Joe Sternberg of the Wall Street Journal asks some tough questions:
Everyone knows the greater-fool theory of investing—you buy any asset at any price, no matter whether the price has any rational relationship to the underlying value, in the hope you can sell it at an even higher price. The method is more than a little dangerous, and plenty of people have lost a lot of money when they discovered they were the fool at the end of the chain.
So what does that have to do with the Chinese?
Buying ailing companies isn’t inherently foolish. Mitt Romney and his colleagues at Bain made lots of money doing exactly that. A smart acquirer can change the underlying value proposition. Mr. Romney’s success lay in his ability to transform a struggling firm through an injection of better “management technology.”
But this requires skill in distinguishing failed business models from failed businesses—the difference between companies that fail because they’re poorly run, and those that fail because they’re selling a product no one wants. Not even Mr. Romney and other experienced private-equity investors in the West are infallible at this.
The contrast between that model and the China model are striking. The most common justification presented for so many Chinese acquisitions, including A123 and Nexen, is technology transfer. The idea is that Chinese companies, at their government’s urging, are buying Western companies mainly for their know-how.
Think about this for a minute. The successful market-economy acquirers focus on transferring skill into their purchases: Management acumen better unlocks the value of a viable but struggling company, or integrates a reasonably successful firm into a larger whole that can better exploit its resources. China is interested mainly in transferring mechanical and managerial know-how out of struggling companies, without any apparent thought for why the companies are struggling in the first place.
I have only just started on a few recent pieces on China.
This comment from a guy named Mark Kitto, a life-long Sinophile now abandoning the place left me pretty disturbed about the scale of malinvestment there:
I hope he is wrong, I fear he isn’t.
Myrddin Seren
16 Aug 12 at 10:07 pm
Yeah, it doesn’t make a lot of sense, does it? When you think about it for a moment.
is this really the Chinese strategy, or is it something that is used post-hoc to explain poor investment decisions?
dd
16 Aug 12 at 10:17 pm
Another perspective to consider is that the Chinese considers USD to be worth less to them than they are to others on the market.
A lot of paper that they have to get rid of in exchange for something, anything, of real or potential value.
Driftforge
16 Aug 12 at 10:17 pm
The result is the biggest property bubble in history, which when it pops will sound like a thousand firework accidents.
Either that or affordable housing for millions who previously couldn’t. Yes, it will be disastrous, but with a price so low, new players may be able to get into the real-estate game (if the rules allow them to).
China is interested mainly in transferring mechanical and managerial know-how out of struggling companies, without any apparent thought for why the companies are struggling in the first place.
When your own system is third- or fourth-rate, investing in someone else’s first-or second-rate product, even if it’s a failing one, may be a reasonable thing to do. I’m not all that sure the Chinese are being stupid here.
perturbed
16 Aug 12 at 10:24 pm
It seems that the investment rationale is weak at best with some of these purchases; merely that Chinese companies are flush with cash and are desperately seeking a return. Even if the idea is for a transfer of technological know-how, that thesis is weak given that it is overpaying for poor technical/managerial skillsets.
The Chinese economy needs further liberalisation otherwise these imbalances will represent a massive wealth transfer from China to the west, and in the most incompetent method available.
faust
16 Aug 12 at 10:31 pm
I would call it cutting losses. Buying a real asset is better than holding onto rapidly depreciating Treasury bonds. The Chinese are buying more Aussie assets than US assets anyway so it is not like they are going crazy over there. Political risk must be seen as higher in the US as blaming the Chinese for US failures is a bi-partisan past time look at Romney and Obama competing to be the most anti Chinese, then contrast that with the Australian situation where most people in both parties do not see the problem.
kelly liddle
16 Aug 12 at 11:39 pm
Am currently working on a project where we are in competition with Africa for funds. Africa is seen as risk less as the investment will be underwritten by the world bank.
Interested investors are handling Chinese European and British funds. All have expressesed concern that the Australian government doesn’t want foreign investment any more.
Told them not to worry, there would be a new government sooner rather than later. That’s the government we’re talking about, they said.
We’re in a bit of strife when it’s safer to put your money with an African despot rather than here, no matter who’s runnin the show.
Pickles
17 Aug 12 at 7:54 am
A picture is a thousand words. When one owns $1.164 trillion in bonds of a country with economic fundamentals worse than Spain, Portugal or Italy, one might wish to sell out at the top of the market and buy something else. Anything else.
Bruce
17 Aug 12 at 9:22 am