MONEY MATTERS
Money Matters
by

For a fund manager named George, it was time to say goodbye to investing in China

PUBLISHED : Friday, 01 January, 2016, 6:00pm
UPDATED : Sunday, 03 January, 2016, 1:04pm

2016 is turning into a new chapter for George. The veteran fund manager has put an end to his 20 years’ career in China investment.

He has spent the last few months convincing his clients to change the fund from China focus into an Asian Pacific one. They agreed.

Jumping off the China vessel isn’t an easy decision. Business-wise, this economy is too big to miss. Who else is not into China?

If fundamentals no longer count in the country, so does a fund manager

Personal-wise, this is where George has built his speciality. Money Matters met him on a pre-listing visit to a state factory in early 90s when bankers had to bring along a map to tell fund managers where Guangzhou is.

Pessimism is not at work. Boom and bust he has seen many. Buy low sell high has been his game.

The Hong Kong-based fund manager was out because of the in-proportional risk and reward tilt.

His list of economic risk has nothing new: growing non-performing loans in banks; ballooning shadow banking; state owned enterprises with high debt but low incentive; and disappearance of private entrepreneurs.

“The big difference is there used to be the reward of high growth,” said George. “That makes everyone more tolerant.”

Then, there is the political risk: a leadership of one man has all and knows all: and a forceful anti-corruption combat that gets tension among different camps snowballing.

“Multiply this with the opaqueness, why bother?” said George.

When almost every major industry of a country has been listed, it should not remain opaque. Yet, when the country is China, it is a different game.

It is not just about the size but power.

Listen to what economists of some international brokerage said about China; one would have mistaken them as spokepersons of the People’s Bank of China.

About six years ago, when the central bank said there was no inflation but only “structural inflation”, the term was in almost every report. When the bank said inflation, everyone followed.

The reality is in a country where numbers are not to be trusted, economists survive on the tip-off of the central bank and the “good” one is often rewarded with prestigious jobs in the bank or other state bodies.

The analysts are worse. The joke is every China analyst carries an expiry date like a can of sardines. When his or her contact in a ministry or corporate is gone, he or she shall be discarded.

It is hard to swim against the current when one’s estimation or recommendation will turn rubbish over-night with a policy change, say an order to merge or an increase in the tax rebate by the local authorities.

Take a look at how the dozen of SOEs have all outperformed the market before trading suspension for mergers and restructuring ordered by the top, one would appreciate the game.

This tilt of power did happen before. No one would be too critical about Jardines in the colonial days and Li Ka-shing in his hey day.

Yet, when China is on the other side of the balance, it is a different thing. Everyone has to bend - the accountants, the lawyers, the valuers and sometimes even the regulators.

Money, the muscle of professional fund managers, does not quite work here; given the ample supply of domestic investors who rate corporate behaviour differently.

Corporate management has little incentive to be transparent and fair. They were seldom penalised for doing otherwise.

So the number of listed companies have ballooned, the number of press conference has not. None of the SOEs involved in the restructuring spree in the last 12 months saw a need to speak to the press.

Mega fund houses have resorted to hiring their own investigation team or hired external help to figure out the real picture at the field.

George tried something else. Last year, he has been buying on the call of a computer programme that counted in momentum and therefore insider trading.

The machine has rightly suggested banking stocks when bad debt was on the rise; solar power equipment supplier Hanergy Power when short selling piles up; and nothing in mid-June before the A share crash happened.

It worked.

To George, it is a call to kiss China goodbye. If fundamentals no longer count in the country, so does a fund manager.