2015-06-16

China's Cannibal Market

During the housing market boom, many companies, including SOEs, created real estate divisions to cash in on the sector. Some also used their cheap bank credit to become loan sharks to the smaller private developers. See: Sinopec Sichuan sales office: King of the loan sharks? Usury scandal may be the tip of the iceberg Chinese firms were lifting their profits via the housing boom, neglecting the core business.

Depending on how you view China's economy, a new malinvestment boom is underway or China is rapidly unlocking capital from industries suffering overproduction.

Take Dong Jun, who earlier this year shut down his factory making lighting equipment and electrical wiring and let go some 100 workers. The 50-year-old comes to the plant in the eastern city of Yancheng almost daily, but spends his time trading stocks on behalf of his company, Yanwu Keda Electric Co. 
“Manufacturing is a very hard business these days,” said Mr. Dong, chairman of the company. “I want to make some money from the stock market and use the profits to restart my manufacturing business later, when the economy turns for the better.” 
...According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%. 
...China Railway Construction Corp. is among the companies that have put more of their funds at work in the stock market. According to its regulatory filings, the state-owned contractor since late last year has bought shares in companies including a liquor maker in Shanxi province, in the north, a retailer in central China, and a property developer near Beijing.
China's stock market boom is feeding upon itself, directing capital away from productive investment. Every company is trying to become diversified into everything. The end result will be capital losses all around.

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