December 20, 2010 | In: Opinion
Chinese Stocks: Why I’m Afraid of Them
There are many Chinese Stocks listed in the US market nowadays. In fact, there are too many! Investors, especially day traders, apparently make a decent amount of money with these stocks, usually betting on an upward trend.
But, we all know that the market capitalization of any company is really debt that the company has, at one point or the other, pay back. This is where I get skeptical when it comes to Chinese stocks. What if that company doesn’t want to pay back the money, and is there just to screw investors, who are willing to risk their money by believing in the future of that company. What forces a foreign company trading in the US stock market, that really has no customers in the US, to pay its debts.
There are many Chinese companies that I’m sure will never be able to pay back their debts, including Youku.com (a company that was listed almost a couple of weeks ago). I discussed, in detail, why YOKU is overvalued and why this company will never ever be able to generate any serious revenue, let alone paying dividends or caring about investors. YOKU is currently trading at $30.68, down almost three dollars from when I first examined it nearly a week ago. I predict this stock will experience a huge retreat once it drops below the $30 level. Anything that’s keeping the stock at the current price level is just pure speculation, and large investors waiting for the right time to get out.
Now Youku.com doesn’t care if it will ever make money or not, and it won’t!
The problem is that most investors are treating China as if it’s another United States, with 4 times the population, and the same GDP per capita. This last part of the previous statement is completely wrong, and even if it’s true, the spending habits of the Chinese in general are much more conservative than those of Americans. They buy less and they like paying much less (there’s nothing wrong with that, but this means that spending can never be the same). Investors keep on thinking that even if this is not true, then it will be true in a few years… Have you seen what happened to Japan?
Here’s a Chinese company that went belly up, RINO which was kicked out of NASDAQ because of fraud. I feel sympathy for all the investors who lost money on this stock. RINO is now listed in the PINK market.
Now I’m not saying that all Chinese Stocks are bad, but the assumption that all Chinese stocks are always set to explode is creating a speculation that is inflating Chinese stock prices to unrealistic levels. And who gets hurt? Always the small investor…
Still, some Chinese Stocks are good (especially those depending on the world market), but not all of them are. After all, all that glitters is not gold.