regarding repatriation; it also appears that in order to boost FDI China is considering loosening it’s substantive business requirement for investors located in jurisdictions with favorable tax treaties with China. 

    That being said, I am not convinced that this is the intent of this article but there is no link to follow. I suspect this may have more to do with average investors looking at securities tied to the China market such as the reserve merger trend that read more like a bad day-time soap opera with all of the histrionics and blatant fraud. 

  7. Kanelbulle says:

    October 7th, 2012 at 4:59 am

    Anyone who thinks doing business in China is the same or similar to doing business in Europe or the US is either stupid or completely misinformed. The Chinese courts are political in nature, and will rule in whatever way the Party desires any given day. There is no rule of law, and rules can change at any time. Large corporations like Google get hacked, scared out, and replaced by Baidu. Facebook is blocked so QQ gets a chance, same with Youtube vs. Youku, and VISA is given the middle finger so China can build up the utterly worthless China UnionPay system.

    Most investments require local partners, and these local partners will steal your technology as fast as you can blink. Then they’ll get fat government contracts, you’ll get screwed, and a year later they’ll launch your own product back on your home market via some profit-hungry retailer.

    There will always be short-sighted morons with their eyes on the gold who will sell out the countries/companies for a quick quarterly profit. So if that’s your game, go right ahead. But be quick about it. There’s less left to “sell out” every year.

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