One question that has puzzled investors looking at the gross underperformance of the Chinese Stockmarket is why the disconnect from perceived reality. The Chinese economy has been booming for the last 10 years but their stockmarket has been busting so to speak.
The answer is simple, 90%+ of all listed Chinese companies are basically internal frauds whose figures cannot be trusted. And nowhere is this more apparent than with the banks and their massive non-performing loans.
The international accountant Ernst & Young recently published a report stating that these non-performing loans were worth a total of nearly $1trillion!
Of course, as soon as the Chinese authorities saw this they went crazy forcing E&Y to make a highly embarrassing admission that no, the report was actually incorrect and of course there’s no problem.
Whoever wrote the report should be commended for getting it right but they obviously didn’t check who some of their clients were, the Bank of China and the Industrial and Commercial Bank of China, two of the banks in the report
Summary
The game plan for many long term investors eying China is to wait on the sidelines perhaps only allocating small amounts of money until this financial mess is cleared up, the deadwood is cleared up and some real corporate governance is introduced into the market.
A crash of epic proportions is likely to happen within the next 5 years in the Chinese market and that will be the perfect time to invest ready to ride on the dragon’s back for the following 10 years.
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