When we first began exploring the teapot art market, in China, we discovered that many artists and dealers set prices of teapot art, relatively and unreasonably high, versus other forms of art, like paintings and traditional sculpture.  As investors in and collectors of art, in addition to being a dealer, in art, we were offended by this practice, which, often, is a phenomenon, in prices of many goods available, in China.

Our response to this overpricing in the teapot market has been multifaceted.  First, we have endeavored to make connections with artists, directly, so, that we know what the prices are from the source.  Then, we have included the art, only of artists whose prices are relatively reasonable.  In addition, we have written several articles about this overpricing phenomenon, published in both English and in Chinese, to try to make people aware and wary.  In the beginning, in fact, we put a link to one of our articles on a tea forum of Adagio Teas, in the U.S, and there were so many complaints from dealers, who were apparently overcharging on teapot prices, that the article was closed by the moderator.

It appears that we are still a thorn in the sides of some teapot dealers because, in the last month or so, we have gotten calls from artists telling us that other dealers are complaining about our prices being too low and that they cannot compete with us.  In the case of one of the artists, we took his overpriced teapots off the website, at least, from the Chinese part of the website, which is the only part that he can read, because he insisted that we make the price four times the price that we had on the site.  We left those teapots on the English version of the site at the original prices that we had on them.  This week we got our second call from an artist, and we told him that the problem is not our.  The real problem is that the other dealers are overcharging on prices out of greed.  If the prices that we charge can earn us a reasonable margin on his art, other dealers could also be satisfied with that level of profit margin instead of insisting that we follow them in trying to rip off customers.  In fact, we even give genuine dealers a discount on our retail price, so, there is no reason for other dealers to complain that they cannot compete with us.  Indeed, we have, on a number of occasions, seen teapot art that we offer at Leona Craig Art, priced by other dealers for as much as ten times the price that we charge.  What those other dealers really mean when they complain about our prices is that they can no longer charge the excessive, rip-off prices for the teapot art that they were accustomed to charging before we at Leona Craig Art entered the market.

As art dealers, we will always get a dealer price on any art, be it paintings or teapots, because it is our business to buy larger amounts of art, to promote, and to sell art, and we get compensated for that either by getting an inside dealer price from artists or by investing, risking our own capital, and holding art for a number of years to make a return on investment from price appreciation.  More generally, it is the business of the arbitrageur to make returns from the differences of prices in two markets, in this case, retail versus wholesale art markets and recognizing emerging artistic talent before others have caught on.  In fact, the teapot artists who we represent, in the Leona Craig Art Gallery, also sell their teapots in the retail market.  As a result, most of them suggest that we charge a lower price than they charge to retail customers because they give us a dealer price, in the first place, and they want us to be able to compete with them in the retail markets, in the second place.

At Leona Craig Art, we want to promote art and the art markets: we do not want to promote bubbles in the art market.  In a country where ethical standards are, in general, lacking, and greed is rampant, we want to stand out, not only for our selection of great art, but also for our integrity, honesty, and fair dealing.  We do not want to end up like those teapot dealers, who are complaining about us, and have our customers come back to us after realizing that they have been ripped off when they find out what the prices should really have been.  Therefore, we will continue to promote only the art of artists who have both artistic talent and ethical practices in pricing their art.

To see our current offerings in teapot art from Yixing China, the capital of Chinese teapot art, please, visit the Leona Craig Art Gallery Teapot Section.

        

A tactic that I see all too often, in Chinese businesses, is being penny smart but pound foolish.  I see it at the local businesses, in my neighborhood, where the merchants over charge on price and lose volume of business.  They figure that the higher the price, the less they will have to sell to become rich.  I see it at the college at which I teach, where the administration provides a poor educational and play experience for its students, and it has shabby class rooms.  They charge a high price, but graduating students tell me that they tell their parents' friends, who ask., not to send their sons and daughters there.  The school could have an enrollment of ten times its current size, if they would spend some money on enhancing their student's college experience; indeed, that was the estimated size when the project was first done, 6 years ago. 

My most recent experience was a real mind-blower.   I wanted to buy my girlfriend some art books about a number of arts, through the ages.  I was expecting to spend several thousand Yuan.  My first thought was to go to the Guangzhou Museum, down the Street from me, so, I went there, first.  I entered the lobby; told the woman at the ticket counter that I wanted to go just inside the entrance to the book store; and I was told that I needed to buy a Y15 ticket to enter the museum.  I tried to reason with her, but it was wasted breath.  In the end, I went to the other large museum, in Guangzhou, on Er Sa Dao Island, and they called someone from the bookstore to escort me in.  Guess they are not all penny smart and pound foolish, but the vast majority of businesses that I come into contact, daily, are.

        

As you may have read in our other articles, blogs and reports, there is much dishonesty, fueled by greed, in China.  There are fake DVD’s, software, LV bags, and teapots, to name a few.  Every time, I go to a store or market, most of which do not put price labels on their items, the price can sometimes be as much as ten times the actual price.  Indeed, many Chinese business owners charge too high prices, even to Chinese customers, because they believe that the higher the price, the sooner they will be able to retire: the truth is, usually, the sooner they will be out of business.

Moreover, the rules for establishing a business are tilted heavily against foreigners.  For example, to register a corporation, a foreigner needs to have ¥1,000,000, while a local needs only ¥30,000, and a local can even go lower by doing the equivalent of a DBA for a total cost of around ¥2,000 for fees only.  The red tape, in the case of a foreigner, can take as much as three quarters of a year, too.  Moeover, even if you look at the companies that are listed on the exchanges, in China, the weight shifts from private to government enterprises with less than 50 of about 1,500 listed companies from the private, as opposed to government, sector.

Over the years, we have heard many personal accounts of those who have done business, in China, and some recent experiences cause to write this blog entry.  The first comes from a Chinese person that we work with, in our Leona Craig Art business.  That person had given up a previous partner and entered a new partnership with a friend whom was believed to be in a position to promote the business.  They both did separate things, and our friend believed that there was some synergy.  This week the friend called my protégé and told her that she had discovered that her partner, whom she had taken to the art studio where she gets her art, was going behind her back, getting art, and secretly selling it to her customers.  The same day we read an article (http://bit.ly/89Mez)  about a German advertising company that had set up an outpost, in Beijing, and discovered that seven of its key employees had set up their own company and were siphoning off all of the best contracts.  There have been many similar cases, over the years.

At Red Hill Capital, we have been involved in investing in underdiscovered and inefficient markets for several decades.  We have never been fans of the Chinese stock markets because of the lack of transparency of information, in China, to begin with, and because of the multi-tier stock scheme for Chinese listed companies that gives the least rights to foreign owners, in addition.  Being in country for half a decade, we have heard first hand stories and we have seen those that have made the news, like the Sanlu milk scandal that left their foreign minority owner, Fonterra of New Zealand, out several hundred million.  Just last week, GM would not sell a division to a Chinese company because they did not want to have their intellectual property stolen, in the bargain.  Also, within the last several week, there have been news reports about Chinese spies trying to steal information and technology, in both the U.S. and Germany.  On the other hand, China recentlt arrested the lead engotiator from Rio Tinto of Australia, which supplies China with much needed iron ore. He has been charged with spying and, at the time of publication of this blog entry, has been held in custody for about a month, and the offical charges still haven't been released to the public.  Moreover, his arrest just happens to come after Rio Tinto rejected a bid by the Chinese to buy a large stake in the company. 

As we have said, in a number of reports, we believe that China will not be the economic giant that some think they will.  Those opinions are based on what we see, here, in education and in ethics.  What we do acknowledge is that China will be a big market, and, if they ever open up, in both information flow and fair playing field for foreign businesses, it will be a place for many foreign businesses to set up plants and to give all of these people jobs.  However, the more we see and hear, the more we believe that day is far off, but China should really change their attitude and let it come because we can help, if only they would let us.

© 2009 Red Hill Capital Corporation, Delaware, USA; all rights reserved

        

If you follow us on twitter and read all of our blogs, article board articles and reports on our website, you will have a sense of what we feel about the Chinese economy.  We took down our report about the Chinese stock market after it had crossed the 200-day moving average, a few months back.  In the mean time, in the economy, the government has been pouring back money into the economy, some of which has been loosening up of lending standards.

Since that time, credit card loan bad debt has risen to highs.  The stock has increased about 90 percent, and we have been seeing the same inexperienced friends jumping on that bandwagon, recently, like they did during the crescendo to the last stock market bubble, and real estate prices are rising again.  Moreover, in the past few weeks, there have been many IPO’s, which also skyrocketed on debut, which is another classic sign of a market top, as people tend to go public when they think the market is nearing a top because they can sell out their interests to other investors at the maximum.  Also, we have written about how much saber rattling and barking the scared dogs have been doing lately, which is another sign of fear on the part of the barkers.

Exports, which have driven the economy, are dead.  Over 21 million people lost their jobs, by the beginning of the year, about one million businesses, in Guangdong, the engine of export growth closed their doors, many of our friends who had thriving export businesses have closed up shop and gone home, and 60 percent of current college graduates cannot get jobs.  So, the government has been trying to pump money into the domestic economy, which it can do because it also controls a lot of the economy.  Recently we read that about one-third of China’s GDP will come from new loose loans, which is not a good sign.  The central bank has been raising caution for over a month, but, here, in China, the government controls the economy.  All of this points to the possibility of bad news for the economy, including stock markets, real estate, banks, and the entire economy.

It’s always tricky to time bubbles.  In fact, we began advising people to get out of the Chinese stock market well over a year before the last bubble burst.  Now, many companies are doing IPO's, which companies tend to do when they think the market is high (you don't lay off your stake in a company when you think the market is low).  Since the vast majority of companies listed on the exchange are government owned or affiliated (out of the approximately 1,500 lasted Chinese companies, less than 50 are private sector companies) the government may be waiting until those IPO's are out of the pipeline before the tigthening comes.  Although we cannot be sure of the timing, again, especially since the government is not exactly transparent with their economic figures, we believe that the handwriting is on the wall.  The bubbles are coming, and they will burst in many places.  So, don’t be foolish like many of our friends have been, last time and this.  Remeber what the Baron de Rothschilde said when asked how he got so rich: "I sold too soon."

We list some additional refernces for further reading:

1. Asia Sentinal "Cracks in China's Foundation" http://tiny.cc/7tFJO 
2. Foreign Policy "Insider's View to Washington's China War" http://tiny.cc/aFXSq
3.  http://tiny.cc/wJIKa
4. Debt sales for Augusthttp://tiny.cc/mFVcP
5. MS Analyst believes China will cut loans H2 http://tiny.cc/E1NR9
6. MIT professors viewpoint http://bit.ly/uKOes
7. China Central bank says it will use market tools http://tiny.cc/99QPJ
8. Overnight MM rates up http://tiny.cc/59T38
9. FP article about loose loans/bubble http://bit.ly/vy3by
10. Remind me when will the Asian Century begin http://xi.gs/06oz
11. 1.63 million new securities accounts opened, in China, in July http://tiny.cc/jaot9
12. Everbright Securities IPO priced about 30% above analysts expectations http://tiny.cc/d0iTr 
13. Oppenheimer alanyst predicting 18% drop in Chinese stocks next 3 months http://tiny.cc/hPMBq

© C. L. Mattoli, CEO Red Hill Capital 2009

        

The way that we examine economic activity, and everything else, for that matter, is not by looking at official statistics, alone, but also at the microscopic data that we come face to face with, on a daily basis.  We are in Guangzhou, the capital of Guangdong, which has been the major area driving the export market.

Over the past year and a half we have reported things, like almost a million businesses closing in Guangdong and over 20 million migrant workers, who worked here losing their jobs and going back to their hometowns, in the north and west.  We also reported about the traffic at the cafés on Xiao Bei Lu, which is a major shopping area for those in the export business.

Our neighborhood is one where many foreigners live or hang out.  Two more indications that we have seen, recently, are: one of our good friend who had a thriving export business for about six years has closed up shop and moved back to his home country.  In our old apartment complex, which has many small stores that cater to Westerns have closed over the past few months, and yesterday, one of our friend at the local wet market, there, which sells fresh meats, seafood, vegetables, and other such goods told us that her business is down eighty percent, just over the last few months.  She told us that the reason is that most of the foreigners who lived there, which we have been noticing over the last year, have moved out and gone back to their own countries. 

        

China has gotten itself onto the world economic stage through an undervalued Yuan and low tech products.  Sure, they have a few companies, like Haier, whose two-piece air conditioners are innovative, but, lately, the government is pushing to shift its industrial might to higher tech.  Indeed, that is the underlying motivation for the new employment rules that went into effect, last year, which put over 20 million migrant workers out of jobs and about a million businesses, in Guangdong, out of business.  I suppose it is the misguided justification for Lenovo’s purchase of IBM’s microcomputer business, a few years ago (IBM, on the other hand, has flourished since then because of their change in emphasis; Carly Fiorina of HP lost her job as CEO over her purchase of Compaq, almost a decade ago).

The bigger problem that China faces, in this attempted shift, as we see it, is the education system.  As part of Mao’s cultural revolution, all comrades were supposed to be equal.  Women were de-feminized (see our blog entry, in Leona Crag Art Blog: Why are Chinese girls so popular), and academics were imprisoned because Mao did not like the ivory tower.  The result is that, today, the education system, in China, is very poor.  Students are taught to memorize, and, even at the college level, students are pretty much told what they need to memorize to pass exams.  The whole system is devoid of creativity, which is the benchmark for innovation and development of the pool of knowledge, which is the key to technological development.

We can compare this to the German-U.S.-Russian experience.  In the first half of the twentieth century, Germany had many good scientists.  People, like Max Planck, Erwin Schrödinger, and Albert Einstein were all German and were responsible for the beginning of modern physics, including quantum theory and relativity.  During WW2, many of them immigrated to the U.S., and after the war, the U.S. and the former Soviet Union split up the leftovers.

Even though the Soviet Union was communist-socialist, they were smart enough to recognize the value of education, in general, and science, in particular.  Over the past century, as a result, there were many great physicists from Germany, U.S., and Russia.  As a result of the Chinese communist policies towards education and academia, there is a dearth of scientist and creative minds, today, in China, even though China’s population far exceeds those of these other industrial and scientific giants (even a blind pig finds an acorn, once in a while).

We, now, also read reports about Chinese trying to steal technology from both Germany and the U.S.  That was also the case with Japan, several decades ago, but countries have gotten, at least, somewhat smarter about keeping their technology secrets.  For China to become a technological giant will take a total revamp of their education system unless they happen to get lucky from the law of large numbers.

© 2009 Red Hill Capital Corporation, Delaware, USA; all worldwide rights reserved.

        

In the past month or so, we have seen the true China shine through.  Never mind that the growth of the Chinese economy, having been built at the expense of Western & Eastern people, alike – Westerners because it was made possible by strict control of the undervalue of the Yuan vis-à-vis the international market; Easterners because of poor work conditions and pollution - has been made possible, mostly, by a free Western World.  And having told the world, during and after the 2008 Olympics, last August, that it would loosen the flow of information, there have been many recent examples to the contrary.

Towards the end of May, in fear that there would be too much chatter on the internet about the 20th anniversary of the Tiananmen Square debacle, China shut down sites like twitter and fanfou, twitter’s Chinese clone.  Of course, these days, there were many who got through the blockade of the Great Fire Wall, using clones, proxies, and VPN’s.  Then, after that was past, China announced, then, retracted a new rule that would have required that all computers sold in China would come with mandatory censor-ware (spy-ware).  The reason for the software was supposedly to keep kids from getting to porno sites, but the program also had more sinister capabilities.  Of course, the retraction may have had more to do with the fact that people actually found code, in the program, that was lifted from a program for parent control, made by a U.S. company, right down to code that had the U.S. company’s name in it.  Then, China turned it’s wrath on Google, and it was blocked for several days, supposedly because porno could be found, on it.

As soon as those bumps in the road passed, there were race wars in Xinjiang, a Muslim area, annexed to China as one of its autonomous regions (the other being Tibet; the two comprising one-third of the landmass of “China”).  Again, the kneejerk reaction was to close down social networking and other sites, like twitter, fanfou, and facebook.  That only heightened the dread and resulted in false reports on the phantom network, which again got around the Great Fire Wall.  As of the writing of this post, those sites are still blocked.

In the mean time, China has detained the head of Tinto Rio, an Australian iron ore firm and his assistants, purportedly on stealing national secrets.  Note that Rio Tinto had just rejected a large investment in it by a large government controlled Chinese steel maker.  Moreover, the men were detained for three days without informing anyone that they were being detained.  The move has unleashed an international cry foul, and the government has still not made charges against them any clearer except to say that bribery might have been involved.  Of course, the whole law in that area is rather vague, and, technically, foreign firms are not allowed to even take someone out to dinner.  In the meantime, a Chinese, in the U.S., was convicted of stealing defense department secrets over a number of year, while working for Boeing.

To add to the fray, one or several Nigerians were either injured or died trying to escape a surprise passport inspection at one of the local clothing market areas, and as a result, a hundred-strong group of their fellow countrymen surrounded the local police station in protest, something completely new in China but which has had potential festering for some time.  Many of my African friends have left either Guangzhou, in particular, or China, completely, saying that, while China seeks to rape their countries of natural resources, it turns around and discriminates against Africans doing business or living in China, and they are not happy with the disparity.  

And to top it off, a blogger, in China, who wrote some blogs about corruption and false police reports, in Fujian Province, was taken away by the local police, a few days ago, and had not been heard from since (all the while, he was telling about his arrest on twitter via his telephone).  Later reports said that a number of bloggers had been jailed.

Doing business and investing require good information and disclosure.  These, along with other reasons that we have discussed in our posts on our blogs plus some private information, are the reasons that we are cautious to invest in businesses, in China.  It is already difficult enough, just to get fair treatment in purchasing goods to resell, in the West, but when it comes to the intricacies of business practice and law, rules and avenues of disclosure, lack of protection of copyrights and trademarks, and the unfair playing field for foreigners versus locals, in Chinese business, we would rather sit on the sidelines and wait for the climate to greatly improve before we jump in.  All the while, the barking dogs try to make their case that China should somehow displace the U.S. and  the U.S. dollar as the economic and financial force in the world (good luck on that one: it's not quantity of people, it's quality).

Although the world puts up with such shenanigans, as parents might with a screaming spoiled child, China will have to learn that they cannot get everything it wants, out of some misguided thoughts of entitlement.  Although you can cheat or get lucky with accruing monetary wealth, the other two things that must be earned, respect and trust, can not be bought or bullied.  Even the run-of-the-mill nouveau riche person has learned that.

C.L. Mattoli, CEO
Red Hill Capital Corporation, Delaware, USA
© 2009; all rights reserved.

        

My protégé wants to buy a new laptop.  Her present one, an IBM, is getting old and slow.  I explained to her that micro-computers have been commoditized for about 20 years and that any good brand will do, but she wanted to do her own research.  First, she wanted to buy an IBM, and I explained that there is no more IBM, in the portable computer market, because they sold that business to Lenovo.  I also explained to her that Compaq is owned by HP.  With that knowledge, she went shopping.

When she came back she gave me a debriefing.  First, the Lenovo salesman insisted that their ThinkPad is really IBM and that all of the same people, parts, and plants were used to make it as when it was really IBM.  Personally, I don't know if I buy that, but other of you, the readers, may comment on that.  More surprising were the answers that she got, while visiting an HP outlet.  There, she told the salesman that many of her friends had told her that there were problems with HP-Compaq.  In fact, the salesman told her that there really is a difference between HP and Compaq, in China.  He had her touch a Compaq laptop to feel how hot it was; then, an HP to compare how cool it was.  He went on to tell her that the real difference was that HP were made in Shanghai, while Compaq was made at a plant in Suzhou, and that HP was a much better quality machine.

I remember how everyone thought that it was not a smart move for HP to buy Compaq, back in 2001.  In fact, the head of HP eventually lost her job over it.  I felt the same way about Lenovo buying IBM, but at least that might have helped to give a Chinese computer company a bit of legitimacy, both in country and outside.  However, when I see how each has treated their purchases, I think that HP-Compaq is the real loser.

        

We did a blog entry on the Red Hill Capital blog, today, about trading systems, pyramid schemes, greed and arbitrage.  You can read it at http://blog.redhillcapitalco.com/2009/06/26/mythical-trading-systems-pyradmid-schemes-greed-and-arbitrage.aspx ...<< MORE >>

We added two blog entries about the art markets on our Leona Craig Blog, this week.  One is about recent reports concerning the firming of art markets, of late, including our recent personal experience at the Leona Craig Gallery.  The other takes a closer look at the recent evening auctions of Impressionist & Modern Art at Sotheby's and Christie's, in London.

You can view them at http://blog.leonacraig.com/ ...<< MORE >>