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Another Comment on Overpricing in the Chinese Yixing Zisha Teapot Market

2010-01-02T05:24:00Z

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.

Chinese Business Tactics: Penny Smart; Pound Foolish

2009-08-21T14:51:00Z

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.

The Treacherous Waters of Business in China

2009-07-31T05:05:00Z

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

The Bubbles are Coming: This Time Even More Will Come to the Party

2009-07-30T02:19:00Z

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:

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

More Indirect Indicators about the China Export Market

2009-07-26T07:56:00Z

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.

Education, Technology, and Economic Development: China versus the U.S., Germany and Russia

2009-07-25T06:03:00Z

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.

The Bully

2009-07-18T09:26:00Z

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.

Computer Logic

2009-07-09T02:05:00Z

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.

Entry on Red Hill Capital Blog about Trading Systems

2009-06-27T12:33:00Z

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 ...

Recent Leona Craig Art Blogs about the Art Markets

2009-06-26T03:07:00Z

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/ ...

Barking Dogs: China's Aspirations to be a Financial Powerhouse

2009-06-05T16:28:00Z

There has been a lot of saber rattling, this year, from Beijing about the U.S. dollar, U.S. Treasury securities, and the Chinese Yuan. We even read an article saying that as the Yuan becomes a major reserve currency, it will be good for the value of Chinese art. Our opinion of all of this can be summed up as: what a load of crap! The truth is that the Chinese are just jockeying for attention and recognition, and, like, in most cases, they want it without the requisite hard work that it takes to become truly successful and respected. It is like a child trying to get attention or a barking dog.

First of all, the only reason that the Chinese have been successful in the exports markets is that the Yuan is underpriced, so Chinese products are cheap to the West, on the one hand, and Chinese people, in general, cannot afford to buy Western products, which they would love to buy, on the other. While people might pay lip service to the miracle that is the Chinese economy over the last two decades, in which it has gone from an agrarian economy to one, in manufacturing, that has had its costs to the rest of the world, in a number of ways. It has been done, first of all, at the expense of the environment, not only of China, but the whole world. The pollution from China is so great that it can be seen from space, and there are deposits of heavy metals on the Rocky Mountains of America from prevailing winds. Its cheap products have put millions of workers from other countries out of jobs, not because China is producing superior goods or labor, in any industry, but because the underpriced Yuan has made it difficult to compete, on price, in the international market. Even more, while the Chinese workers have benefited from the industrialization by getting a job and barracks-style living arrangements, they had not gotten other benefits that other workers around the world see as common. In fact, they have not even had the benefit of the free flow of information from the outside world, which could have shown them what there labors were truly worth in the international market place, and, in the end, the real profits have been made by other people.

Now, China has been setting its sites on becoming more than just a large machine that produces cheap goods. It wants to replace its low-tech industries with high-tech, and it wants to gain international respect, but it has a long way to go and many obstacles to overcome. In addition to the stated goal by the government to turn from low to hi tech and the recent employment legislation that puts pressure on low-tech industries to the point that about a million businesses closed their doors, last year, we saw Lenovo buy IBM’s microcomputer business. However, to move into hi-tech requires a solid educational system, which the Chinese do not have, and Lenovo’s purchase shows how little the Chinese understand about hi-tech: a similar purchase of Compaq by HP, back in the beginning of the decade, was already considered such a poor business move that the CEO of HP lost her job over it. Time Warner thought that it would be even smarter to buy AOL; now, the marriage is over. Some technologies have already become fungible. It is new innovative technology that is true hi tech, and that takes innovative minds, trained in an creativity-based grade-to-graduate-school education system, not rote learning.

The other barking that China has been doing lately is trying to talk down the importance of the dollar and suggesting that its currency should gain more acceptance, in the international community. For example, in the fall of 2008, China suggested that it might not buy any more U.S. Treasuries. Beyond the folly of such a remark, trying to provoke, it could only have done harm to its own existing huge position in U.S. Treasuries because by talking them down, they would have suffered paper losses, at least. In truth, China did go so far as to sell some Treasuries, in January of 2009, but it began accumulating them, the next month, as did other entities, in China, besides the government.

As far as concerns China’s aspirations to become a reserve currency, those are sheer fantasy. First of all, as it stands, the Yuan is in a pegged currency, not allowed to freely float against other currencies in a market or even to be freely traded in markets. In such an exchange rate regime, the central bank is the only buyer and seller of the currency, which also means that a person cannot open an account outside of China and freely keep and trade the currency. Albeit recently, the central bank has exchanged RMB with foreign central banks, it is more like window dressing to give evidence of its international currency ambitions. Am additional problem of the combined undervaluation of the Yuan and the sole buyer position of the central bank is that the massive foreign currency reserves held by the central bank (about half of total assets in the last data released by the China Central Bank) would come down substantially, in value, in the event that the Yuan was allowed to freely float and move to a more reasonable purchasing power parity valuation.

Of course, when it comes to thinking about revaluing the Yuan, we also have to think about the large position in U.S. T- securities that the Chinese government owns. Again, if the Yuan were to appreciate, all of those holdings would decrease in value. Indeed, in the last year there have been a number of articles, in the Chinese press, about how the U.S. tricked the Chinese into buying Treasuries. However, it just shows, once again, that there is a lack of understanding and forethought about the intricacies of international finance, within the government financial sector, in China. It is the same lack of forethought that led the Chinese to try to denigrate the integrity of Treasuries recently: apparently not having thought out the financial consequences, for China, of negative comments about securities in which they hold a large position (only a crazy professional trader would do such a thing; not a rational one).

The compelling quality that is needed in a reserve currency, though, which China has a long way to achieving is confidence since that is all that modern currencies, which are backed by nothing by words and respect, since currencies went off the gold standard, in the 1970’s. In a system that is completely controlled by the government, including the free and fair flow of information, that will be extremely difficult to accomplish. Indeed, beyond the fact that information flow is controlled and censored by the government, even the statistics that the government releases about economic and financial data has been questioned by a number of authors, over recent years.

The same can be said for China’s desire to have Shanghai become the future financial hub of the world. That, again, takes respectability and confidence and, in addition, requires a knowledgeable pool of financial professionals plus a large network of contacts. Italy invented financial markets and instruments during the Middle Ages. Over the intervening 600 years or so, the center of the financial world has migrated to Amsterdam, then, London and, then, New York; each of those shifts was preceded by several hundred years of base building, paving the way with accumulated knowledge, relationships, capital, and trust, before the shift was putatively accomplished. Based on those statistics, alone, a shift to Shanghai is not in the cards for at least another century or two.

All in all, China and its protestation and campaigning for recognition in the real world of technology, money and finance is simply a naughty economic child vying for attention from its upright parents and the neighbors. Instead of being a barking dog, trying to convince passersby that it is ferocious, it should realize that anyone who knows dogs will know that it is just starving for attention. Indeed, their recent words and actions demonstrate that they are not ready even to begin to long trudge that long road that has taken others to where they want to go but, again, seek to find a shortcut, which may have worked in its drive to industrialization, but will not work in its lobbying for financialization or respect among the respectable.

Wen Jia Bao Speech at Qing Hua University

2009-05-05T14:10:00Z

Over the weekend Wen Jia Bao gave a talk to students at Qing Hua University. One thing that he told them that the employment situation, in China, is not so great right now and that they would be better off trying to go to graduate school, rather than trying to get jobs, in the current economic environment. Not too encouraging.

We have heard similar talk about students who are recently graduating from university and finding it difficult to get jobs, in Hong Kong, over the last several months from the Hong Kong television news.

New Red Hill Blog and Initial Entries

2009-05-05T13:20:00Z

We recently opened a new blog for our parent company, Red Hill Capital Corporation, Delaware. We will move the general investment and strategy discussions to that blog, and we will report to the readers of this blog when we have put something on that blog that may also be of interest to them. In that regard, the first two entries discuss: 1) real estate investment, in China, and 2) initial investment considerations for any business. You can get to the new Red Hill Capital Co. Blog at http://tiny.cc/pwxoz .

The Chinese version of "The Chinese Art Markets" by Craig Mattoli & Ayu Chen: 中国艺术市场, the original

2009-05-01T16:46:00Z

Apparently our recent article about the Chinese art markets has been well-received, in China: we have seen versions of it on about a hundred Chinese websites, in finance, investing, artist, art research, art auction, and art dealer sites. Thousands of Chinese have read it. We do think that that is great, but we are disappointed about the, sometimes, lack of correct, total, or any attribution.

The analysis, "The Chinese Art Markets". was originally posted on the "In Country Analysis" page of our website: http://www.leonacraig.com/In_Country_Analysis.htm, in February, in English, and later in Chinese as, "中国艺术市场". Last Month, we gave permission to a weekly collecting and investment magazine, in Beijing, to print from the original article. You can download the original at http://www.leonacraig.com/In_Country_Analysis/The_Art_of_China.doc, in English or at http://www.leonacraig.com/In_Country_Analysis/中国艺术市场.doc, in Chinese.

We have begun putting comments on many of the sites that do not give full or proper attribution for the analysis. What is almost funny is that on one site, the site owner warns that others should not copy the information because it is his, even though it still has our names and the name of the magazine that he got it from on the article on their websites.

In the mean time, why not invite everyone else to download a copy of the original. Why settle for a cheap imitation?

We are just finishing up an article about fake Yixing teapots, and now we see our analysis being copied. In fact, when students or colleagues ask me about will I publish the investment book that I am finishing up, in China? I say, "No. Only one copy would be sold . The rest would come from Kinkos."

Canton Trade Fair Spring 2009 Update

2009-04-26T05:26:00Z

Just wanted to tell you what we are hearing, on the ground, from this spring's famous Canton (Guangzhou) Trade Fair. In the fall, we reported that attendance at that one was down about one-third from spring 2008. This spring it appears, from the reports that we have heard from people, that attendance is down by about one-half or more from last year.

On one of the first day's of the show, we ate at a local Indian restaurant, in our neighborhood, which also has a lot of Western restaurants and hotels, and it is where a lot of trade show people come to dinner or stay. We sat with a man who was a seller at the fair, and he told us that on the first day by 9:30 in the morning the only people at the fair were those with booths: no buyers. This weekend, we again went to the Indian restaurant, and it was empty, suggesting that many people did not even stay for the second week. We also heard similar reports from our contacts at the hotels that are usually booked by trade fair goers.

From our discussions with other people, in the know, and from other reports that we have seen, locally, it appears that even those people who did place orders reduced their dollar values by about 80 to 90 percent, this year compared to last year, and the focus has gone from higher tech to very low tech.

Not a good sign for China exports.

You can read more about our thoughts on the China Export market ,in our recent article on buzzle.com at http://www.buzzle.com/articles/china-exports-purchasing-power-arbitrage.html

What is the Most Important Thing in Investing?

2009-04-22T12:30:00Z

What is the most important thing in investing? Is it a hot tip from your broker? Is it good insider sources? Is it momentum? Is it who you know at your club? Is it good stock trading software for your computer? Is it the U.S. budget deficit? Is it Lehman Brothers' arrogance and stupidity? Is it recommendations from securities analysts? Is it China's tastes and preferences? Is it the thickness of Ben Bernanke's briefcase? Is it oil prices?

Well, we don't know what you think, but you can read about what we think in our latest Ezine Article at http://tiny.cc/Ht5EX

China on Auto

2009-04-21T11:30:00Z

As we have mentioned in several blogs and reports, lately, one of the best businesses to be invested in, in China, for the future is automobiles and related, including highway owners and builders. As we have also mentioned, few people, in China, currently own cars. You can link to this recent article about car sales, in China, finally overtaking sales, in the U.S., from the NY Times: http://tiny.cc/ASvRD .

Think about that! China has 6 times the population of the U.S. but the same demand for cars, finally. That means there is, basically, 6 times the potential to go. There are already hundreds of auto repair shops, just near our neighborhood, in Guangzhou. Most of them do not even have a modern hydraulic lift or a pit, like repair shops in any small town, in the U.S. We even have a friend whose family is rich because they have a little shop that sells kits and parts to soup-up those little Honda, like some high school kids do, in the U.S., but here, they are hot cars and are generating enormous cash flows for a little shop, in a big city. My twenty-three-year-old protégé has never driven a car or taken driving lessons, although her father does own a car.

Even toll road companies, then, are a growth opportunity, in China. As is anything else that has to do with driving or cars.

It is even more than that! There are many items from the West that the Chinese would love to have, like cars, but because of the mispricing of the Yuan, they cannot afford cars or most other imported good. I even have a hard time finding Bayer aspirin. As the Yuan price changes and as China lowers trade barriers and tariffs, there will be many things to sell from the West to China. The Times article concludes that Chinese tastes and preferences will dominate the markets of the future. We do disagree with that. They will just want all of those great things Western that they longed to be able to afford and own, for a long time. There will, thus, come a time when China will turn from net exporter of its goods to net importer of Western goods and exporter of Western companys' goods made at plants, in China, giving Chinese labor jobs. Be ready for that turning point!

Contrarian Investment Strategy as P/E Arbitrage

2009-04-02T14:08:00Z

Contrarian Investment Strategy was made famous by David Dreman, in the 1970's. We, at Red Hill Capital, are experts in arbitrage, and we believe that arbitrage is the best, or even the only, way to make money in investing. We also tend to see the arbitrage in things that other people have not realized are arbitrages.

We recently wrote an article on Articles Base that gives a few uncommon examples of arbitrage, including Contrarian Investment Strategy as a P/E Arbitrage, if done the right way. You can also read more about arbitrage on the In Country Analysis Page of the Red Hill Website.

A Comment on Coke's rejection by Huiyuan

2009-03-21T09:25:00Z

The rejection of Coca Cola's proposed takeover of China's Huiyuan Juice Company is typical of business dealing with China, today. After all, China is a country that has closed itself off from the rest of the world, for much of the past. In opening up to the West, it is not seeking to become a global friend but, instead, is motivated by the realization that they are several decades behind the rest of the world, and they can also use the rest of the world to pull themselves up.

That is why the Yuan is priced the way it is against foreign currencies. The low price not only allows Chinese exports an advantage in the international markets but, also, penalizes imports. Thus, I can buy lunch for the week with the same amount of money that it costs to buy a small bottle of Listerine, in China. Plus, there are import tariffs. When I first came to China, I ordered a battery for my computer from Gateway (there were no knock-offs available). With import fees and shipping, it cost about $300.

The Chinese also employ a lot of foreign experts to help with various things, but they are not loved nor really wanted. Again, it is the realization that they need help from people from outside the country, but they wish they did not.

It is a more general phenomena than just these few examples. When you take it to the top level, investment in China by outsiders, it is not very welcome, and it is always made difficult. To incorporate as a foreign company, in China, for example, one is required to have Y1,000,000 of equity capital; similar investment by a local requires orders of magnitude less in initial capitalization. Then, when you talk of foreign investment in the stocks of listed Chinese companies, there is a multi-tier system of stock ownership rights. Government officials can own shares with the most rights, and foreign investors have the least rights.

As a merger arbitrageur in the 1980's, we did a lot to do away with unfair, multi-tier stock systems. In those cases, we were helping U.S. takeover law to evolve into something that was not tantamount to management entrenchment. With the system of Chinese stock tiers, we have always been cautious. Now, that it comes time for true colors to be shown, in something like a venerable international corporation trying to buy a simple juice company, in China (moreover, one listed on a major stock exchange), it may be time to think about what investment, in China, will really get for you.

The rules of the game are still being developed in China, in general. As I tell my students and clients, information is the most important thing, in investment; uncertainty translates into risk. A lot of laws have been put into place, around the word, to ensure that disclosure of information is maximized, in order to promote a fair investment landscape. China, however, still only has a partially opened door, concerning information. You can barely find newspapers and magazines from outside of China, and I once saw the police come into a Starbucks and tell the manager that he should not display the English language version of a local Chinese newspaper. China still has a long way to go, in many ways. As far as concerns development of law for business, it is still minimal, and the old boy network is a larger factor than the written law (the local expression is guanxi). Of course, that particular aspect is not a uniquely Chinese, communist or socialist problem. In the 1980's, for example, one of my friends tried to takeover a British company, and the British old boy network, not the actual written law, defeated him. However, most of the world has come a long way, in developing protection and disclosure laws for business and investors.

Of course, if you look at how New Zealand's Fonterra lost several hundred million in its investment in the Chinese milk company, Sanlu, perhaps it is not such a bad thing that Coke lost out on its Huiyuan bid. Moreover, Fonterra could never have guessed that they would ever have such a problem with a simple product, like milk. Even worse, people made sure that the discovery of the problem with the milk was covered up, not disclosed, for more than a year.

In a more recent article in Forbes (June 18, 2009) Wang Xiaodong, an outspoken pro-China essayist, is quoted as saying that the rejection of the Coke deal was just stupid revenge [for how the West treats China] http://www.forbes.com/2009/06/18/china-wang-xiaodong-rio-tinto-bhp-beijing-dispatch.html

Uncommon: car ownership in China

2009-03-17T08:53:00Z

You may not realize this, but most people, in China, do not have a car. Indeed, I have met few people who have cars, and most of the ones who I have met have a van to use as a gypsy cab for long or short hauls. In fact, most people have never even learned to drive a car.

When I was growing up (even way back then), in the backwoods of Pennsylvania, we had to take driver's ed, in high school, and we all had licenses by the time we were 16. Even as a relatively poor kid, I bought myself a car by the time I was 16. When I tell people, here in China, they think that that is so incredible. To me it seems so common for every 16 year old kid to be able to drive and probably have a car, and I was young a long time ago.

The basic reason is that with the mispricing of the Yuan against major foreign currencies. To bring you up to speed (see "You're Missing the Point", a free download on our website on the In Country Analysis Page), 10 Yuan can buy me a nice dinner, in China. Y3,000 pays rent on a great apartment, in Guangzhou, a major city. Salary for the guards and doormen, in our luxury apartment complex, is around Y800/month. Kids getting an accounting degree from the foreign university where I teach econ and finance, in Guangzhou, are tickled pink, if they get a starting salary of Y3,000/month. So, even Y50,000 in salary per year can give you a lot of local purchasing power.

Since most automobiles (and mostly what people, here, want) are imported, they have to suffer the flip side of a cheap Yuan. In addition, there are high import fees on the imported goods that I have encountered. Thus, even a relatively cheap car can cost several hundred thousand Yuan, which a relatively large price compared to average income. Indeed, Hondas from Japan (anyone who buys one made at the Honda plant in Guangdong Province is just a wannabe) are actually prized and used to show off how rich someone is: where I come from, only mostly kids would drive a little Honda. To give it a little more perspective: my niece, back in Pennsylvania, for example, just bought a historic building in a small college town for around $100,000. She is a graphic artist, so she even makes relatively more money than the average person,, here, but the expense is even smaller, relative, for her [on the basis that one Yuan, in China, has about the same local buying power as one dollar, in America] than the car purchase expense, relative, in China. In the countryside, though, you do see a lot of motorcycles, sometimes one will carry a family of five. Then, there are motorcycles with two wheels on the back with a cart for either people or goods transport. There is also another smaller utility vehicles that is part motorcycle and part truck. In Guangzhou, motorcycles were banned recently because there are more and more cars (only difficult to get a taxi when it rains).

The Transportation Sector, including infrastructure, is always an important one, in a developing economy. In the U.S., we had trains coast-to-coast, in the 1800's. When I was little, buses were a very big thing, but by the time I went to college, the major bus lines had merged, and buses were relatively scarce, either in their schedules, their available terminals or where they went. In China, right now, there is huge availability of public transportation. I teach at a college, 45 minutes outside of Guangzhou. I usually take a private car because, for me, it costs around $15 [sometimes, in China, I think in terns of $, but most of the time I think in Yuan], but if I get a bus the mile down to the major thoroughfare (3 or 4 buses pass by plus many motorcycle taxis), I only have to wait at the thoroughfare for about 2 minutes for a bus because there are about 10 different buses that pass by and will be going to Guangzhou. If I want to take a train to Shenzhen, the major mainland city next door to Hong Kong, they run every half hour.

I ha d friend, for example, whose uncle had a small trucking line, having started out with a single rig. He has recently switched to excavation equipment because of the ongoing building of infrastructure. Indeed the 3 lane highway between the school and Guangzhou is being replace by a 6 lane superhighway; the underground subway system, in Guangzhou is being expanded with new lines running through the city and further into the environs; seven-story-high raised highways run through the city, in several layers of rings.

Thus, a good area for investment in China for the future is transportation related. Car dealerships; driving schools; and toll highway companies, to name a few, will be good areas for longer term growth as the Yuan gets revalued, as barriers to imports are lowered, and as all those beautiful and varied foreign cars come into China into showrooms and onto the highway.

You can read more about real life, in today's China on our In Country Tips Page. You can read more about our thoughts on business, investment and the economy, in China, on our In Country Analysis Page.