I first went to Asia in the late 1980s. Shortly after my first trip I was posted to Hong Kong and spent the next decade or more developing my company’s business in the region. Much of this saw me north of the border in the PRC. These were early days when much of Pudong was farmland. Those of you who have been to Shanghai will know that it now dwarves Manhattan and the City of London combined. It was the same story in Shenzhen and other cities.
The rate of change was mesmerising. However, during that time and notwithstanding the transformation that was taking place, I was struck by how many investors visiting from the West invariably asked the same question. It came in different forms, but it boiled down to the same thing: “aren’t you worried about the bad guys?” It was as if there was something about corporate chicanery that was particular to China which made fraud and sharp practise normalised. Of course, there were examples of this. Everything from “oppressing minorities” to more egregious examples of fraud.
Over the years things got better: security regulations were tightened, disclosure in public offerings increased and the quality of companies seeking financing in the public markets improved. Despite all of this however, the prevailing attitude amongst Western investors was that the risks were too great. It began to strike me as odd that poor governance should be regarded as a distinctly Chinese trait, particularly with Parmalat, Enron and WorldCom all hidden in plain sight.
In the last 10 to 15 years, the growth of the Chinese economy and stock market has tipped the balance. Investors are now embracing the opportunities and doing their best to manage the risks.
Why this reminiscence? Well, this rather negative impression of the Chinese “robbers” which made the place un-investible for many investors now seems to be doing the rounds vis-à-vis the Chinese “cops”. In particular, Chinese regulations on the way businesses conduct themselves appear to be regarded as fundamentally anti-capitalist. Consequently, the share prices of many growth companies have been severely marked down since a new regulatory regime was announced in July. Whilst some business models have been undermined (after school tutoring), we believe others will adapt – just as great companies in the western world have done over the last 100 years. Many of these have rewarded their shareholders mightily, notwithstanding the lawmakers and regulators. Just in the last decade Google, Microsoft and Amazon have all been investigated and fined heavily, yet have come storming back.
The answer is that “cops and robbers” are pretty much the same all round the world. No better or worse, just different.
Bad practise in all its guises (from the downright criminal to the inequitable) is often difficult to predict as is the regulatory response to it. Both have the potential to impact share prices but are no means confined within national boundaries.
The governance element of our process has been developed over the years and is the means by which we handle both the cops and the robbers on behalf of our investors.
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A version of this article was published in Fundtruffle.
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