Updated – September 15, 2015: Worries about Investing in Asia continues

China’s Problem Isn’t Its Markets

  • There are many good reasons to be spooked about economic stability in China—but the performance of its markets isn’t one of them.
  • Clumsiness is out of character for a government that has confidently worked through every economic crisis it has faced over the past three decades, including the 2008 global financial meltdown.
  • But this is different. There are no easy fixes for an economy growing at its slowest rate in a quarter of a century, burdened by debt, swamped in industrial overcapacity and in the throes of an economic transition that Premier Li Keqiang admitted just last week at the World Economic Forum would be “painful and treacherous.”
  • Money is fleeing the country. Among foreign investors, the most closely watched number in China today is not the Shanghai stock market index, or the exchange rate, or the price per square meter of a Shanghai apartment. It is the figure for capital outflows reflected in the decline of the country’s foreign- exchange reserves.
  • They’re still massive but they’re dwindling fast. The reserves fell by a record $93.9 billion in August. If that’s a proxy for confidence in the government – which many believe to be the case — repression isn’t helping. » The WSJ Article – By Andrew Browne – September 15, 2015.

This Is Why So Many Chinese Companies Are Suspended

  • At least 1,331 companies have halted trading on China’s mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market value, Bloomberg News reports today.
  • The unwinding of margin loans is adding fuel to the fire. Individual investors, we all know by now, have used generous margin financing terms to enter the stock market and then build up their portfolios. Less known is that Chinese companies have been doing the exact same thing by using their own corporate stock to secure loans from banks.
  • That means that they stand to lose a lot when those share prices start trending dramatically lower.
  • This vicious circle described above also explains why China’s central bank has quickly moved to support the market in an effort to limit its impact on the wider economy. » The Bloomberg article – By Tracy Alloway – July 8,2015.

New Laws in China and Thailand a thin legal veneer to repression in the name of national security

  • China’s growing paranoia about national security has rattled American and European companies with a raft of new laws creating rising uncertainty for foreign investors, business leaders and diplomats say.
  • repression in the name of national security » Image source and article

  • The security clampdown reflects President Xi Jinping’s concerns that foreign forces are intent on overthrowing China’s Communist Party, propagating dangerous Western values such as democracy and free speech, and inspiring a popular uprising or “color revolution,” experts say.
  • Human rights groups have already come out strongly against the new laws, arguing that they will be used to silence critics and give a thin legal veneer to repression in the name of national security. » The Washington Post article – By Simon Denyer – June 10, 2015

    The 2006 and 2014 coups are examples in Thailand where poor governance, unreliable laws and biased courts increase the risk of investment

  • This week: The ruling coup military junta has shut down a Foreign Correspondents’ Club of Thailand (FCCT) event for the second time this month.
  • The FCCT said in a statement Monday afternoon that it had cancelled a discussion scheduled to take place Wednesday on Thailand’s draconian else majesty law after it received a verbal order from police.

    The use of Article 112 has long been controversial, and has increased markedly since the coup. We believe the law is a legitimate subject for discussion, not only for Thais, but also for foreigners who live or invest in Thailand. Our discussion would, we believe, have been constructive. The FCCT statement

  • Authorities refused to give a written order to shut down the event, saying it might damage their reputation.
  • “The NCPO has now told us they will not issue such a letter because they fear it would be used in the media to damage their image,” the FCCT said The full Statement
  • Earlier this month the ruling junta blocked a panel discussion on human rights in post-coup Thailand scheduled to take place at the same venue. » The Asian Correspondent article – June 15, 2015.

The Thai Justice system Thai coup (AFP)

  • Looking back to the 2006 coup: Giles Ungpakorn, (who left Thailand and is now in exile in the UK after the Abhisit government filed les mageste charges against him) was a political scientist at Chulalongkorn University and said the whole justice system should be overhauled, from the police to judges to bureaucrats. He advocates trials by jury and elections for judges to increase public accountability.
    “The constitution (sponsored by the military) has a problem right from the start,” he said. “Giving power to unelected civil servants who tend to be very conservative is a step backwards.” – The Asian Sentinel article – By Daniel Ten Kate – May 11, 2007.
  • Prinya Thaewanarumitkul, one of the country’s leading constitutional lawyers, (said) the practice of coups in Thailand is a bad habit that needs to end. “If we didn’t have this coup the Thai people could have learned more about democracy and politics and about how to develop,” – Quote from: News Analysis: Democracy, Thai style – Ban the politicians – By Thomas Fuller International Herald Tribune – Published: October 6, 2006.

Frustrated with doing business in China and looking elsewhere in Asia – investors find the same patterns

  • Burma: Good investment Daw Aung San Suu Kyi, the leader of Myanmar’s democracy movement, stared down an audience of corporate executives (in Thailand) on Friday and urged them to avoid “reckless optimism” and to be aware of the pitfalls her country still holds for investors.
  • “Would-be investors in Burma, please be warned,” she said, referring to the country by its former name. “Even the best investment laws would be of no use whatsoever if there are no courts that are clean enough and independent enough to be able to administer those laws justly. This is our problem: So far we have not been aware of any reforms on the judicial front.” » The full New York Times article – By Thomas Fuller – June 2, 2012.

15 years later the risks throughout Asia remain:

  • Sustainable economic growth requires efficient capital markets, and today these markets are global. They consist of myriad shareholders and creditors who each take small stakes in many different companies. If investors are confident that their rights are well protected, they open their wallets; if they fear that majority shareholders, managers or governments might fleece them, they hold back.
  • The “Asian miracle” ended in July 1997, abruptly turning into what is now known as the “Asian crisis”. Investors were badly burnt, and those who could get out did so in a hurry. Suddenly the lack of transparency, of good corporate governance and of legal protection rose to the top of the agenda.
  • Doing BUsioness in Asia Image and article source – The Economist April 5, 2001


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LFS Lessons are sponsored by The Learning Foundation an American non-profit organization which has developed programs to encourage independent thinking for over 30 years. The Foundation also has a training center and a reforestation project on an 8 acre site in the Northeast of Thailand. My name is Keerock Rook and I have been involved with the Foundation since its inception. I edit most of the lessons.