There’s an old saying that you know it’s time to sell when the help starts giving you share tips. Most famously, liquor merchant, share trader, SEC Chairman and father of JFK, Joe Kennedy, sold out of his share holdings shortly before the 1929 crash after bellboys started giving him share tips.
But perhaps it’s time to update the old cliché — the best time to sell could now be when China starts buying.
The poor Chinese, only new to the wonders of free market capitalism, have spent the last couple of years spending its sovereign wealth on a host of Western companies. Sadly for our notionally Communist friends, when it comes to investing, the Chinese make excellent chefs.
While the Chinese certainly aren’t alone in losing money of late (even Warren Buffett’s Berkshire Hathaway has dropped almost 50 percent off its peak), some of their investments have not been particularly well-timed.
Yesterday’s decision by BHP to withdraw its takeover bid for Rio Tinto was the most recent in a series of investing pitfalls to befall Chinese state-owned companies. In February, Chinalco, China’s state-owned aluminum company acquired a stake in Rio’s UK listed entity (largely in response to BHP’s now defunct takeover bid for the Anglo-Australian miner). Chinalco spent US$14 billion acquiring 12 percent of Rio Tinto PLC. Slumping commodities prices and debt from its ill-fated acquisition of Alcan has led to the value of Chinalco’s stake in Rio dropping by around 60 percent.
China Petroleum and Chemical Corp (better known as Sinopec) has also had an investing experience to forget. Sinopec invested US$561 million (in current AUD terms $876 million), to form a joint venture with AED Oil. While Sinopec’s investment isn’t able to be easily valued, its 40 percent joint venture partner, AED, is capped at approximately $160 million.
Sinosteel, the Chinese steel concern, won a bitter fought takeover bid for Midwest Corporation in July, eventually paying $1.3 billion for the iron producer. Since acquiring majority control of Midwest on 8 July 2008, the iron ore price has collapsed, with most iron producers losing upwards of 50 percent of their market value.
Chinese investments in financial firms have been even more calamitous. In December 2007, the state-controlled China Investment Corporation (CIC) spent US$5.5 billion acquiring a 9.9 percent interest in investment bank, Morgan Stanley. That stake is now worth around US$1.4 billion. CIC also took a US$3 billion equity interest in the Blackstone Group when it floated in June 2007 at the height of the private equity boom. With debt now less fashionable than hypercolour t-shirts, that stake is now worth around US$600 million (CIC increased its holding in Blackstone in October, only to see it drop by a further 50 percent a few weeks later).
Another Chinese investment corporation, CITIC Securities, was more fortunate. In October 2007, Citic was in the process of acquiring a US$1 billion (6 percent) stake in Bear Sterns. Citic was awaiting regulatory approvals when Bear collapsed, eventually being taken over by JP Morgan for US$10 per share.
It now appears that a Chinese investment can be added to the list of key leading indicators of when to sell, along with bellboys and Jim Cramer.