China is miracle. From a poor to rich, 800 million people have been lifted from poverty the last 40 years. An amazing feat, but how did they do it? A combination of free market policies, perfect geographical position and the opening up to foreign investors. This Is what made the GDP grow 9.5% per year. Astonishing.
So you may be tempted to invest in this growing economy, I get it, it does look good on the surface doesn’t it? Wait there a minute though, let me try to change your mind. Here are 6 good reasons not too.
1 The stock market is over regulated. Way too much. To buy a stock in China as a foreigner you have to meet at least one of these criteria: Have a permanent China residence card, foreign employees of listed A-share companies who currently live in China or abroad as long as he is participating in the companies equity incentive (getting paid in stock options or similar), or have a work license or are already an owner of a corporation within China. Even if you do satisfy these criteria you won’t have voting rights. That means you will not participate in the decision making process. China really doesn’t want foreign interference in its corporations. Simply because at least theoretically China is a Communist nation, so lots of corporations are partially controlled by the government. So they are often used by them to advance their political agenda. Foreigners having a voice about decision making, make things more complicated for them.
2 The government owns the stock market, it can do anything it wants. It sees it as a public service, being a communist nation. So the government decides what companies get listed and which do not, anger them and your business is gone. In western capitalist countries the stock market is a private company, the same as any other, The New York stock exchange is owned by a private company Inter Continental Exchange known also as ICE, that own stock exchanges all over the world.
3 The Chinese Stock market is not growing much. You would suppose that a country with such economic growth would also have an equal stock market growth. But that’s not entirely true. From 1991 the year the Shanghai Index was founded, to 2017, the stock market has had an average yearly return of around 23%. That’s a lot. But that number has gradually slowed down in recent years. Future predictions have it grow only 6% per year, that’s 4% less than the S&P 500. Why? Well, because, Chinese investors prefer other assets such as real estate. Before you say anything, no, buying Chinese real estate is not a good idea, but that’s a topic for another time.
4 You can easily get defrauded. The regulation protecting you is very loose in these cases. The most common way they will do so, is forming a business, we are going to call Shady Unlimited. Operative or not, doesn’t really matter. All that matters is that it has a warehouse and a website.
Then get your accountants to start generating reports, that make it look like your company is generating loads of revenue. Keep this up for a few years and then go on to the reverse merger stage. At this point they find a usually old, irrelevant business. Let’s call it, Wiggy Giggy, listed on the New York Stock Exchange.
Some companies like Wiggy Giggy here can have a market capitalization of under 25 million. Which might seem a lot but too complete the merger you may only need a controlling interest in the company, so at least 51%. Once this company is formed the two will merge creating a new entity we will call Totally Legit Business. Shady Unlimited will now be liquidated and what previously owned will be sold off to regain those 12 million dollars they spent to acquire part of Wiggy Giggy.
Through the Totally Legit Business they will try to find new investors. Convincing them to pour money in the stock. Now is finally time to capitalize. The first way to do so is to pay yourself the CEO a massive salary or use it to pay another business that you own as a “consulting expense”.
The second way is just to sell off your own shares on the public market once they’ve risen to a high valuation. Is all this legal? Absolutely not, but these people don’t care, they’re laughing straight to the bank.
Worst of all they usually have immunity from legal action, they cannot be brought to justice, due to the connections they have.
Now that you know how that is, recognize the signs and stay away from companies which you suspect are doing this.
5 The Chinese Government is awful. You can make money in China sure, but listen to your conscience. You are giving money to the cruelest totalitarian regime in the world. Let me be clear I am not talking about Chinese people in general, but only about the ruling Communist Party. That’s a big reason, maybe the biggest, to not invest in China.
6 The stock market is already overvalued. Everybody already knows, from your cousin Brad to your neighbor John. China has been, is and will continue growing in the future. That means that a lot of people have already invested in it making the market overvalued. Why would you get in now? But do keep in mind, a global stock market crash may come and prices will go down, but as of today it wouldn’t be the best time at all.
Disclaimer: The Content is an opinion and is for information purposes only. It is not intended to be investment or financial advice nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or any other assets. Seek a duly licensed professional for investment or financial advice.