FREE KIC - NO. 34 AUG 08
mark the occasion of the Beijing Olympics I thought that it might be interesting
to share some of my experiences of visiting
I first visited
I did not meet any Chinese companies on
that trip because at the time virtually everything was still state owned and
It was on my second visit in 1992 that I
realised the scale of the ambitions of the Chinese authorities. I was taken to
meet the Pudong Development Company. (Pudong is the area of land on the
opposite side of the river that runs through
At the time Pudong was a giant building site and the Pudong Development Company showed me a scale model of what they hoped to build. I couldn’t believe that they were trying to build so many skyscrapers. I have to admit that at the time I had my doubts about whether they would achieve these ambitious targets.
On this trip I also met some of the first
listed companies on the
It was after this visit to the chemical company (Shanghai Chlor Alkali) that I realised just how complicated and risky it would be to invest in individual Chinese companies.
The management of Shanghai Chlor Alkali explained how their business worked. They explained that they bought their raw materials (e.g. naptha) from state owned chemical companies and sold their finished products (e.g. PVC) to other state owned companies. This meant that profits were completely in the hands of the government and market forces did not apply!
In a situation like this I get very nervous about investing. How much confidence could I have in determining how profitable the government would allow this company to be!
I just felt that I did not know nor understand how the Chinese government worked and in fact it was probably even more complicated than that because local government was often the owner.
I also came away with the impression that this (local) government control was generally the case for most listed companies at the time.
I do not want to give the impression that I do not or will not invest in companies where the government can influence outcomes. In fact governments regularly influence outcomes. I have written about investing in Glaxo where governments have enormous influence over profitability.
I invest in companies where I think I understand how the rules work. This is a complicated subject that I am not going to go into in detail here so I might write a future opinion piece on that very topic. (Suffice to say that I did not feel in 1992 that I understood how the rules worked in China.)
I went into
This was a trip to visit Japanese companies
that had set up manufacturing operations in the city of
This trip was the first time that I felt I really had the chance to get out among the ordinary people. I began to feel that these ordinary people were similar to the people I had met in Hong Kong, Singapore and Taiwan, in other words a very entrepreneurial group of people that had finally been allowed to ditch communism.
I began to believe that
My next trip to
I was convinced that there was a long term growth story happening but once again I was struggling to find companies that I could invest in.
That was the last time I was in
Naturally enough I continued to read about
At one stage in 1999 in Setanta Asset
Management we even invested in China Mobile the biggest mobile company in
I also met PetroChina when they were just about to come to the stock market. Once again I had the same concerns as I did when I met Shanghai Chlor Alkali. The government still had such control. They even required the company to provide schools and hospitals for their employees.
I recognised that PetroChina appeared to be cheap relative to oil companies in the rest of the world but I was concerned that the Chinese government might not allow foreign investors exploit that cheapness.
You can imagine my surprise when I learned
that Warren Buffett decided to invest in Petro
I could have copied Buffett and bought some PetroChina shares but I continued to have concerns about the way the Chinese government would potentially interfere in their business.
Buffett sold out of Petro
investment. He managed to sell out before Chinese government interference began to create problems for all of the Chinese oil companies.
The Chinese government has been concerned about inflation and has attempted to keep down the price of petrol at the pumps. They have forced the Chinese oil companies to lose money on their refining businesses. This is the very thing that kept me away in the first place. It appears that Buffett got lucky. I think he could have made one of his very rare mistakes but then again it shows that he is human!
In conclusion I continue to believe in the
More on Buffett
Warren Buffett recently gave a series of interviews to CNBC entitled “Three hours with Warren Buffett”. If you have the time it is well worth watching at http://www.cnbc.com/id/19206666
He mentioned that he tried to buy a half billion stake in an unnamed Chinese company! (He is having better luck than me in finding Chinese companies to invest in).