Friday 5 June 2009

Chinese company results - does anyone believe the numbers?

I am glad it not just me. This Chinese stock market rose and then fell and is beginning to climb again.

First, it should never have risen so high (we have previously covered why it did so).

Second, it should have fallen further (and may still do so).

Third, the recent rally will not last.

My personal worries again relate to what Chinese companies are reporting. I have had my doubts and this links in with my view that I simply do not believe the data that these companies are reporting.

It was reassuring therefore to see that the Economist has picked up on this and about time.

The issue of Chinese subsidies is very important. This is the mother of all stimulus packages and it is clearly helping companies survive but to what cost and to what end?

It is tempting to take a large short position on China at the moment.

Red flags [Economist]

CHINA’S stockmarket has been one of the best performing in the world this year, and the country’s firms have so far steered through the global financial crisis better than many of their global peers. Partly they may have been buoyed by robust business conditions in China. But two recent studies, which raise serious questions about the credibility of China’s corporate earnings, suggest that companies may also have had an artificial boost.

The less damning of the two is issued under the auspices of the Hong Kong Monetary Authority and written by Giovanni Ferri, of Italy’s University of Bari, and Li-Gang Liu of BBVA, a bank. It argues that the profits of China’s large state-owned companies are entirely a product of subsidised financing by state banks, which lets them borrow much more cheaply than private or foreign firms (see chart).

To reach that conclusion the authors sifted through government data from 1999-2005. Mr Liu believes that such subsidies may have even increased since last summer, because the big state-owned enterprises have been the main beneficiaries of China’s economic stimulus. In the short term the subsidies will have boosted profits, not least compared with the firms’ credit-starved private peers. But in the longer term Mr Liu believes that the political component of the loans will mean capital is being allocated inefficiently, raising the prospect of future losses.

At least the academics are convinced that the profits are genuine, even if they are subsidised. But an exhaustive working paper by TJ Wong and Danqing Young, of the Chinese University of Hong Kong, and Xianjie He, of Shanghai University of Finance and Economics, reaches a more alarming conclusion. It suggests investors have little faith in the numbers.

To measure this they looked at Chinese firms before and after the country broke with its accounting traditions in 2007, adopting something akin to international accounting standards, which base valuations on market prices. They then dissected earnings in three ways. First, they compared how shifts in earnings correlated with shifts in share prices under the old accounting system and the new. An improvement in accounting practices should have meant a closer correlation between earnings and the performance of the share price. Not only did this not happen—there were some signs that things got worse.

Nor were there correlations between the share price and the shift in reported value of investment instruments, goodwill and the impairment of assets—all typically critical to an investor’s analysis. Lastly, the academics examined a nuance in the new standards that allowed Chinese firms to book profits by restructuring debt that was owed to affiliated companies. Before the change in accounting standards, this kind of debt restructuring was rare. Afterwards, it was common: more than 200 companies, or over 15% of those in the study, did it in 2007. This resulted in clear gains to earnings but no impact on share prices. So is there anything in the company reports that investors do consider to be meaningful? That, says Mr Wong, is the subject of the next study.


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4 comments:

JOSE LUIS REVILLA ESCUDERO said...

CHINA, ready to lead...?

I have spent the last month travelling around ASIA to try to find an answer to this question. Just now, when we are in the middle of a global crisis, with almost all foundations of economy in danger, I wanted to answer myself about the role that each country is going to take to lead the world out of this recession period.
I travelled to Hong Kong, Shanghai, Taipei and Seoul. I spent a certain time reading the local press, involving myself with their domestic issues, and watching and asking about the role of Hong Kong, China, Taiwan and South Korea in the future recovery process.
China latests are focused on the opening of Shanghai Stock exchange listings to foreign companies, but still with the limitation of doing it only with yuan currency, and still being not convertible.
Hong Kong, who belongs to China, but with a S.A.R. ( special administrative regime ) is deciding now its own future, since Shanghai and itself must now compete to become the financial centre of the "new" China.
Taipei celebrates that for the first time in six decades, a mainland company, China Mobile is due to acquire a 20% stake in a local communications carrier, breaking with this step, the so long disputes among these 2 asian states. Nevertheless, some old nationalists from Taiwan see into this movement from mainland, the challenge of a new adhesion process, similar to the one carried with Hong Kong.
And finally, Seoul is focused on recovery the way they best know. That is, working tough and smart to become again what two years ago it really was... an still unknown, but highly effective and productive capitalist economy.
So, the answer to my question was not easy, but I think I can clarify some things that really matters to a global economy world.
China strategy along the years has been to manufacture goods at a low work labour cost, and sell them mainly to the US and Europe. Now, with 1,3 billion people living in the mainland, they realise that their real market may be inside, may be domestic. But to go along with this change in the way exports are handled, is not an easy task... but you can see already some interesting movements, such as the recently signed collaboration with India, to get a chunk into the OUTSOURCING market, as well as, the already mentioned opening of Shanghai Stock index to foreign companies.
My opinion resides on the idea that in a not so long future, we will start looking at Shanghai index closings the same way we do it with Wall Street now.
If China converges into a more open performance, USA supremacy as the first economy in the world may be in danger.
China will try to joint Hong Kong current power and international presence, with Shanghai newest challenges. At the same time, it will break old and stupid disputes with Taiwan and even South Korea, to walk along a new asian world, capable of assuming the role of leading it.
But, for sure, we do not expect China president to become a worldwide "prime time TV star" the same way the US does with its presidents. We will never know if China president has bought a dog called "Bob" to his daughters... we even won´t know if he has kids at home,... or if his wife is dating another men ...
We must expect a new role, focused on discretion, hard work, no discussions, but highly effective and consumer oriented strategies.
If the US unveils its secret CIA files, ... China will continue with its secrecy in domestic critical matters.
If the US continues fighting muslims in Afghanistan, China will stretch its ties in a peaceful way with its long time disputed neighbors, trying to consolidate its presence in Asia.
If the US continues with prime time interviews, China will present only specific topics of its politicians activities.

Jose Luis Revilla Escudero
Chairman & CEO
WW Shares, Inc
-Global Wealth Management-
www.worldwideshares.blogspot.com

JOSE LUIS REVILLA ESCUDERO said...

LEHMAN down, GM down, Citi, Chrysler ... Is AMERICA really hurt ?


PONTIAC, BUICK, CHEVROLET... the "American dreamt" brands, the symbol of an era in America.
The wish of many teenagers that then became great personalities around the globe.

But, this was a forecasted end. TOYOTA has been for many years, the real revolution in the american auto industry. Together with NISSAN, both japanese manufacturers, leaded the auto sales market for many years in a row.

Afterwards, came the korean cars... the asian conquer of the american auto corporations.

Is this the sign of an hegemony change ?... Is AMERICA really that hurt ?
Is competitiveness the key crack-down factor for this consequences ?

The US will always mean marketing, show, branding, globality, with its own values and essence. But, is this enough to keep US sovereignity in the planet ??

AMERICA has voted for a change. Barack Obama, the first black president, meant a new change era and a barn of hopes for many americans. But is it enough with a good carisma and beautiful words ??

USA is now playing a tough game. The game of competitiveness, the game of innovation, the new rules of capitalism...

Can AMERICA workers compete with the 24-hour turns of japanese or chinese workers ?
Can AMERICA export more than import ?
Can AMERICA reissue the huge external debt owned by CHINA now ?

Does anyone know that the main owner of the USA is CHINA ?

Yes, the main owners of US debt is CHINA. If CHINA decides to do it, US Dollar can dissapear.

Nowadays, CHINA has lived of US imports. Therefore, CHINA has accumulated vast deposits of T-bonds and US Dollars. This has been the reason for the dollar stability.
Once CHINA develops their internal consumer rates, or begin diversifying their exports, CHINA will be in position to change US dollars for other currencies. Then, US Dollar will be dead.

Is AMERICA ready for this era ?
Does Barack Obama has a real plan to put a brake on this dynamic ?

Huge challenges ahead. But, for sure, the only opportunity for AMERICA is not to lose their essence. The AMERICAN DREAMT must be on, but politicians and decisions makers must also help on this.

One advice for Mr Obama:
Capitalism has not failed, it has been the lack of regulation in the financial markets.

It is very important to keep this clear, because around this point, the US must build their next future generations.




Jose Luis Revilla Escudero
Chairman&CEO
WWShares, Inc
-Global Wealth Management-
www.worldwideshares.blogspot.com

Radio Streaming said...

I thought economics china will grow not be the same as the year ago
because :

1. Issue of Weather
2. Economic Worldwide is slowly Growth.

But economics china continue to leading was compared by the other country

AMIT said...

Chinese Company produce goods on low quality thats y they may have more profit.

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