Archive for the ‘Business’ Category

Fraud ADRs

A reliable friend once told me that in his opinion 50% of Chinese ADRs are fraud.  He then explained to me that since companies are generally valued at much higher multiples in domestic stock markets in China, all Chinese companies will seek to get listed domestically first.  The problem is that domestic listings are limited and unless you are a stellar company and have connections to the SEC-of-china, your best bet is to list as ADR in overseas market.  That is, the lesser quality stocks actually get listed abroad; a reversal of what it used to be earlier in this decade.

Betting against these stocks seem to be a sure-win…. the timing, however, is difficult to gauge.  Let’s say you are  75% sure that a company is fraud, when will they get exposed is unpredictable.  The stock can rally on fake information for a long period of time.  When there is an opportunity, there are people monetizing – just came across this site: Muddy Waters, who claim they can “sees through appearances to a Chinese company’s true worth.”  With services like this being publicized, I’m guessing the ADR bubble will burst pretty soon.


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The Currency Debate

I am getting quite confused by the currency manipulation discussion surround the Chinese RMB.  Today, Nobel Laureate Krugman came up with this piece in the NY Times. 

I read it once, twice, thrice.  But I think I am missing his point still.  Here’s where I think his logic lies.  Exchange rate is determined by supply and demand of currencies, which in turn, should be determined by import/export balance (either capital or goods).  It is a mechanism which should, in theory, make massive trade imbalances unsustainable.  In theory, since this assumes free trade between all countries. Since the RMB is pegged against the USD, its value appreciates or depreciates with the USD.   At the moment, the RMB is pegged at a lower rate than what it will be at, if traded freely (that’s the assumption, I have no idea). 

I get all that.  What I don’t quite get is how the peg is considered to be currency manipulation when pumping USD into the marketplace is considered not.  When our Fed fixes interest rate at almost zero, requiring our treasury to issue bonds and purchasing them back…   the result is massive pumping and devaluation of the currency.  Yes, the USD is determined by supply and demand, but when we can create the supply and demand ourselves, how is that not manipulation? 

My simple conclusion here is that we are trying to manipulate our currency, but the Chinese are getting in our way since they have their own manipulation mechanism.

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From Yahoo’s perspective

The Deal:

Under the terms of the agreement, Yahoo! will contribute its Yahoo! China business to Alibaba.com and the two companies will work together in an exclusive partnership to grow the Yahoo! brand in China. (Yahoo press release in 2005)

CEO Bartz:

…  she disliked how the Yahoo brand was being treated in China, according to a source familiar with the situation. But Bartz said at a July conference that it wouldn’t “make any sense at all” to try to buy the brand back or to “get rid” of Yahoo’s stake in Alibaba.

“We have a bigger play just riding the fortune of Alibaba than we ever could being Yahoo China,” she said.

From Alibaba’s perspective

The Deal:

Alibaba Group acquired China Yahoo! (www.yahoo.com.cn) in October 2005 as part of its strategic partnership with Yahoo! Inc. (Alibaba Group’s website)

Ma’s perspective:

“We will digest Yahoo China in our own way”

Ma said the way Alibaba integrates Yahoo China will be a “case study,” but did not say how the portal may continue to change.

Articles: Alibaba Mulls Yahoo China Future After Bing Deal; Alibaba Removes Classifieds Business From Yahoo China

Here’s the reality.  Yahoo relinguished control over it’s Yahoo China brand back in 2005.  While it is true that Alibaba has since neglected Yahoo China and focused on Taoboa, Alipay and others, in the end, they are doing what makes the most sense for Alibaba Group as an aggregate. 

Since Yahoo owns 40% of Alibaba Group, everyone’s interest should be aligned.  Well, economically at least.  Strategically, the day Yahoo decided to give up control is the day Yahoo threw in the towels for China.  Personally, I think that is one of the few good decisions Yahoo has made in the past few years.

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The Rio Tinto Debacle

There is something about the Rio Tinto case that has been bothering me.   Perhaps it is because I cannot quite form an opinion on it – one one hand, I am appalled by the due process of the legal proceedings.  Where the accused employees were held without charge for 5 weeks, and without right to consult a lawyer for even longer.  On the other hand, from what I have read, this is in accordance with the local Chinese law.  So we can’t quite challenge the proper execution of a law, can we? 

In one of my previous posts, I talked about gray areas in Chinese business laws.  I might have misused the word “gray area”.  The better phrase may be the selective enforcement of laws.  An example in the US is jaywalking.  In NYC, jaywalking is illegal and and you’re subject to a fine.  Everybody does it anyways.  Imagine you are amony 20 jaywalkers at a junction and a policeman pointed at you and gave you a fine.  Just you and nobody else.  Tough luck – you did break the law!

It is naive to think that one can do successfully do (big) business in China without some form of bribery or corruption.  Or what in the US might be labeled lobbying instead. 

What makes me uncomfortable in the RioTinto case is that the employees seem to be caught in the middle.  Australia, China and certainly RioTinto all wish to treat this as a case against individuals.  It lets all parties save face in the process and allows business to go on as usual.  I know some of you will tell me that stealing competitive secrets and bribery is illegal and will be prosecuted in most developed country also.  Which is why I am not sure what to think of this.  Maybe you can enlighten me here.

p.s. Another reason this makes me feel uneasy is because this is analogous to a tactic often used within the Chinese political system to remove political threats.  Once in a while, high level political officials will be prosecuted for corruption and either executed or sent to a zillion years in hard labor. 

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Christopher Clarke wrote a very nice piece published in the Yale Global Online titled: US-China Duopoly Is a Pipedream

Here’s the exerpt and the jist:

In short, Sino-American economic symbiosis has come to look more like a mutual death grip in which neither side dares make a precipitous move for fear of going over the cliff with the other.

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Discovery on Baidu

Discovery Channel recently partnered with Baidu and launched a website targeting Chinese audience.  The site hosts a selected number of Discovery shows, with Chinese subtitles.  My first impression from watching a couple of clips is that it can probably double as an English learning tool!

I’m excited to see this for a number of reasons.  Firstly, I do see a market for non-Disney media content in China.  Non-Disney, non-news, non-politically sensitive content.  Secondly, Internet video content presents a huge opportunity in China since it is much less regulated than traditional media channels. 

The website will be ad-supported.  Over time, I see the opportunity for Discovery to further monetize through e-commerce; selling DVDs and other merchandise.  Other potential content areas include home improvement, cooking, traveling, and yes, even Disney.

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There are many rules and regulations in China that are ignored systematically.  One of the hardest things for an outsider to master is the art of tiptoeing through the gray area.  If you use the western interpretation of the law, you will find PRC laws paralyzing – if you are going to be a boyscout about it, you will not be able to get anything done. 

To further illustrate this, let me try to explain the different approaches to establishing law.  The US focuses on fairness, equality, logic, and transparency.  In the most general term, we expect that everyone should be treated the same under the same set of circumstances.  Of course, this doesn’t always happen, but that is what our system aspires to do. 

The Chinese legal system is more similar to parenting.  Just because other kids have an iphone doesn’t mean you can have it too.   When I said no more TV ever, I really meant no more TV until I change my mind.  When I said you’re grounded for life, you can of course go to school… and after school activities, and if you behave well, I won’t say a word when you tell me you’re heading out for a movie.  Let’s both just forget the rule is there. 

To operate in China effectively requires one to push the envelop and challenge the authority.  But remember, not all laws are meant to be broken.  And just because your neighbor breaks the law doesn’t mean you can do so too.  And herein lies the art of doing business in China.

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