Friday, February 22, 2013

If it sounds too good, it is a Ponzi scheme



Many investors still have illusions about investing in China, especially Chinese who know relatively less about the outside word and who have the blind confidence about government’s ability to eventually clean the mess. Their number is smaller compared to the time when I start to turn bearish on China. For example, many still boast to me about how much return they are getting on their wealth management products. However, they just do not have common sense (if you read this blog and find me to be too arrogant, that is because 1) as I said a long time ago, you need to take a strong stand to be heard; 2) there are just too many irrationality in investors, many of them are just smart people.) The returns they get could be easily between 6-10%. If you add 1-2% for the transaction costs, the borrowers have to pay easily about 8%. For an equity holder who takes more risks, unless they make higher returns than fixed income claim holders, say 10% or much more if you understand how much hassles are to do business in China, otherwise why would they take the additional risks? But have you ever seen many projects returning that high in China today? So why not just invest in wealth management products as well and get the safe 6-10% returns, which means no one is out there generating wealth anymore. A friend told me that years ago, it is very hard to drive through the main drag in Dongguang, an industrial capital in Pearl Delta. Now he can zoom through by stepping on the gas without any release in the matter of minutes.

By the end of next years, but probably earlier, we will hear cries and see tears in those wealth management products.

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