China Inc. Is Out on a Limb – Frederik Balfour and Chi-Chu Tschang
This is actually a story that can be best summed up by a Chinese proverb, “crying up wine selling vinegar,” or hanging up lamb selling dog meat (ÊåÇÁæäÂ§¥ÂçñÁãóËÇâ), as many Chinese companies have been doing to derail from core businesses to plow huge funds into the rocketing stock market. From BusinessWeek:
By now every investor on the planet is trying to handicap what happens when China’s scorching-hot stock markets finally start to cool off. The conventional wisdom is that China’s greenhorn individual investors will take the hit, while corporate China”the companies that make shirts, build ships, and run utilities”won’t feel much at all. The real economy these companies operate in is far too strong to be affected by stock wobbles, goes the argument. The price of corporate shares may fall, but underlying earnings will power on.
That line of argument, though, is looking suspect for the simple reason that companies big and small are now playing the markets with abandon, using corporate funds to invest in each other’s initial public offerings and bolster their bottom lines. Although figures are hard to pin down, Morgan Stanley figures a third of reported corporate earnings in China stem from investments outside companies’ core businesses”which in almost all cases means plowing money into stocks. “It’s quite dangerous for these Chinese companies because these gains have no cash basis,” says Ding Yuan, a professor of accounting at China Europe International Business School in Shanghai. “It’s really frightening.” [Full Text]