Is Investing in China a Safe Bet?

China economics
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There is a very old and popular proverb in China called; Sai-weng-shi-ma, which roughly means, ‘A Blessing in Disguise”.  However, as in all things Chinese, it can also mean the opposite – a blessing or good thing is not always as it seems.

The proverb tells the tale of an old man whose prized horse runs away. After a few days, the horse returns and brings with it another horse (a good thing). However, when the oldchina amatuer economist man’s son attempts to ride the new horse, the son falls and becomes severely disabled (bad thing). But alas, the proverb is not complete. A war soon breaks out and all the young men in the old man’s village are called to fight and, unfortunately, all soon die in battle. Except, of course, the old man’s son – who did not get drafted  as he cannot fight because he was disabled from the fall from the horse…

The analogy of the proverb with investing in China is a correct one. Things are often not as they seem. Since China does not have the history of capitalism and investment controls enjoyed in the western world, investors and China watchers should be cautious when investing in China – or in Chinese stocks.

In the U.S., all public companies that issue stock must abide by the rules and regulations of the Securities and Exchange Commission (the S.E.C.). In China, the counterpart is the China Securities Regulatory Commission, or the C.S.R.C.  However, other than both being commissions, the similarities between the two generally end.

The S.E.C. in the United States governs and requires the accuracy of all economic data coming from publicly traded companies. The S.E.C. has little interest in a company’s stock price, other than to monitor for unusual activity. However, the CSRC in China often takes the role of protecting the company, or recently, the Chinese government – not the individual investor as in the U.S.

Since June of this year, the major stock markets in China lost over 40% of their value. But unlike the U.S., which would typically allow markets to rise and fall on their own accord, the Chinese government has directly intervened and began buying stocks on the open market (through a government agency) to “prop up” the market.  As of today, the Chinese government has spent $800 billion to keep stock markets from falling. This sort of direct governmental intervention in a capitalistic stock market is not allowed (and generally frowned upon) in the western world.

In theory at least, the value of a publicly traded stock should reflect the business decisions and financial results of the company, not how much the government spends to prop-up the price. Of course, such actions by the Chinese government have not gone unnoticed by major money managers. The Wall Street Journal reported revealing comments by one the world’s top investment guru’s, Raymond Dalio of Bridgewater Associates;

“Our views about China have changed, there are now no safe places to invest.”

Prior to that statement, Bridgewater was very bullish on Chinese investments.

China now appears to be at an economic cross-roads. It’s leaders can allow its economy and markets to rise and fall as the result of the fickle economic winds. Or they can continue and try to manipulate the results through direct government intervention and questionable reporting. Regardless, savvy and wise investors would be wise to sit and watch this one out.