Don't Invest in China

By Malcolm Berko

December 19, 2018 5 min read

Dear Mr. Berko: My wife and I are thinking of investing in Chinese stocks or mutual funds. If we were to buy stocks, we'd invest $10,000 each in Alibaba, Noble Group, Ping An Insurance, ICBC and HNA Technology. If we were to buy mutual funds, we'd invest $10,000 each in Templeton China World Fund, Fidelity China Region Fund, Invesco Greater China Fund and Matthews China Fund. — DA, Akron, Ohio

Dear DA: You must be smoking those funny cigarettes.

The Chinese monetary unit, the yuan, has been falling like a tear from a tall camel's eye. At this writing, the yuan has reached its lowest level since 2007. It's so low that even a Mexican peso buys 0.34 yuan, and the yuan may be headed lower over the coming few years. The yuan is hurting so badly that China is secretly dipping into its foreign exchange reserves to preserve the currency's integrity. That's scary. China's bureaucrats in Beijing are reluctant to share their economic data, which they cleverly contrive to hide and disguise China's economic weakness. And China will be dipping deeper as Donald Trump's tariffs on billions of dollars' worth of Chinese goods are beginning to move Buddha to the mountain and exact a toll. Yes, the slowdown is accelerating, and Trump seems to have the Chinese tiger by its tail and be looking it squarely in the eye. The yuan's slide has ignited a capital flight that continues to crash the currency, and China's stock market is a menacing minefield. Unfortunately, China's central bank lacks the alchemy to support the yuan.

China's debt, at over 300 times the country's gross domestic product, scares the diyu out of China's leaders and me, too. The yuan has been sullied in the past few years by an economic slowdown. Factories continue to mass-produce unsold bicycles, cars, toys, solar panels, electronics, building supplies, textiles, etc. Rather than lay off millions of workers and shut doors, provincial governments admonish factories to continue production. Resultantly, billions of dollars' worth of tires, sports equipment, calculators, steel, furniture, medical products, tubing, air conditioners, tools and mobile phones are literally buckling the floors of China's factories and warehouses. The Chinese stock market is crashing, and massive unemployment of nearly 9.2 percent (actual figure, not the official government figure) is giving China's leaders serious laundry problems. The stink is so bad that even Congress can smell it from D.C.

Home sales are sagging, while mortgage fraud is rampant. Commercial property values are collapsing. Ghost towns litter China's landscape. Lessors are canceling leases, and industrial property prices are foundering for want of lessees. And some think China is segueing into a recession, and its weakened banking system, supported by "shadow collateral," is hurting badly. Bribery is rampant.

China's largest property developer, Evergrande Group, recently issued $2 billion in five-year dollar-denominated bonds paying 13.5 percent. The syndicate could sell only half the issue, so the group's chairman bought $1 billion worth of bonds with his own money. China Properties Group sold three-year bonds with a 15 percent coupon. Hainan Airlines needed $100 million and sold two-year dollar bonds priced at 13.2 percent. China's insurance companies are destitute, and many are unloading their real estate portfolios to increase liquidity. In fact, Anbang, China's largest insurer, is begging for someone to buy the Waldorf Astoria. Dalian Wanda is desperate to sell AMC Entertainment Holdings. HNA Group has earmarked $6 billion worth of properties for sale. And the beat goes on. It's spine-chilling! According to The Heritage Foundation, China's investment in the U.S. is between $1.9 trillion and $2.6 trillion.

China's stock market isn't an investment; it's a foul speculation. I don't trust Chinese accountants who prepare data for Chinese income statements and balance sheets. I don't trust Chinese data because they are so often politically contrived fabrication. I'm uncomfortable with all of Beijing's reporting on employment numbers, factory and farm production, retail sales, electrical consumption, inflation, and so on. In an authoritarian system such as China's, there is an incentive for officials to publish data that please the bosses. Economic policy based on this kind of data leads only to negative outcomes. The Chinese market is the sword of Damocles hanging over Pandora's box.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: at Pixabay

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