I want to make a contribution and explain Why I Do Not Invest In China?
I am not an expert in the Chinese market, nor am I an expert in the stock market. But I want to share the fears that make me not want to invest in China so that someone will refute them or take them into account when investing.
Let’s start with the fact that like everywhere there are good companies and bad companies.
China is not the exception so what I will do now is to generalize and generalizations are usually not very precise and you have to go case by case.
The Asian market and in particular the Chinese market is very peculiar. It appears as a way of life and having something European or American is synonymous with status.
So I leave you two real phrases that I have heard in my travels to contextualize.
- Young Investor: I have a Xiaomi and I think it’s a good phone.
- Taxi Driver: Xiaomi for Europeans and Americans, for us Apple which is the real good thing.
- Young Investor: Come on! That car looks really cool on the outside… and it doesn’t make sounds. Is it electric? How much is it worth?
- Chinese Fellow: It looks good on the outside, it’s very cheap but it’s only on the inside that matters. It will never be like a German car. Remember which cars the customers pick up us? BMW and Mercedes, the Chinese is nice on the outside but it doesn’t last, with time you can see the defects.
I could give more examples but I think you get the idea.
Chinese customer prefers the foreign, if they do not buy more iPhone or use more Instagram is because they can not. So, although Instagram is prohibited they prefer to use a VPN and use Instagram.
If the Chinese see an American movie where the main character uses iPhone, they will want iPhone. That’s why many Hollywood movies put the scene in China, to capture that market.
The internationalization of China.
Having said that, one often thinks, reads and hears: “Look at this list of companies that are the equivalent of Google or Facebook. Buy that! When China opens up to the world they are going to eat up the whole market”
I strongly disagree with this, and I’ll explain why.
To begin with China does not innovate, when you work with them you see that in their education they have not been taught to think but to obey. It shows in the hotels, it shows at work, they do not have their minds trained to think. So do not expect great innovations. They will copy what others do.
So we have companies like Xiaomi, that usually only copy (and skip a few patents) others. Then they sell the phone with a 5% margin and that’s it.
If you were given to choose iPhone or Samsung at the same price as Xiaomi, would you have any reason to buy Xiaomi? This generalization can be applied in many cases.
Do you think that in Europe and USA people will stop using Amazon to use JD.com and Alibaba?
The only reason would be the price and more than one would prefer to pay 2 euro more and have Amazon guarantee.
If Google or Facebook do not enter the Chinese market it is because of tensions with the Chinese government.
Why is the president of the USA going to let these companies enter the American market? There you have the result of the 5G antennas of Huawei where Trump is already telling Europe to be careful that it exterminate the NATO.
Internally, words also from a Chinese person, the biggest company in China is the Chinese government. So, if you want to set up your company and make it successful you have to “have friends” in the government.
Tencent and other big companies have succeeded and not others not for being better but for being friends with.
That said, no, if Chinese companies internationalize it does not mean that they will wipe out other markets. And, if they open up to the world they will have competition in their market where the Chinese customer prefers the West.
A clear example, Microsoft is in the Chinese market and everybody uses Windows.
What no one tells you is that in Chinese culture, lying has been commonplace for years.
I hear that people don’t know if what China says is real. We can see in the coronavirus that West does not trust in China. China is maybe hiding more deaths!
The last thing my Chinese colleagues told me was that they had a curfew in cities like Shanghai. The whole family had to stay at home and only one person per family was allowed to go and buy food.
If you die at home even if the cause is coronavirus is not counted because it is not diagnosed as such and obviously they are not going to do that many autopsies.
If a company friend with the Chinese government starts to go regular… why won’t they fake the accounts?
We have already some tax fraud in Europe I would not be surprised if we have more than one in China.
I do not see anyone investing in China who says, hey maybe they are lying to us. People think that there is the same culture and the same ethics as in the West, I am sorry to tell you that it is not!
The bubble in the Chinese stock market.
To explain this part I have to tell you a little more about China because not everything in it is bad. It is the only communist country that “works”.
Poverty in the last decades has been greatly reduced by getting many peasants to move to the city.
Before studying in Europe or America was a status symbol now more and more Chinese can send their children abroad because their conditions have improved.
And what do the Chinese do with their savings?
They invest it in the Chinese stock exchange. In fact it is one of the exchanges with the largest number of private investors.
There are so many of them that when there has been a possible crisis the Chinese government has closed the stock markets, preventing them from trading until people relax to avoid a crash, which is a stock market corralito that shows that the Chinese stock market is anything but independent.
Not to mention that they’ve also intervened the yuan a few times. Why are they doing this? Because many Chinese have their savings in the stock market “because it always goes up” and as soon as they see the stock market falling they start selling in a panic.
When you go to invest in China, think that if something goes wrong, they might close the market on you.
The war between the US and China has been won by Trump.
The tariff war is thought to have done more damage to the US than to China, which is totally false.
I have seen how some of my customers in 2019 has grown more than 30%, the reason is that the Chinese government to counteract the damage that could make the trade war invested internally like crazy to increase internal orders, that if more high speed trains, renewal of the military fleet, etc. This has affected the Chinese currency, so from a favorable trend to the yuan where 1$ = 6 yuan seems to be establishing the 1$= 7 yuan.
If the US wants to, they can do much more damage to China than China would do to them, hence Trump freely allows himself to attack a Chinese company like Huawei, where he even made Google refuse to continue collaborating with Huawei.
People often tend to underestimate the risks of investing in China , and I personally do not think it is worth taking that risk. If tomorrow the USA says that Xiaomi is a poo, or that Trencent is a poo, that they are spying on us, you can imagine what will happen.
As I said at the beginning. This is only a personal opinion about why I, as a private person, do not invest in China. As Peter Lynch said “A company with an institutional investor is bad for investment”. I do not like companies that depend on any government, as to want companies that depend on or are related to the Chinese government.
Having said all this, surely there are Chinese companies that will do very well over the next 20 years. I’m just not sure which ones they will be.
A couple more anecdotes:
The boss in China is usually the one who dresses in the poorest way, it is striking that the one who looks less like the boss or owner of the company, maybe it is because they are people who have known the Chinese poverty, have prospered and have not been influenced by marketing.
In China to do business it doesn’t matter if you have the best and cheapest product, if you want to do business you need contacts and be friends with. When you have made friends and they trust you as a person you can talk about technical issues.
Always remember. You have to be able to control difficult situations through diplomacy, having a lot of tact, patience and knowing how to treat people, China is different. It does not mean that it is worse. If you go in an arrogant way they will tell you that you do not understand “how things are done in China” and they will close the doors.
How many owners of Chinese companies know “how things are done in China”? Don’t analyze a Chinese company as a Western company.