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Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the... More
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  • The China Game Continues 0 comments
    Jan 29, 2013 10:58 PM

    An Examination of China's Reality as Compared to Media Reports

    The information coming out of China continues to confuse and obstruct what is truly important, which is the gradual improvement in economic numbers coming out of the US. The US is the economic engine of the world, and as the US recovers, so does the rest of the world. However, analysts and fund managers continually scan the news for information that will allow them to see what the future holds. The most favorite subject has been and continues to be China. In a misguided belief, China watchers think that what happens in China will determine what next happens in the economic world. We comment in this article on some of the misleading and confusing information being published in the news.

    What follows starts with what appears to be economic good news, and is followed by the treasure trove of misleading information out of China.

    China's Numbers Look Promising
    China's January HSBC Flash PMI rises to 51.9 from December's final read of 51.5. It's the fifth-consecutive rise for the index, which now stands at its highest level in two years. "Despite still-tepid external demand," says HSBC, "The domestic-driven restocking process is likely to add steam to China's ongoing recovery."

    What on earth a "Restocking Process" means is beyond me. It sounds like the "double speak" described in the book "1984″. Presumably we are to believe that no-one in China saw that the shelves were emptying and no-one thought to reorder merchandise. The result is that now there is economic momentum from "re-stocking". Does this sound convincing? I think not.

    This report from Credit Suisse Chief Economist for Non-Japan Asia Dong Tao, goes on to infer that this economic activity will confuse the central government as to the true state of the economy, and the government therefore will not embark on a needed economic stimulus. All of this confusing advice makes me wonder what to believe.

    Trying to interpret misleading economic reports from China, leads me to the next misleading report.

    More Shenanigans With Chinese Rare-Earth Export Statistics
    In the last day or two it has been widely reported that the total quantity of rare earths exported from China in 2012 was 16,265 t, per statistics from "Hong Kong-based China Customs Statistics Information Service Center", with this figure representing "a drop of 3.5% compared to the year before", i.e. 2011.

    This would mean that the 2011 figure for total rare-earth exports from China was 16,855 t. The problem with that is that last year, the vice-director of the Chinese Ministry of Industry and Information Technology indicated that the figure for 2011 was 18,600 t, and this figure was also widely used and reported by other sources throughout 2012 - even as recently as last month, in the same article that I criticized recently for getting the smuggling numbers wrong.

    So, which is it? 16,855 t or 18,600 t? If it is the latter, then the actual drop from 2011 to 2012, assuming that the figure of 16,265 t is accurate (quite an assumption, I'm now thinking), is closer to 12.6%, not 3.5%, as the newer value being implied for 2011 would suggest. A simple error? Deliberate manipulation? Who knows, but it is yet another discrepancy in a long list associated with these statistics.

    It is disappointing to see industry and other commentators re-publishing these types of numbers once published by Chinese media sources, without doing the simplest of basic fact and number checking - or remembering the contents of pieces they re-published or quoted from just a month before.

    More Information on Trying to Understand What is Happening in China
    We now republish parts of a report from Phoenix Capital Research in which they detail how Caterpiller among others misread China. The following is only an excerpt of a larger article

    January 23 2013
    Is China an Economic Miracle or a Government Sponsored Fraud? Pt 2
    A few months ago, we asked, "is China an economic miracle or one giant government sponsored fraud?" Our views were the latter with corruption as one of the key driving forces for wealth creation and economic growth in China.

    Consider the following:
    1) In 2010 alone, 146,000 cases of corruption were launched in China (that's 400 PER DAY).
    2) Of the 14 cases that were actually reported in the Chinese media, the average amount stolen was 18 MILLION RMB (for perspective, the average college graduate in China earns 2,500 RMB per year).
    3) Between 1991-2011, it's estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China's entire GDP was just 2.1 trillion RMB in 1991.
    4) It's estimated that on average bribes comprise 5-10% of a given project's costs in China today.

    Indeed, things are so corrupt in China, that as soon as the new Government stated it would crack down on corruption, a fire sale of luxury properties began as corrupt officials sought to dump their illegal holdings. Thousands of Chinese communist officials have been panicked into a fire sale of their illicit properties and billions of pounds have been smuggled overseas as the country's new leaders intensify a campaign to root out corruption…

    It said the volume of deals had intensified by "a hundred times" after Xi Jinping, the incoming Chinese president, warned that corruption could kill the party and put one of the country's most vigorous and resolute politicians, Wang Qishan, in charge of stamping out graft…

    This sort of fraud and corruption is systemic in China but it doesn't show up in the GDP or other economic figures the country posts. After all, if a poorly constructed bridge collapses China can always build another one and count it twice for GDP growth. And since the Government controls the media, no one is the wiser.

    As a final example of how the China story will likely turn out, consider the following:
    Caterpillar Inc. believed acquiring China's Zhengzhou Siwei was a way for the U.S. company to boost its fortunes in a lucrative but challenging market. Siwei's sales and profit growth were surging. And the company offered access to China's mining industry, where domestic companies were prospering. Siwei, which sells mine-safety equipment, also boasted an American pedigree. Its controlling shareholders were James E. Thompson III, the scion of one of Asia's most successful expatriate families, and Emory Williams, a former head of the American Chamber of Commerce in China. Caterpillar paid about $700 million in June for Siwei's parent, ERA Mining Machinery Ltd.

    Caterpillar, known for bulldozers, excavators and wheel loaders, will have to write off about $580 million over alleged accounting misconduct at a Chinese maker of mine-safety equipment it bought in June. The WSJ's James T. Areddy talks about what this means for the big U.S. industrial company.

    But now, the purchase has dealt a blow to Caterpillar's already lackluster performance in China. The Peoria, Ill., construction-machinery maker on Friday said it would write down ERA's value by $580 million, blaming "deliberate, multiyear, coordinated accounting misconduct" that was designed to overstate profit at the unit before the deal. The accounting surprise contributed to the departure of a senior Caterpillar executive, a person familiar with the matter said.
    Phoenix Capital Research

    How To Understand China
    The bottom line here, is that investors should invest where they understand the rules of the game and everyone plays under those same rules. The USA has been the place to invest, and will continue to be so.

    Don't be misled by industry reports and advices urging you to diversify and put your money in other markets.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

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