The Chinese Finger Trap

Chinese copper wire producer Lihua fell a record 22% earlier this week after short seller Absaroka Capital Management reminded us that Sino-Forest was no flash in the pan. While the whole envious planet giggles at the thought of China taking over the U.S. role of top econ cop, we are reminded once again of why Communism and Capitalism do not go hand-in-hand.

Lihua's arrival at "illogical financial results" and "excessive stock promotion" sound like a flashback to old time pump'n'dumps. The more Chinese companies open up their cloudy transactions to outside analysis, the more obvious it becomes that a house of cards can't stand forever. For those of my like, who have long been skeptical of China as a legitimate economic force, (and not just a chop shop for bootleg ebay gear) vindication is ever closer.

Lihua, however, is not going down without a who me?! fight, their corporate finance and investor relations head, Daphne Huang had the following lucid analytical gem to offer:


Lihua is a real business. These allegations are pretty baseless.

Absaroka, however, tells a far different story. In far more intriguing detail, as it stands.

I won't go on making pan-global generalizations as there a certainly many Chinese companies doing legitimate business out there. There is, however, something to be extrapolated from the growing trend of Sino-Forests and Lihuas. The inbred, favor-for-a-favor business style of closed centralized societies and economies can only work while the secrets stay in the shadows. One huge disadvantage of being brought up in a market based society is thinking that transparency always exists. It certainly does not when dealing with a lot of Chinese companies.

China will continue to present a bounty of opportunities for you short sellers out there. Everything in life has a price, justice isn't always poetic but it is a sonuvabitch when it comes for your ass. The years upon years of bootlegging by Chinese chop shops have stripped the pockets of companies like Sony and Nike of billions in lost revenue. Wouldn't it be funny if the Chinese economy gave the benefits of all that bootlegging back, via short sales of shady companies actually unfit for exchange trading?

All I know is that I have been getting an ear full of China eating America alive over the past few months and stories like this one always bring a giggle and smirk.

 

As someone who has spoken to many, many Chinese mining/metal analysts over the past 4 months, I must say this isn't surprising.

Copper is extremely core to the 5-year plan and China is very much doing what it can to show the world it doesn't need to rely on it for copper (and other infrastructure materials). So firms like this feel the need to show the Chinese government, and the world at-large, that it is performing well - even if it can't run its smelters due to energy problems or simply a lack of raw Cu.

The Chinese reduced their Cu imports by about 33% 1H11 but this news should be a boon for copper prices (that have already been booming).

 

China will continue to develop as an increasingly influential economic player, but I wholeheartedly disagree with the mentalities of 'China will rule the world' or 'China will own everything'. As Midas pointed out, inbred opaque business is the norm here, and will continue to be for quite some time. The country is akin to a 15 year old girl; it wants all the attention and all the money from all the boys, but its tits haven't fully grown in yet and it has occasional acne.

Once the well-rounded C-cups have arrived and the acne goes away - you'll see this through domestic multinational companies beginning to have an influence in the US and other countries, like going down to your local Dazhong Electronics instead of Best Buy to pick up a new laptop, or a company deciding to use a Chinese company's software or hardware over Oracle or Cisco. Situations where China wants a piece of our action, not us wanting a bit of theirs, that will be a sign of the country truly becoming a world player.

 
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