Wednesday, 11 February 2004
The Daily Reckoning PRESENTS: Karim Rahemtulla with his own
doubts on the Pao Mo* bubble...
[* "Pao Mo" = bubble in Chinese]
PAO MO RELOADED
By Karim Rahemtulla
China is touted everywhere as the investment destination of
the century. Don't believe it. My experience tells me that
the only people who can really make money in China are the
Chinese... or at best those who have real, extensive, on-
the-ground experience in the country.
My first journey to China, about ten years ago now, was
courtesy of an all-expenses-paid research trip funded by an
investment group out of Florida. The outfit wanted me and a
gaggle of other editors to give some coverage to the
'China' story. Yes, my friends, China was a story ten years
ago as well.
This was before the Asian Financial Crisis, when Chinese
companies were going public in their local markets with the
help of some shady Hong Kong business types. Hong Kong, if
you were not aware, was born of illicit trade... and it
hasn't changed since birth. It's just cleaner, not as
smelly and you now can say thanks in English before getting
ripped off.
As my plane landed in Cheng-Du, in the Sichuan Province, I
noticed that it was quite dark outside. I am more used to
seeing the lighting grids that illuminate most U.S. cities
when I travel. There was not a single light in sight. It's
hard to be all lit up when you don't have electricity in
the rural areas! We landed. As we walked through the
customs and immigration lines, I noticed that one of the
agents had pulled over a cadre of Japanese businessmen and
was giving them a good amount of grief. I guess old
memories die hard in China.
The first thing I noticed outside the terminal was a huge
sign for Jeep Cherokee - remember, this was circa 1995. A
huge Mercedes pulled up and whisked us to our hotel. I was
beginning to get the feeling that China had really come of
age. The hotel was arguably the best hotel I have ever
stayed in, five star all the way. Satellite TV, electric
shades, marble baths - these guys really knew how to live.
The next morning, I was ready for the tour of the steel
mill that we were scheduled to visit. You see, 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 reach 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.
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 who agreed to give a little speech to
mark our visit. We entered an building that was set up like
a small amphitheater. 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 younger,
more naïve young man. He must have gotten rid of the
manilla 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 ye" (not to be confused with "falun
gong.") It was barely 2pm and out of nowhere appeared a
bevy of beauties with bottles and glasses. Woolong ye is
the Chinese equivalent of moonshine... I guess. I don't
drink alcohol (before 6 pm anyway) and so I refused to
partake in this party with the party.
These Chinese were not shy about showing their fondness for
hooch. It was too late. An hour had passed and I was the
only sober one in the room, probably in the entire plant.
They started to spill their guts - figuratively. The plant
was not owned by the Hong Kong company. It was still owned
by the state... ha ha. The company executives in cahoots
with Mr. Rolex had "leased" the plant to the Hong Kong
company so they could pitch it to unsuspecting foreigners
(read Americans who love a bargain) and then turn over
their shares in the this public company at a nice profit.
If a few of the analysts and writers on the trip wrote
about this Hong Kong small cap that also traded on the
Nasdaq bulletin boards - their retirement would be set in
stone, or better yet, U.S. dollars. Then, they could tear
up the lease agreement and the state would be none the
wiser. I mean, how many people are there in China? A
billion two, three? How easy is it to pull a fast one?
It's all in the numbers.
The trip ended badly, in more ways than one. I left feeling
that I had wasted my time. As I mentioned before, I came to
the conclusion that the only people who would make money in
China then were the Chinese. If you want to invest in
China, be careful and look to experience. It is one of the
few countries where I would gladly pay a fund manager like
Mark Mobius a point or two to lead the way.
Fast Forward to 2004. Just days ago, China Life, a wildly
successful Chinese Life Insurance company, saw its shares
tank. In fact, they are down 30% in about a month. The
decline worsened as news came that an investigation into
the company's parent company yielded lots of
irregularities. I wonder if the company's CEO wears a
Rolex?
Next stop - India.
Regards,
Karim Rahemtulla