Just how strong is China

4th January 2012

Bentley

UK based but German-owned luxury carmaker Bentley now sells more of its vehicles in China than the UK. While the United States remains the top market for the ultra-expensive motors, the People's Republic emerges as the Volkwagen subsidiary's number two export market. Sales of the Crewe-built status symbols in China almost doubled in 2011 to 1,839 deliveries. 

Chinese trading standards

But at the same time, the Financial Times reports data from US investment bankers Roth Capital Partners showing that the value of Chinese companies delisting from US stock exchanges has for the first time exceeded the amount Chinese companies have raised via US exchanges in Initial Public Offerings (IPOs).

Reasons cited for the taming of the Chinese investment dragon include fears over slowing growth prospects and a slew of fraud allegations plus doubts over accounting and corporate governance standards. A number of companies have been banned on US exchanges because they have failed to comply with basic regulatory requirements such as filing annual and other reports.

The USX China Index, which tracks US listed companies gaining most of their turnover from China, fell 27% in 2011. That's an average with some shedding as much as 80% of market value, leading many companies to question the expense of a US quote. Some may relist, perhaps to a less critical audience, in Shanghai or Hong Kong. Others will stay private.

So which is the better indicator of the health of the Chinese economy – the surge in luxury car purchases or the retreat from markets with some of the world's highest standards? 

It could be that the two are complementary, not at odds with each other. That purchase of a limousine (whether armour-plated or not) could be the result of past economic growth or historical share price performance, rather than a harbinger of a more prosperous China to come.

In the same way that investors now take a negative view a chief executive's personal purchase of a helicopter (and crew) and even more so annual report pictures of it landing in exotic locales – former press tycoon Robert Maxwell was fond on touching down on the Mirror building in Holborn and having a photographer to record the event – the luxury limousine acquisition could be a sign to sell. 

Or should investors go beyond this? According to King Fuei Lee, Asian equities fund manager at investment group Schroders, "lusting after the exciting growth story" is not what it is about, at least for investors prepared to take a longer term view.

Instead, he says that "while fears of a cyclical slowdown in China may put many investors off the region, the reality is that the bigger picture trend of stronger economic growth driven by urbanisation, industrialisation and positive demographics will continue to unfold across Asia over the next two decades."

His advice is to put the "market obsession with share price appreciation" to one side to focus on the historical fact of "almost two thirds of long term equity returns in Asia coming from dividends.  Investors seeking exposure to the multi-decade Asian economic growth story will do well to pay close heed to the dividends they are capturing from their equity investments."

So if the chief executive buys a Bentley (or any other luxury marque), investors should differentiate between its purchase out of dividends and buying it as a trophy company car out of shareholder cash. And if they can't, then maybe it's one of those companies with lax, or even fraudulent, reporting standards.

 

More from Mindful Money:

Corporate truth: The art of transparency

Company life cycles: from birth to death

Lies, damned lies and investment statistics

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