Chinese communist dictatorship tightens controls, adding one more market concern
The Chinese government is going after dissidents(1) in a much more aggressive way in recent months. They have also tightened their censorship of media and the internet as well. It appears that the "Arab spring" has alerted the Chinese leadership to dangers lurking, and they are making every effort to clamp down and get ahead of any thoughts of political activity that could undermine their control. Eventually this may not end well, but government control when they assert it is so unyielding that in the near or medium term any threats will likely be crushed mercilessly, so that may be the meaning of "may not end well" in communist China.
Combining unequivocal political control with a carefully watched but at times corrupt market economy has been China's miracle formula for growth over the last 20 years. Now with inflation rising to levels well above the investment returns available to any member of the rising middle class and with economic growth set to slow down, albeit modestly relative to the rest of the world, the addition of this government human rights and free speech crackdown will not help their reputation generally and will put a damper on their ability to attract investors to their equity markets. That may be the one thing that could catch the attention of these leaders.
On that front here, after owning only FXI(the Hong Kong equity index that includes not only Hong Kong focused companies but ones with significant investments and activity on the mainland) and Baidu through 2010 and before, in 2011 investments were added in six other companies. FXI and Baidu had done well, why not do more than just have a toe in the water. Of those six, I sold four in the September/October time frame due to concerns about inflation, rising wage demands, and a potential slow down from China's exceptionally strong growth rates. The net effect was a small positive with two small losses and two modest gains. Thinking that the one area with unassailable growth opportunities was the internet related stocks, I kept Baidu, plus Sohu and Sina.
Why I ask now? The government was keeping foreign competition out, and the market for cell phones and computer interaction was booming and had plenty of room and plenty of people to expand further. Now my gains in Baidu are significantly diminished, there are modest losses for Sohu, and the Sina position has a substantial loss. I sold part of it last week as it became a candidate for offsetting capital gains and balancing out what I would report on 2011taxes.(2)
With Baidu being, generally speaking, the Google of China, Sina the Twitter of China, and Sohu the interactive gaming and media content leader of China, they have now become vulnerable to more government control. These types of communication vehicles allowed for the organization and message spreading that led to the fall of the Egyptian government and others. How far the Chinese authorities go in further restricting these businesses is unknown but my guess is that they are not done yet.
This series of events, fear of inflation, fear of slowing growth, and fear of more government intervention in publicly traded companies(plus of course lack of transparency in financial statements) has led to an examination of many Chinese companies listed on U.S. exchanges and whether they have legitimate right to be traded in the U.S. There's more to come.
Footnote 1 - dissident is an interesting media word. In communist countries like China, North Korea, and Cuba there are "dissidents". In the U.S., are the tea party or the OWS movement or even Idaho enclaves of skinheads ever called dissidents? No, they are called activists, or protesters, anarchists or bigots, but never dissidents. In the new Russia are there dissidents now? Putin's corrupt judges and thugs "take care" of his business, but people are accused of tax fraud or malicious lying or just beaten to within an inch of life on the street, but the state itself provides at times a course of due process that is at times phony and does not use the word dissident. It's nominally a democracy.
Footnote 2 - why would I seek to balance out capital gains and losses and avoid any capital gains tax exposure when the capital gains tax rate is only 15% for equities held for more than a year. First reason is that there were and hopefully always will be some meaniningful short term gains to cover. Second reason is that when one falls into the AMT trap that catches the modestly to relatively prosperous and misses the really wealthy entirely, all bets are off for any favorable tax treatment. Aggregate income is what gets the AMT "penalty", which is the only word that can really describe it.
Combining unequivocal political control with a carefully watched but at times corrupt market economy has been China's miracle formula for growth over the last 20 years. Now with inflation rising to levels well above the investment returns available to any member of the rising middle class and with economic growth set to slow down, albeit modestly relative to the rest of the world, the addition of this government human rights and free speech crackdown will not help their reputation generally and will put a damper on their ability to attract investors to their equity markets. That may be the one thing that could catch the attention of these leaders.
On that front here, after owning only FXI(the Hong Kong equity index that includes not only Hong Kong focused companies but ones with significant investments and activity on the mainland) and Baidu through 2010 and before, in 2011 investments were added in six other companies. FXI and Baidu had done well, why not do more than just have a toe in the water. Of those six, I sold four in the September/October time frame due to concerns about inflation, rising wage demands, and a potential slow down from China's exceptionally strong growth rates. The net effect was a small positive with two small losses and two modest gains. Thinking that the one area with unassailable growth opportunities was the internet related stocks, I kept Baidu, plus Sohu and Sina.
Why I ask now? The government was keeping foreign competition out, and the market for cell phones and computer interaction was booming and had plenty of room and plenty of people to expand further. Now my gains in Baidu are significantly diminished, there are modest losses for Sohu, and the Sina position has a substantial loss. I sold part of it last week as it became a candidate for offsetting capital gains and balancing out what I would report on 2011taxes.(2)
With Baidu being, generally speaking, the Google of China, Sina the Twitter of China, and Sohu the interactive gaming and media content leader of China, they have now become vulnerable to more government control. These types of communication vehicles allowed for the organization and message spreading that led to the fall of the Egyptian government and others. How far the Chinese authorities go in further restricting these businesses is unknown but my guess is that they are not done yet.
This series of events, fear of inflation, fear of slowing growth, and fear of more government intervention in publicly traded companies(plus of course lack of transparency in financial statements) has led to an examination of many Chinese companies listed on U.S. exchanges and whether they have legitimate right to be traded in the U.S. There's more to come.
Footnote 1 - dissident is an interesting media word. In communist countries like China, North Korea, and Cuba there are "dissidents". In the U.S., are the tea party or the OWS movement or even Idaho enclaves of skinheads ever called dissidents? No, they are called activists, or protesters, anarchists or bigots, but never dissidents. In the new Russia are there dissidents now? Putin's corrupt judges and thugs "take care" of his business, but people are accused of tax fraud or malicious lying or just beaten to within an inch of life on the street, but the state itself provides at times a course of due process that is at times phony and does not use the word dissident. It's nominally a democracy.
Footnote 2 - why would I seek to balance out capital gains and losses and avoid any capital gains tax exposure when the capital gains tax rate is only 15% for equities held for more than a year. First reason is that there were and hopefully always will be some meaniningful short term gains to cover. Second reason is that when one falls into the AMT trap that catches the modestly to relatively prosperous and misses the really wealthy entirely, all bets are off for any favorable tax treatment. Aggregate income is what gets the AMT "penalty", which is the only word that can really describe it.
posted by John Borden at 8:23 PM
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