Money Matters

Something smells funny in the sandalwood scheme as the rich log out of China

PUBLISHED : Friday, 29 April, 2016, 10:42pm
UPDATED : Saturday, 30 April, 2016, 5:49pm

My friend George the broker has found a new passion: sandalwood.

No, it is not the code for a listed company or bonds. He is really selling the fragrant tree that yields perfume oil and furniture and incense wood.

Grow the tree of gold for a 700 per cent gain, says George’s pitch book selling an investment fund that plans to plant the exotic wood in Indonesia. Chip in a minimum of US$1.5 million and wait for seven years, and you will get a return of seven times. Easy, eh?

Total nonsense, most would say. It’s against nature. Sandalwood grows really slow and doesn’t yield oil till the 15th year. Any return in seven years is impossible.

And it goes against the grain of economics. Sandalwood prices have climbed 15 per cent annually in the past 15 years. Its oil fetches US$4,500 a kilogram. It can go higher, of course, because wild plants are disappearing quickly, and the Chinese and the Indians can’t get enough of it.

Yet, the world’s largest sandalwood plantation in Australia, which has just signed off two years of its coming harvests to the two countries, is suggesting only a 20 per cent annual return for its investors. Seven hundred per cent? Not if you seriously think the tree of gold should be priced higher than gold itself.

A US$60m HK life policy will do to get money out of China

By the way, the half-centimetre thick pitch book lists the participation of various Hong Kong-based mainland Chinese brokers and trust firms, but has nothing on who will pay when things go wrong.

Now who invest in a scheme like that?

The answer is mainland Chinese investors – in droves. They forked out 6 billion yuan in three months, says George.

Stupidity can’t explain when something is so outright stupid. Not when various investment banks deploying entire teams churning out schemes no less crackpot than George’s. Not when these plans become the lifeline of professionals who till the other day used to structure stock funds for foreign institutions. Fear probably explains it better.

Sandalwood, rosewood, ebony...whatever crop these super smart bankers are flogging, these ridiculous get-rich-quick schemes are nothing but smokescreen for the China’s rich to move money out of the country. The air is thick with fear – of more yuan depreciation and midnight knocks on the door by zealous graft busters – and one better be prepared.

In 2014, in a bid to encourage its businesses to “go out”, Beijing relaxed the approval process and capital controls over outbound direct investment. Many of these schemes tick all the correct boxes of the outbound investment norms introduced then.

The investment is deliberately kept below US$1 billion so that only a province-level clearance suffices. The typical destinations are developing countries, where Beijing wields some clout and regulators are sloppy. The targets are natural resources because it is in line with the state policy and difficult to audit.

The investment schemes are sold by brokers instead of the heavily regulated banks in order to minimise the paper trail. You deposit the money in your account with the broker, who will then send it to Indonesia into a trustee account of the fund. Naturally, the trustee account is inthe same brokerage firm.

China’s outbound property buying spree will continue

Some trees would be planted, for sure, to satisfy the regulators and auditors. Going by what the Australian plantation is doing, a 6 billion yuan investment would be sufficient to plant and manage three million sandalwood trees for 15 years. That would fill up 6,000 soccer fields, by the way. But who’s counting? How many can tell a sandalwood tree from an oak?

Most of the money would eventually find its way back to the investor. Who will question why the seeds and fertilizers cost hundred times the market price? Who supplies the fertilizers, by the way?

At the end of seven years, everything will disappear: the trees, and the money.

Mother Nature provides all sorts of excuses. How about the entire plantation was wiped out by a pest attack?

For all these, you don’t pay much. The intermediates charge only a few percentages because competition is keen. You get to keep the bulk of the money outside China.

Of course, not every scheme sells well. The sandalwood investment did not take off last year, for a very telling reason, though.

“Back then, the minimum investment was US$1 million (6.5 million yuan). Nobody was interested,” says George. “It became a hit after we raised it to US$1.5 million.”

By now you know why.