A Bull in China

Investing Profitably in the World's Greatest Market

Jim Rogers

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9780470985601, 9780470985618
• eBook ISBN: 9781119049845
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Profiting from China without getting burned is currently an obsession with the international investment community. The estimated size of the Chinese economy has just been revised upwards, making it the 4th largest in the world behind the US, Japan and Germany, and ahead of the UK but the idea that investing in China is a sure-fire, get-rich-quick investment story is dangerously misleading.
* The author of the bestselling Investment Biker, Adventure Capitalist, and Hot Commodities, is providing a book that provides a window into what will soon be the most vital, most lucrative market of our time: China.
* While the Chinese economy has had an annual average growth of 9.4 percent since 1978, and despite the ongoing speculation about China's future, its stock market is now emerging from a six-year low.
* As the Chinese economy continues to lumber toward a free market system - and as the Chinese government inevitably unpegs its currency and opens its stock market to more foreign investment, Rogers foresees an abundance of opportunities for investors.
* In this book, he shows readers not only how to take advantage of
China's coming dominance - what, where, how, and when to buy - but how China will impact individual companies, markets, and economies around the world.
* "Nobody with blue eyes has ever made money investing in China," the old saying goes.
Jim Rogers aims to disprove this adage.

Jim Rogers co-founded the Quantum Fund and retired at age 37. Since then, he has served as a sometime professor of finance at Columbia University's business school, and as a media commentator. He appears twice a week on Fox Business News, and is the author of three immensely successful books.

1
Investing: From Mao Caps to Small-Market Caps

Two stock markets, three if you count Hong Kong’s. At least five types of shares, not to mention ADR’s and various funds. Shares you can purchase outside China that you can’t if you are there, and shares with differing values on different exchanges. Like most everything else about China, buying into China’s prosperity is loads more complicated than it needs to be but a whole lot simpler than it looks from a distance. And the process is getting ever more accessible to foreign investors through U.S. brokers, international banks, and the Internet. So do not let the details deter you: a stock is a stock, a solid company worth investing in, no matter where it is listed. But before you decide how to invest, let’s review the way China’s exchanges have been forged—and just where they may be headed in future.

How China Took Stock

Forget pandas or golden pagodas. On my third journey to China in 1988, the first Chinese attraction I wanted to see for myself was a small trading counter that had recently been set up by the Industrial and Commercial Bank of China. This wasn’t quite a real stock market yet. Without tickers or brokers, the few shares traded there—at the start in late 1986, just thirty a day, representing two companies, not exactly major volume—were practically done by appointment. Though Shanghai had once hosted the richest exchange in Asia, it would still take two more years to launch properly once more. Yet this nondescript office, in a small building off an unpaved side street strewn with piles of water pipes, made the workings of capitalism more vividly real to me than all the world’s speeding electronic tickers. Here was honest-to-goodness “over the counter” buying and selling—across one single cluttered counter, in fact.

Having found the place, which a government official had mentioned to me in passing, I couldn’t resist joining a few brave souls in purchasing stock certificates, printed on real paper as oversize as my high school diploma. Nothing “virtual” here. With the help of my translator, and the few stray old gentlemen in line who remembered the old exchanges from before 1949 and were adding some excitement to their old age, I attempted to place my own order across an open ledge to a poor lady clerk who nearly went into shock. She seemed afraid to take my money—Chinese bills, as good as anyone else’s—and had to confer with superiors since I was the first “foreign ghost” to turn up before her. Even after she agreed with a grin to finalize the trade, the stock itself, and numerous torn receipts flimsy as flypaper, had to be passed around for numerous “chops”—official carved seals wielded by bureaucrats. This was followed by so much clicking and reclicking of beads on a desktop abacus that I had to tell them to move it and complete the transaction before my stock price moved up.

But I was proud when it all got done. For an inveterate investor, holding a piece of China’s burgeoning experiment in free markets was a lot more exciting than grasping chopsticks. “May we all get rich together!” I told the clerk, two years ahead of the real Shanghai exchange’s opening. The twinkle in her eye indicated she just might have understood.

I wish I could claim that single share of an obscure bank is now worth all the tea in Shanghai. I have no idea. Nor do I want to know. It is framed and hanging on my wall. It will probably be more valuable as an antique someday than as a stock. In any case, I’ll never sell it, as they told me I was the first foreigner ever to buy there. But I can assure you that China’s “experiment” in stock exchanges has more than panned out. In the first twelve years, listed companies rose from twelve to nearly fourteen hundred, investors in Chinese exchanges rose from four hundred thousand to just under sixty-seven million—and that was before things really took off at the end of 2005! From 1991 to 2005, companies raised over US$150 billion on the two exchanges. By September 2006, the two exchanges listed 1,377 companies, with total market capitalization of US$400 billion.

Despite wasted years of inconsistent policies, reflecting a lack of experience and a lack of faith in market mechanisms, the Shanghai Stock Exchange (established along with one in the booming southern border town of Shenzhen) has already become the second-highest in capitalization for Asia, at over US$500 billion, on its way to returning to the place of preeminence it held before the Second World War.

Actually, the Chinese have been capitalists since way back. If the capitalist system itself is one of the few inventions that the Chinese can’t claim, they certainly have plenty of practice at private entrepreneurship—and, given time, may yet perfect it. Even during the last decadent days of the Qing Dynasty (1644–1911), when antiquated feudal rule under the aging empress dowager left China open for plunder by Western armies, some Chinese companies began issuing public shares as a means to raise money for expansion. In the late 1860s, a securities trading market started up in Shanghai. A list of thirteen companies, including the Hongkong and Shanghai Banking Corporation (global HSBC as we know it today), appeared in a June 1866 newspaper under the “Shares and Stocks” section. (The New York Stock Exchange had started small, too, in 1792.)

The first share trading firm was established in Shanghai as early as 1882. In 1891, during a boom in mining shares, European and American businessmen founded the Shanghai Share Broker’s Association, China’s first stock exchange, to help make stocks available to foreigners in that thriving international settlement. By 1914, China’s government had passed the first regulatory law concerning securities. Small trading counters were established in the northern cities of Tianjin and Beijing. But Shanghai’s main exchange dominated from 1920 and thrived through the thirties, when Shanghai, divided into British, French, and American zones, reached its wild apex as the “Paris of the East.” In 1937, Japanese bombardment and occupation put a definite end to all investment and speculation frenzies. While small exchanges were attempted in the chaotic days before and after the Communist Party’s takeover in 1949, anything resembling shareholding or trading vanished for three decades of collectivization and economic control and ownership by Mao Zedong’s omnipresent state.

During the fanatical period of the Cultural Revolution, Chinese people were persecuted for reading Western novels or knowing how to play the piano. Can you imagine how much sludge someone would have had to shovel to do penance for holding a share of IBM? Years of forced labor would have awaited anyone even caught mumbling about such horrid things as brokerage firms or initial public offerings (if anyone in China had even heard of them). But in July 1977, just one year after the end of a decade of tumult that left China poorer and more isolated than ever, Deng Xiaoping, a former vice president and general of the Red Army who had been living under house arrest, was restored to his party posts and would soon start the country on a path of pragmatism and reform.

The Communist system, Deng could clearly see, was failing worldwide. A quick look at the world in the 1980s confirmed that countries permitting competition, allowing low-tariff imports of raw materials and intermediate goods, and encouraging exports through realistic currency values were doing well. The “Asian Tigers” of South Korea, Taiwan, Hong Kong, and Singapore inspired Deng to offer his famed dictum: “It doesn’t matter if a cat is black or white so long as it catches mice.” The cat turned out to be capitalism, prosperity its prey. In the meantime, the country was going to need a lot more than government alone could provide to rebuild and expand its base. As Deng would later muse publicly, “Are such things as securities and stock markets good or not? Are they dangerous? It is permitted to try them out, but it must be done with determination.”

Some people were determined to get going right away, especially after Deng permitted farmers freed from their communal duties to sell small crops in order to improve equipment. That was in 1984, the year of my first meanderings, and I can’t say that I saw too much trading in anything but old Mao caps. Several years earlier, some factories and department stores had begun raising capital the old-fashioned way, testing the limits of what was permissible. By 1986, Deng Xiaoping actually welcomed the head of the New York Stock Exchange to the Great Hall of the People! His original plan was to experiment with stock issuance in Shenzhen, since he’d tried out almost every other facet of the new system. This farming village on China’s southern border with Hong Kong boomed into a prosperous city of six million after it was designated the first “Special Economic Zone.” In 1988, the Shenzhen Development Bank, born of numerous credit unions, was allowed to sell five hundred thousand shares of common stock—that quickly and successfully raised several million in both U.S. and Hong Kong dollars.

But Shanghai, China’s savvy window to the West since the mid-nineteenth century, was not to be denied its role. Rushed into existence by the need to find ways to raise funds at a time when money supplies had tightened to curb inflation, Shanghai’s exchange opened in December 1990. Thousands waited in line for days to buy shares, though only eight companies were represented. Shenzhen, already operating, had its official launch six months later. To this day, the two exchanges both claim the distinction of having started first. Some temporary rules on stock issue and trading, cobbled together in 1989 from whatever overseas exchange rules the Chinese could translate, governed both.

Having seen its modest original site scant years before, I was stunned by my first peek at the current Shanghai exchange—now in Pudong, a futuristic city of skyscrapers set across the Huangpu River from the historic part of town. Here I saw at once how China’s markets could take advantage of having studied existing markets and could leapfrog over all of them in the future. The setting was luxurious, the trading high-tech. There was none of the clutter and bother of live traders racing around like they still do in “backward” burgs like New York. No hand signals or confetti, just pure electronic trading—which is far speedier and more efficient. The building that houses the New York Stock Exchange, remember, was built in 1903, China’s exchanges in 1990. One of those credited with an influential report that helped push China’s leaders into taking that big step toward capitalism was a Chinese student named Wang Boming, who had returned from working five years at the Wall Street exchange.

In the beginning, regulators who held tight controls on which companies could list were concentrating mainly on aiding prestigious Hong Kong and New York IPO’s for big state firms, and these regulators had little appreciation for the accountability that a free market demands. Amazingly, China had no laws to govern corporations until 1994 and no laws to regulate securities until 1999—nine years after the stock markets opened their doors. In spite of this lack of oversight, the number of individual stock investors exceeded ten million by the end of 1994.

The ride to prosperity has not been without its bumps and setbacks. At first, it seemed the market couldn’t fail. Beginning in 1991, the Shanghai index went from 100 to 250 points in less than a year, and then reached 1,200 by the first quarter of 1992. By mid-1992, multiples of 50 to 100 times actual earnings became the norm on the Shanghai Stock Exchange and some “hot” issues fetched even higher multiples.

But by June 1992, the Shanghai stock market had dropped by more than 60 percent in a period of five months. Within a few days of hitting bottom, the bull market returned, and in just three months, the overall market index rose from 400 to a new height of 1,600. However, by the middle of 1994, the index was back to 400. From 1993 to 2001, the Shanghai market suffered twenty mini-crashes of more than 10 percent within a month.

During the first decade of operation, overall market growth seemed spectacular—but it was an illusion. Companies burned through the cash generated from splashy IPO’s. Investment banks like Merrill Lynch were coming in and handing millions of dollars to companies on silver platters, shouting, “We want to invest!” Far from idiots, the Chinese thought it was great, and took the money to buy Rolexes and Ferraris. International Trust and Investment Corporations (ITIC’s), Chinese government-backed investment companies, had raised billions of dollars to develop much-needed Chinese infrastructure: airports, toll roads, seaports, and especially power plants. But these trusts made the age-old banker’s mistake of lending long and borrowing short—and in 1999, some went bankrupt or had to be bailed out by the Chinese government, further damaging the credibility of China’s business community. By 2001–2002, the fledgling securities industry also fell apart in scandal. Inevitably, as has been the case in every investment market throughout history, some people took advantage, getting the jump on those not in the know. This kind of behavior is as old as time and not just China’s problem.

In this period, I had already started picking up bargains in China. In May 1999, for instance, B-shares available to foreigners were in such disrepute that they had fallen 85 percent from their highs. Such a discrepancy really whet my appetite—and I bought quite a few. But I stayed away after that until late 2005.

I knew China’s investment mechanisms lagged behind the country’s breakneck development largely because the mechanisms were dominated by creaky state-run enterprises that didn’t have clear values, shareholder rights, or transparent accounting. Of course, every stock market in the world has nontradable shares such as company crossholdings, government-owned shares, and private holdings. But while about 14 percent of shares worldwide are nontradable, 70 percent of the value of China’s listed companies were in that category in 2002. Only 11 percent of listed companies were entirely outside government hands.

Figuring out how to reduce this overhang, and how to do so in a fair manner for other stockholders, has been a major hurdle. Faced with an explosion of available shares, any market is at risk of a collapse. The Tracker Fund of Hong Kong, the first exchange-traded fund (ETF) in the Asia Pacific, was originally created as a vehicle for the Hong Kong government to unload the shares it bought to maintain market stability during the financial turmoil in 1998. Each quarter since its launch in November 1999, the Hong Kong market has seen a drop when the government has put those shares on the market.

In 2001, one flawed plan to deal with China’s state-held shares caused an immediate 45 percent crash. Doubt and anxiety increased when each new plan was floated—then dashed—regarding how to recalculate value once this flood of...

Table of contents

• Cover
• Title page
• Copyright page
• Dedication
• Introduction: Catching the China Ride
• 1: Investing: From Mao Caps to Small-Market Caps
• 2: Risk: The Perils of Success
• 3: Companies: Let a Thousand Brands Bloom
• 4: Energy: Not So Black
• 5: Transport: Paving the Way
• 6: Tourism: Up, Up, and Away
• 7: Agriculture: Have You Invested Yet?
• 8: Health, Education, Housing: Serve the Masses
• 9: Emerging China: The People’s Republic of Tomorrow
• Appendix
• Index
• About the Author
• About the Type
• End User License Agreement