Why you should be wary of China
It might be time to start questioning the true strength of Chinese capital.
When James Bond's nemesis Auric Goldfinger remarked that "Once is happenstance. Twice is coincidence. Three times is enemy action," he wasn't talking about investing in China. But based on a recent sequence of confidence-rattling developments there, he could have been.
For several years now, mature, western nations have been licking their collective chops at the prospect of burgeoning consumer demand in China. Strong, steady growth there has fuelled world commodity prices and sparked investor interest in getting in on the action.
Increasingly, however, there's a sense that this global economic engine may be starting to sputter. While it may not yet be smoking, the warning lights that are now flashing on the dashboard suggest that things are getting a little hot under the hood.
The much-touted $5.4-billion shale gas development deal between Encana and PetroChina International (the state-owned oil company) fell apart recently, amid allegations that there were "control issues" over management of the projects. Encana apparently thought it was going to lead the charge, but it got a little more pushback than it reckoned on from its partner.
To date, the Chinese have been careful to tread lightly with their investments in Canada, wary of the government review process for foreign investors who want to do much more than put cash into Canadian-run ventures. While Encana may be putting some spin on why their deal fell apart, it's going to make other companies a little more wary of counting on Chinese capital for some time to come.
It's also worth noting that it's the second failed Chinese bid in the space of a few weeks: China Minmetal's $6.3 billion bid for Equinox Minerals was bested by a rival bid from Barrick Gold. However prudent that stand down, it could also be construed as a loss of face in market terms.
The greatest blow to investor confidence, however, has been delivered by the saga of Sino-Forest Corp. A former stock-market darling — despite the fact it became listed in Canada through a loophole rather than an initial public offering — Sino-Forest is under extreme pressure. Even if the allegations that it has fraudulently overstated the extent of its timber assets in China turn out to be false, the lack of transparency in its structure and operations is legitimate cause for caution.
The abrupt reversal of Sino-Forest's fortunes has also revealed the innate conflict of interest that lies at the heart of capital markets: sector analysts are aggressively encouraged to cover and endorse such capital-hungry companies that drive lucrative investment banking deals. It's not a particularly new insight — just a rather stark one under the circumstances.
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