Don't buy any Chinese stocks.

A series on the China gold rush.
April 27 2005 12:40 PM

Go Work in China, Immediately.

But don't buy any stocks from there.

The yellow brick road to riches. Click on image to expand.
 The yellow brick road to riches 

As I reach the end of my China experiment—ship a Sino-ignoramus across the Pacific and see what he learns—it's time to answer the two questions I posed at the outset. First, is the China gold rush real enough that adventurous, fortune-seeking young people should enroll in Mandarin classes and go east? And, second, should I, a former Internet analyst, try to cash in on the gold rush by buying a Chinese Internet stock?

The first bet is what Wall Streeters would call a "layup." Definitely go east. The best way to stack career odds in your favor is to hitch yourself to long-term growth trends (that way, even if you make boneheaded career mistakes, you'll still be dragged along). Based on the last 30 years, China's long-term growth trend is as powerful as any in history, and the majority of the country's consumers and workers are still waiting to get into the game. A reversal in government policy seems unlikely—the disaster of the Mao years is the historic exception rather than the rule—and most other serious threats to the economic miracle (Taiwan, Japan, overcapacity, class instability) would likely have temporary rather than permanent impacts. Even if China's economy stumbles—which, at some point, it will—those with China experience, connections, fluency, and expertise should be able to find some way (or someone) to employ them.

Just because the long-term trend is up-and-to-the-right, of course, doesn't mean that growth will proceed in a straight line or is in any way guaranteed. Fifteen years ago, it seemed all but certain that the last Asian tiger, Japan, was going to blow past the United States, buy up all of our companies and real estate, and win with money a war it had lost with guns a half-century earlier. Alas, Japan is now mired in its second decade of stagnation. The same uncertainty holds for China. With respect to the economy, no one knows what the future holds, and there's no sure thing. Still, if I were 21 and fancy-free, I might be cramming at Berlitz and preparing to move to Shanghai.

The second question is tougher. The idea of buying a Chinese Internet stock is tempting, especially if done in the spirit of education and entertainment. Some of the leading NASDAQ-listed Chinese Internet companies—Sina (portal), Shanda Interactive (gaming), and others—have demonstrated staying power and profitability. Even with the application of a hefty China-uncertainty discount, their stocks do not seem expensive, especially relative to the long-term opportunity. The stocks have also, of course, demonstrated preternatural volatility, so much so that buying them with less than a five-year time horizon would be nuts (or, rather, would be like going to Vegas, bellying up to the craps table, and consigning your hard-earned wad to the luck of the dice—entertaining, but stupid).

In its five-year trading history, for example, Sina, one of the leading candidates to be "the Yahoo! of China," has traded as high as $59 and as low as $1 and now bounces around between $20 and $35. Sina came public in early 2000, at the height of the Internet fever, and immediately blasted to the moon ("One-point-three billion people—you do the math!"). A few months later, when everyone remembered that there was no advertising to speak of in China, it collapsed. Then, after latching onto a revenue stream that didn't exist in the United States, cell-phone messaging, Sina blasted off for $45 again … until everyone realized that the keys to the cell-phone kingdom were firmly in the hands of the cell-phone companies, whereupon it cratered. Then Shanda was going to buy Sina at a humongous premium. Then the government cracked down on Internet cafes. And so on. The good news is that, today, Sina is trading at about the same level as it was when it went public five years ago, has built a diversified business, and (according to its financial statements, anyway) is earning about $1 per share. The bad news is that one could wake up tomorrow, learn that the Chinese government has tweaked a policy, and be the proud owner of a Cayman Islands shell corporation.

Such uncertainty is par for the course for those who try to trade individual emerging market stocks, especially from half the world away. Emerging market stocks do have a (small) place in the average portfolio, but the safest way to own them is through diversified emerging-market mutual funds. That way, the risk of any particular company or country is minimized, and one is simply betting that, over the long term, emerging economies will continue to develop.

If one were able to invest in the growth of the Internet in China, instead of in individual companies, this would be a much safer bet. China has, by and large, missed out on the worldwide development of the television, radio, film, and newspaper industries, so the Internet should rapidly garner an even larger share of media and communications usage and spending in China than in the West. This said, the China Internet leaders do not appear to be as dominant as, say, Yahoo!, eBay, and Amazon were at the beginning of the industry's development in the U.S., and the Internet is a winner-take-most game.  The "Yahoo! of China" and "Google of China," in fact, might end up being Yahoo! and Google, which would make Sina, et al., the equivalents of Lycos and Excite. So, unless you are willing to construct a diversified basket of stocks that tracks the growth of the Internet medium in China, as opposed to particular companies, you should just hang on to your wad.

Epilogue
The trouble with a series like this is that only now that it is ending do I feel prepared to write it. My four-month crash course just scratched the surface of the China business landscape, leaving me with more questions than answers. What helped this project most were the thousand-odd notes I received along the way from Slate readers, the vast majority of which were intelligent, supportive, and helpful.

A few readers did resent the send-the-rookie approach, and others were annoyed by my requests for help, as if I were offloading work that I should have been doing on my own. To this I would say again, with deep gratitude, that many of the better stories in the series were gifts from Slate readers to Slate readers, with my playing the role of grateful delivery boy. And I would also say that—in this age of blogs and grass-roots investigative reporting—readers and listeners will continue to play an ever-greater role in programming the mainstream media, something we can all be thankful for.

Thanks again for all the help, feedback, and thoughts. Please continue to send ideas and comments to chinagoldrush@yahoo.com.

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