September 28, 2005
THE GREATEST OPPORTUNITY SINCE ARGENTINA:
The Great Chinese Bank Sale (Jonathan Anderson, September 2005, Far Eastern Economic Review)
The hedge-fund manager sitting across the table shuts his eyes in frustration and slaps his palm to his forehead. “What on earth are they thinking? This is Latin America all over again. Everybody jumps in on a whim, and then they spend a decade digging themselves out. Plus they lose a truckload of our money in the process. This time is no different.”The place is New York, in one of the countless hedge-fund offices populating east midtown. The time is mid-June 2005, and the reference is to Bank of America’s announcement that it would purchase a 9% stake in the P.R.C.’s China Construction Bank for the princely sum of $3 billion—making it the most expensive banking acquisition (or, for that matter, any acquisition) in China’s history. [...]
According to the press announcements of the overseas banks themselves, this is one of the greatest investment opportunities of the new century: a chance to enter a financial market with $4 trillion in assets, and what’s more, a market that is growing at double-digit rates with no slowdown in sight. Chinese per-capita income is only $1,500, and consumers are just beginning their love affair with mortgage and credit card debt; imagine what riches lie ahead over the next decades as incomes double and double again.
For more cynical observers, of course, this is just the latest in a long string of disastrous banking follies. Perhaps the most engaging read of the past year was Tim Clissold’s Mr. China, a story of two private equity entrepreneurs who collected hundreds of millions of dollars from global investors in order to buy into the “greatest growth story of the century” and transform the Chinese corporate landscape in the process, but ended up pissing away most of the funds down the black hole of mainland economic reality.
So it will be with the banks. According to detractors, Chinese banking problems have simply been glossed over through state bailouts and creative accounting. Nothing has changed in the economy, as civil servants still dutifully shovel money into moribund state enterprises with no regard for repayment prospects. Once the next downturn hits, banks will face a tidal wave of new bad loans, and the foreign giants will be forced to write down tens of billions of dollars in worthless investments in the process.
So which is it? A once-in-a-lifetime opportunity, or a pending disaster? In fact, neither. The truth of the matter is that China’s financial system is neither an explosive minefield nor a beckoning gold mine, but rather a profoundly middle-of-the-road investment option.
But there are a billion customers.... Posted by Orrin Judd at September 28, 2005 8:20 AM
My favorite old saying - "Sure, we're going to lose a dime on each and every one, but we'll make it up in volume..."
Posted by: M. Murcek at September 28, 2005 9:02 AMYeah, a billion-point-two customers, and SOMEONE is going to make a trillion dollars off of 'em...
But being a pioneer, a prospector, if you will, has always been more bust than boom.
Posted by: Michael Herdegen![[TypeKey Profile Page]](http://brothersjuddblog.com/nav-commenters.gif)
at September 28, 2005 9:36 AM
OJ,
Your own posts on China's instability indicate that there are really only about 150-200 million customers, and the rest are dirt poor peasants that make southern Mexicans look rich.
Of course, the numbers will grow. "Proufoundly middle of the road" probably correct.
The best investment a regular American can make (provided they have/develop the mindset, is to open and invest in their own business.
Posted by: Bruno at September 28, 2005 10:58 AMBofA is down about 10% since making this announcement. Obviously, that is not the only factor in their drop, and it will be a year or two (or more) until the 'propriety' of their investment can be seen clearly.
Bottom line - it is relatively easy for a company like BofA to write off up to $1 billion in bad loans (especially if their stock is rising). But a $3 billion investment? That's a different story, mainly because if it truly turns into a bad deal, there will be a couple of cycles where they pump billions more in to try to make it work. That is what investors have to watch out for.
But if their diligence was good, and they watch things closely, it might work. The problems in China are not like those in Argentina.
Posted by: jim hamlen at September 28, 2005 11:37 AMJim, you're right, but not necessarily in the way you think.
China's problems are much worse than Argentina's. There are 22 Chinese provinces, each of which is as large as any Western European country and most of which are as heavily populated as Argentina.
In short, there are at least 22 Argentinas in China, not to mention that it also has 5 "autonomous" regions and 4 municipalities with more than 10 million inhabitants.
Posted by: X at September 28, 2005 12:07 PMoj:
Because they want stuff, and we want to sell stuff to them.
It's China's central gov't that currently prevents Americans from making dynastic fortunes in the PRC.
If that changes, it's Katy bar the door.
Sure, most Chinese are dirt poor, but fortunes have been made in the past on penny candy and tortillas, so it's mostly just a question of getting access.
Posted by: Michael Herdegen at September 29, 2005 3:45 AM
And when it all goes bung and you can't repatriate your money, your plants, etc.?
Posted by: oj at September 29, 2005 8:06 AMIt's just like wildcatting for oil.
You make hay while the sun shines.
Just because it's going to rain "someday" doesn't mean that you can't put up a barnful of hay before then, and in any case it's not a sure thing that civil unrest in China will shut down your operations.
Plenty of people are still millionaires because of their investments in or affiliations with various tech companies during the dot.com bubble years, even though the companies themselves may have failed since then.
Posted by: Michael Herdegen at September 30, 2005 1:24 AM
Exactly--it's like dot.coms.
Posted by: oj at September 30, 2005 7:26 AMWhat's your beef with making huge amounts of money for a time period that's less than forever ?
As long as you know it'll end, and are willing to take your chances, all is well, no ?
Posted by: Michael Herdegen at September 30, 2005 11:16 PM
People generally don't get out in time and don't do anyone much good while they're in such schemes.
Posted by: oj at September 30, 2005 11:22 PMPeople generally don't get out in time...
No, of course not, because why quite while you're winning ?
The point is that AFTER things stop being lucrative, you end up with MORE than you otherwise would have had.
Further, we aren't talking about the general population, which is busy setting itself up for failure in the housing bubble, but professionals, who know that sometimes they'll lose.
...and don't do anyone much good while they're in such schemes.
By that line of reasoning, we shouldn't allow American consumers to benefit now from cheap Chinese goods, since it's possible that at some point in the future, the supply of such will be interrupted by Chinese civil strife.
Posted by: Michael Herdegen at October 1, 2005 5:23 PM
Michael:
The public did fine in the dotcom bubble--it's the companies that are gone.
Posted by: oj at October 1, 2005 5:28 PMYou have that exactly backwards.
The companies' executives, and initial investors did fine, the investing public got badly burnt.
"Companies" are just associations of people, they come and they go.
Nobody cares, unless their demise hurts actual people, as in the case of Enron.
When the mom 'n pop donut shop at the corner closed, nobody cared except mom 'n pop - and probably their creditors.
Posted by: Michael Herdegen at October 1, 2005 11:08 PM
Enrons employees cared that it ceased to exist.
Posted by: oj at October 1, 2005 11:17 PM