By now everyone has heard about Harbin going private at $24 as planned. Many traders are starting to speculate on which company will be the next successful buy-out candidate. This post will not be providing speculation on which stock will be taking out next (Me ain't that smart!). However, I would like to point out an important underlying fundamental change occurring that will create a base for the upward trajectory of strong, small cap Chinese companies.
The big change that is happening right now can be summarized in one word, "Money!" More specifically, the availability of money to China's SMEs (small and medium-sized enterprises). The Chinese government's recent tightening policy designed to control domestic inflation had really hurt these emerging enterprises by cutting off the access to financing that would have been used to help fuel their future growth. This time period has been especially gruelling on small cap Chinese companies with listings on U.S. stock exchanges. The Chinese government's tightening has happened in conjunction with the implosion of these stocks due to some real fraud and what I like to call "synthetic fraud", legitimate, growing companies that shorts make up horror stories about to scare investors into sell their shares. These enterprises have had no where to turn to get financing to help fuel their growth. The banks have not been lending them money and the secondary market slammed shut since all small Chinese companies were considered frauds (or at least that is what the shorts wanted you to believe).
The Chinese government has recently signalled an end to their tightening policy. Premier Wen Jiabao has gone on the record stating the economic importance to provide financing to these enterprises:
http://english.peopledaily.com.cn/90785/7610515.html
The growth of SMEs are strategically important to the Chinese government. Employment has to be created en masse to employ the throngs of citizens moving from a rural-based environment to a modern, market-based economy. High unemployment would mean a disruption to the idea of a "harmonious society" and could threaten the power base of the Communist Party should unemployment bring discontent.
Chinese banks have gone on the record about their recent increases in loans as well as the positive future of the SME lending market:
http://www.chinadaily.com.cn/world/2011-11/14/content_14087486.htm
What Does That Mean for Me?!
I attended a dinner recently put on by a local China club. It was very informative and I encourage all investors interested in investing in China to seek out a club like this and attend. One thing I learned is that many in the Chinese business community look up to Western companies and the brands that western businesses have built over the years. It is important to many in China to build up companies with name-brands of their own to represent China both domestically as well as on the world stage. One or many of these SMEs operating in China may one day bring name-branded products or services to the world market. What is also important for China is to build SMEs into large enterprises in order to achieve scale to help service a market with over 1.3 billion plus people. That said, the foundation is being created right now for the growth of well-managed SMEs. What this means for an investor is clear: a solid economic bottom has been formed and that now is the time to really search out these small to mid-sized businesses that stand to benefit from the future economic growth of China. The SMEs are now backed by a government that will do everything in its power to help with the long-term success of these enterprises.
It is difficult for the average person to invest in Chinese companies through the exchanges in China and Hong Kong. However, individual investors can participate by purchasing companies on major world exchanges as well as through ETFs and mutual funds. There are companies listed on the major U.S. exchanges whose stock can be purchased easily through any broker. A lot of investors are scared or nervous due to the volatility of these stocks as well as the fairly recent well-publicized accounting scandals. My answer to that is a simple one: Scandals and volatility happens in every market.
You must perform extensive research and due diligence daily in order to minimize the risks associated with purchasing individual securities. It does not matter if the company is a U.S.-based company or a Chinese company. If you are not up to performing the work that needs to be done, invest in a basket of stocks or ETFs or mutual funds that invest in SMEs in China. The one thing that is clear is that the future for SMEs in China is bright. The rewards investing long-term in this market far out way the short-term risks that come with day to day market swings driven by day traders and computer trading platforms.
The big change that is happening right now can be summarized in one word, "Money!" More specifically, the availability of money to China's SMEs (small and medium-sized enterprises). The Chinese government's recent tightening policy designed to control domestic inflation had really hurt these emerging enterprises by cutting off the access to financing that would have been used to help fuel their future growth. This time period has been especially gruelling on small cap Chinese companies with listings on U.S. stock exchanges. The Chinese government's tightening has happened in conjunction with the implosion of these stocks due to some real fraud and what I like to call "synthetic fraud", legitimate, growing companies that shorts make up horror stories about to scare investors into sell their shares. These enterprises have had no where to turn to get financing to help fuel their growth. The banks have not been lending them money and the secondary market slammed shut since all small Chinese companies were considered frauds (or at least that is what the shorts wanted you to believe).
The Chinese government has recently signalled an end to their tightening policy. Premier Wen Jiabao has gone on the record stating the economic importance to provide financing to these enterprises:
http://english.peopledaily.com.cn/90785/7610515.html
The growth of SMEs are strategically important to the Chinese government. Employment has to be created en masse to employ the throngs of citizens moving from a rural-based environment to a modern, market-based economy. High unemployment would mean a disruption to the idea of a "harmonious society" and could threaten the power base of the Communist Party should unemployment bring discontent.
Chinese banks have gone on the record about their recent increases in loans as well as the positive future of the SME lending market:
http://www.chinadaily.com.cn/world/2011-11/14/content_14087486.htm
What Does That Mean for Me?!
I attended a dinner recently put on by a local China club. It was very informative and I encourage all investors interested in investing in China to seek out a club like this and attend. One thing I learned is that many in the Chinese business community look up to Western companies and the brands that western businesses have built over the years. It is important to many in China to build up companies with name-brands of their own to represent China both domestically as well as on the world stage. One or many of these SMEs operating in China may one day bring name-branded products or services to the world market. What is also important for China is to build SMEs into large enterprises in order to achieve scale to help service a market with over 1.3 billion plus people. That said, the foundation is being created right now for the growth of well-managed SMEs. What this means for an investor is clear: a solid economic bottom has been formed and that now is the time to really search out these small to mid-sized businesses that stand to benefit from the future economic growth of China. The SMEs are now backed by a government that will do everything in its power to help with the long-term success of these enterprises.
It is difficult for the average person to invest in Chinese companies through the exchanges in China and Hong Kong. However, individual investors can participate by purchasing companies on major world exchanges as well as through ETFs and mutual funds. There are companies listed on the major U.S. exchanges whose stock can be purchased easily through any broker. A lot of investors are scared or nervous due to the volatility of these stocks as well as the fairly recent well-publicized accounting scandals. My answer to that is a simple one: Scandals and volatility happens in every market.
You must perform extensive research and due diligence daily in order to minimize the risks associated with purchasing individual securities. It does not matter if the company is a U.S.-based company or a Chinese company. If you are not up to performing the work that needs to be done, invest in a basket of stocks or ETFs or mutual funds that invest in SMEs in China. The one thing that is clear is that the future for SMEs in China is bright. The rewards investing long-term in this market far out way the short-term risks that come with day to day market swings driven by day traders and computer trading platforms.
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