I’m writing to you from Beijing today. Why Beijing? It’s part of an ongoing effort to bring subscribers of New Frontier Investor the most up to date facts and breaking trends from the world’s largest emerging market.
Over the past few weeks, I’ve visited personal contacts in a lot of second tier cities that you won’t find on most tourist maps. And with good reason. There are not a lot of tourist attractions to draw you there. But these cities do have heaps of development potential ahead of them
It is quite a jump from Xining to Beijing. Xining is one of the second tier cities I just visited in search of new investment opportunities. I never noticed how clean Beijing was before I paid attention to how dirty some of the second tier cities are.
Beijing is a megacity with more than 20 million people. It has massive infrastructure, a lot of residential buildings, a lot of commercial buildings and a lot of food, entertainment and shopping areas.
What differentiates Beijing from Shanghai, is that Beijing has more history, culture and politics. Shanghai, on the other hand, is all about finance, consumption and internationalisation.
Free Reports:
Beijing is like Canberra or Washington DC in terms of its political status. There are government buildings everywhere. This is where all the shots are called, and where all the political elites live.
There is a heightened political awareness and a sense of political power in the air. That and unbearable pollution…
That’s today’s pollution level. The air is actually burning my nostrils. And it looks like the US diplomats have it even worse.
Today, I spoke with a multi-millionaire art dealer. Like most of my connections in China — either friends, or friends of my friends — he asked that I not use his name. You see, China is a very different place from Australia. And with the party now cracking down on online activists, people are quite nervous.
Anyhow, while this multi-millionaire cannot be considered to be among the mega-rich in China, he is definitely among the elite upper class. I spoke with him in his high-price apartment in China. Places like this go for 100,000RMB (AU$16,700) per square metre.
He was nice to enough to pick me up from the hotel in his Mercedes.
We talked about the art and antique market in China. Eventually the conversation turned to various investable asset classes in China and the outlook for China’s economic development.
Given that he’s a descendant of high ranking party officials, he then surprised me with a rather seasoned political view on China, democracy and law. However, that’s a story for another time.
China’s art market peaked in the spring of 2011. By autumn, a trend of deflation in the art market became apparent.
‘This used to be a market for art lovers and collectors, it was never about investment and making money,’ he said.
The boom in economic development, commodity prices and asset prices in China in the 2000s led to massive wealth creation. This wealth stayed safely in equities until the bubble burst after the Global Financial Crisis.
My wealthy friend went on to explain:
‘The guys who got “quick money” from the industrial boom in energy, manufacturing and heavy industries found themselves in a bit of a problem. They needed a place to store and grow their wealth; they were eyeing the art market.
‘This was the same “quick money” that was created from industrial development and corruption. These guys were not ‘smart money’, they were ‘dumb money’, because they didn’t have a clue about the art market.
‘As a result, a lot of these people got burned by fake art. This of course served them right, because it was too easy for them to get this money in the first place. Qi Bai Shi’s painting sold for 400 million yuan [AU$66.7 million] at the height of the market.
‘But soon the party was over, deflation set in, wealth was evaporating quickly. Something that auctioned for 60 million just a two years before, would now be privately offered at 15 million in 2011.
‘It is a similar phenomenon as in properties. Bubbles were only a matter of time, and it didn’t take long for the art bubble to burst. The thing about art is that it doesn’t have any real use. So, many of the traders have decided to open private antique and art museums now days.
‘This is how capital works, it flows around. The problem is it has a tendency to drive bubbles. This is what happened to all the asset classes in China.
‘These gold miners don’t know anything about art or culture, and they thought they could find the next booming asset in art, then after that maybe something else. So they “jump” from one asset class to the next in the hope to ride the next bubble. And of course it doesn’t work; they just end up getting burned.
‘The problem with the art market is, if something is “real”, then it can never be too expensive because there are only so many paintings from the Song Dynasty, they are almost priceless. However, if something is fake, then it is worthless.’
I wondered if there was a way to tell which ones are ‘real’ and which ones are ‘fake’?
‘Of course there is, and it is all about experience. If you have seen a lot of art and a lot of artists and are familiar with the art in a particular historical period, then you can tell if something is true or not.
‘For example, there is a certain way ‘shrimps’ are drawn by the masters in China, and the fake ones get these details wrong, like how many legs are drawn on the shrimp.’
Eventually, with a little prodding from me, the conversation turned back towards investable assets.
‘Right now, capital is flowing back into equities. But a downturn in the art market can last between 5–8 years.
‘In terms of Chinese equities, my experience is that valuation doesn’t really work, because there is too much state interference and institutional control in China. This means you can’t use valuation metrics or even fundamental analysis to predict share prices.
‘It is a very “emotional” market.’
An emotional market. He hit the nail on the head with that one. Which is precisely why I’m here.
You can’t judge Chinese market emotions from afar. And if you can’t usevaluation metrics or even fundamental analysis to predict share prices, you need to get into the thick of it all. Only then will you have the all important inside angle on the investment opportunities of tomorrow.
Ken Wangdong+
Emerging Markets Analyst, New Frontier Investor
The post China: a Very Emotional Market appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
