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Chinese Lessons

by: Mike Steinhardt May 28, 2008 | about stocks: CHA / CHL / CHU / CN / FXI / PGJ    

Mike Steinhardt

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Investors want to participate in the amazing growth of China, and that is understandable. With all the Chinese stocks trading in the US markets, it has become increasingly easy to play along.

And for most of the time since listings began, the normalcy of trading these stocks has allowed American investors to forget that they were investing in companies that exist in a Communist country. However, this weekend’s reorganization of the Chinese telecom industry by the government to make sure that there was sufficient competition and that no single company became too powerful should serve as a very important reminder. Communist governments reserve the right to adjust key aspects of their economy, and communication certainly qualifies as a critical part of their country.

If you bought China Mobile (CHL) last week because you liked its dominance in the industry and the future earnings potential that dominance suggested, your investing thesis was changed overnight. You may not like it, but that is part of the deal when it comes to investing in Chinese stocks.

The Chinese government dictates what happens there and since it is their country and their system, it is not our place to judge. Unfortunately, this risk has been largely ignored for a long time and I suspect that this telecom rearrangement will not do much to change how American investors look at Chinese stocks.

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This article has 18 comments:

  •  
    May 28 10:21 AM
    Nonsense! Was the Chinese government also responsible for ATT(T) breakup years ago?
    Reply
  •  
    May 28 10:35 AM
    Come on, he is talking about China. Is ATT as Chinese company?
    Reply
  •  
    May 28 10:40 AM
    All state owed enterprises are enjoying some degree of state-protected monopoly or oligopoly. Investers should be aware of policy- risk involved in investing in those enterprises.
    Reply
  •  
    May 28 10:56 AM
    This is either "bitterness" from a sore losing player in CHL or the author should be writing for a political journal but not here. So what do you want from the Chinese gov.? Since when increasing ompetition is a bad thing? This is really low.
    Reply
  •  
    May 28 11:13 AM
    Good point author, well taken~
    Reply
  •  
    May 28 11:20 AM
    I understand what he's talking about. People always ask me what they should invest in. CHL was one of my top five. I didn't have any stake in it, and I'm glad I didn't. Shows that I was wrong to assume it was one of the safest bets.
    Reply
  •  
    May 28 11:55 AM
    You should know who the major shareholder is. Don't the major shareholder have the major say. CHL has the largest mobile network. How is that going to change? Haven't they created a large enough "moat".
    Reply
  •  
    May 28 12:30 PM
    Which "communist governemt"?
    Reply
  •  
    May 28 01:47 PM
    This is far different from the AT&T breakup. When AT&T was broken up, there was one system. Remember the Bell Labs credo, "One System, One Policy, Universal Service"?

    On the contrary, the Chinese government is demanding that multiple companies pool their systems together.
    Reply
  •  
    May 28 01:53 PM
    There have been general complaint from average Chinese users that the roaming fee..........etc are too high. The Chinese government has to make the industries more competitive to benefit Chinese consumer. I don't think there is anything wrong with the policy changes. I hope there are more to come!
    Reply
  •  
    May 28 02:31 PM
    A few years ago, China Mobile whacked Sohu, Sina and other Internet stocks by forcing them to charge lower fees for SMS messages sent from their sites. Later, the government cracked down on fortune telling SMS sent from those sites as well, lowering the income of those firms. Be wary of any state owned firm and any private firm in direct competition with the state.
    Reply
  •  
    May 28 03:05 PM
    No investments will be risk free or risk only. Hard to say this is bad or good.
    Reply
  •  
    May 28 07:51 PM
    Why are you panicking?

    China Mobile, after the restructuring, will still have around 70% of the current subscriber share with their network/towers in-tact.

    On the other hand China Netcom/Telecom will be forced (happily) to dash out billions to build-out/augment their own complete wireless network before they can gain traction with subscribers.
    Reply
  •  
    May 29 12:21 AM
    Surely, China Mobile shareholders will be harmed by this new configuration.

    Many smaller compnaies will do well however.

    MYST.OB is one.

    It is profitable and growing. A partner with China Netcom and now has access to 125 million additional clients. Its astounding really.
    Reply
  •  
    May 29 01:54 PM
    wow, really a useful and insightful article.
    Reply
  •  
    May 30 05:38 PM
    <<This is either "bitterness" from a sore losing player in CHL or the author should be writing for a political journal but not here. So what do you want from the Chinese gov.? Since when increasing ompetition is a bad thing? This is really low.>> Well said!!
    Reply
  •  
    Jun 04 10:58 AM
    True, how about the Fed then, by cutting rate to give a lift to the inflation, world wide?
    Reply
  •  
    Jun 23 05:15 PM
    The author's points are valid. He is highlighting the way China's government works in relation to businesses. Officials decide what's best, make a plan and implement it. Period.

    The decision making process in China has little to zero input from the "private" sector and absolutely no recourse for companies or individuals that get harmed by their decisions. Central command & control is still the over-riding mind set there even as they continue to "experiment" with capitalism in certain areas.

    I continue to invest heavily in China but perfer to avoid industries that get harmed the most by government interference. Stick with basic sectors providing basic needs (commodities, infrastructure, transportation, tourism, housing... ). Avoid industries that need to be left alone to thrive through "creative innovations" as these sectors look unstructured and messy to Gov officials who are can't resist trying to "control" them in some form or another. comfortable
    Reply
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