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China vs. the World
This paragraph, taken out SoGen’s Dylan Grice research report, sums up the dichotomy of how investors look at China and the rest of the world.
- Trading on a lowly 0.5x book value, Lloyds is clearly unloved, presumably because prospective investors aren’t sure how safe its loan book is and are understandably concerned that an increasingly unpredictable UK government owns a 43% stake. Who, after all, wants to own an asset which the government reserves the right to commandeer for its own ends and which has an opaque loan book?
- Well, quite a few people it seems, judging by the situation on the other side of the Eurasian plate. Industrial and Commercial Bank of China, for example, is sitting pretty on around 3.5x book value and a forward PE of 14.7x. Yet as far as I can see, it”s 74% owned by the Chinese government and, so far at least, has been subject to far more political interference than anything seen at the semi-nationalised UK banks."
Investors have a healthy distrust, and rightly so, of governments running banks in the US and UK, but are very comfortable with the Chinese government wheeling and dealing Chinese banks.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles by email, click here.
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Amen.
Not quite sure what VK's investment thesis is...
The last thing that I want to do is appear to defend the Chinese system. However, the article does bring up the issue of control. China does appear to exert control over their banks, unlike the US and UK where special interests rule. If Chinese national interests are threatened, someone gets "suicided" or executed and the family billed for the ammo. I think one reason the US finds itself in a mess like this is because as a society, we do not provide any deterence, any reason not to commit crimes against our own citizens.
Difference can be explained by herd mentality even if you dont believe in the "Oh, China and India are the future. Endless 8% growth!" most of your clients do. And this is combined with weird Western racism towards Asia, first aimed at Japan in the 80s and now at China: "Oh the Asiatic mind, its so cold and calculating. It has outsmarted us in just a short 30 years. They have a long term plan for total victory! I wish we werent as selfish, short sighted and corrupt, well better practice my Nin Hao Ma."
Perhaps this difference can be explained
by the fact that China isn't currently camped out in
Afghanistan, burning cash to keep its hands warm,
while 20% of its wife and kids at home are unemployed
and starving to death.
Recommended reading re: China:
http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Lea...
Forgive the xenophobic slip, but China are consuming, polluting and land-grabbing. Supported by US investor dollars!
Beast in the East or ChinaAnstalt. (Pick your poison...either is hemlock.)
It's possible that investors see the corruption and fraud in the US and UK banks and think it's different in China. They are most likely wrong. I've heard to many things about some of the chicanery that happens with banks and party officials. I'm bullish on China in the long term, but good God are they filled with problems.
Agree on all that, and don't forget that it's quite possible for China to prosper while screwing over its foreign investors. Their economic success doesn't automatically mean yours even if you are heavily invested there.