Illusions of Paper Wealth: The Boom Bust Cycles of Two Hong Kong Billionaires

Paper wealth can be characterized as “easy come, easy go.”

The Chinese government’s stock market pump managed to produce many paper wealth billionaires.

By paper wealth, this entails of the net worth of individuals who owns the majority shares of a listed firm, whose fortunes have been dependent on the direction of share prices.

So a stock market pump inflates the owner’s worth and vice versa.

‘Easy come, easy go’ it has been for two of Hong Kong’s paper billionaires.

Piggybacking on the Chinese government’s stock market pump, Mr. Li Hejun, who at one time was considered China’s richest man based on the value of his majority stake in the Chinese solar company, Hanergy Thin Film Power Group Ltd. (Bloomberg HK: 566), according to Wall Street Journal, saw his holdings suffer when his firm’s share prices almost halved last Wednesday.

Trading was reportedly halted for the firm.

Interestingly, media seem to impute Mr. Li’s skipping his company’s annual meeting to the crash.

Yet prior to crash, according to the same Wall Street Journal, Hanergy’s shares “were up more than 42% since the beginning of the year and are more than triple their level of one year”.

Triple++ in about than a year!

Yet a day after the terrifying Hanergy episode, the fortunes a little-known electronics and property tycoon, Mr. Pan Sutong endured the same fate.

Stocks of Mr. Pan Sutong, the Goldin Financial Holdings Ltd. (Bloomberg HK:530) and Goldin Properties Holdings Ltd (Bloomberg HK: 283), which previously skyrocketed by about 350%, likewise collapsed!

According to the same report, "Goldin fell 43%, wiping $12 billion off its market value. A smaller company with the same owner, property developer Goldin Properties, fell by 41%, reducing its market capitalization by $4.6 billion"

Why shouldn’t a crash happen when prices have totally detached from valuations?

Here is a Bloomberg ex-post analysis: Goldin Financial’s revenue in the six months ending December was $34 million and more than 99 percent of its $181 million profit came from marking up the value of a 27-story office building in Hong Kong that’s still under construction. At its height on May 15, the company traded at a price-to-book ratio of nearly 25 times, compared with an average of about 1.5 times for stocks in the Hang Seng Index. (bold mine)

$22 billion worth of market cap for $34 billion of revenues at PBV of 25 times!

Back to the Wall Street Journal article, regulators have already warned of the excesses in Goldin Financials and likewise reported a connection between the two:

Filings with the Hong Kong exchange show Hanergy and Goldin Financial have previously worked together, although it was unclear whether the relationship contributed to Goldin’s fall. Hanergy said in a February disclosure it had appointed Goldin as an independent adviser for a supply agreement under which Hong Kong-listed Hanergy Thin Film would sell solar panels to its parent company.

The Securities and Futures Commission, Hong Kong’s market regulator, warned investors to exercise “extreme caution” with Goldin Financial in March, noting that just 20 shareholders—including its chairman who owns a 70% stake—held nearly 99% of the company. The company said at the time that there was little it could do because the SFC didn’t disclose who those shareholders were. Both Goldin Financial and Goldin Properties issued filings Thursday to the Hong Kong market saying they are not “aware of any reasons” for the movement of the stocks. The companies didn’t respond to requests for comment.

More interestingly, Goldin’s shareholders have represented big time institutions like Norway’s sovereign wealth fund. From the Wall Street Journal report: (bold mine)

Goldin Properties is building a 117-story skyscraper in Tianjin, a city in northeastern China, that will be ringed by China’s largest polo complex. Illustrating Goldin Properties’ size, it will join the MSCI China Index, an index followed by global investors, at the end of this month. The property company had already garnered big investors. At the end of last year, Norway’s government pension fund was the biggest institutional shareholder, with a stake valued at $30 million. The $926 billion fund has been holding the stock since at least 2008, though it has trimmed the position in recent years, according to its annual reports. Norges Bank Investment Management, which manages the fund, declined to comment. Goldin Financial provides a form ofshort-term corporate financing known as factoring. It owns wineries in France and California and wine-storage facilities in China and invests in property.

As I have recently pointed out, governments (mostly via sovereign wealth funds) and central banks have at least $29 trillion of exposure on global stock markets. And stock market losses would extrapolate to eventual ‘deficits’ that would be shouldered by taxpayers. Fortunately yet, Norway's pension fund has been one of the early buyers.

And individual boom bust chapters have not just been in a Hong Kong event. 

A Frankfurt listed German sanitary fitting firm Joyou AG (JY8: XETRA) which operates and has its headquarters in China recently saw its boom then nearly went to ZERO!

That’s because of this surprise announcement (Bloomberg): Joyou AG, which mainly operates in China, yesterday announced it will write down more than half of its capital and possibly file for insolvency. Losses of which according to Reuters has been due to “extraordinary writedown on shareholding in Hong Kong Zhongyu Sanitary Technology Ltd”

Nonetheless, the above reports represent the ex-post explanations.

But it is sad thing for the shareholders of these companies whose participation on the above issues would translate to staggering losses.

Crashing individual stocks have yet been a minority. Yet what happens when they become the majority?

Bottom line: Paper wealth are illusions. The obverse side of every mania is a crash.

Mao’s Grand Daughter’s Great Leap to Wealth

Mao Zedong’s grand daughter Kong Dongmei has acquired massive wealth in part by selling Grand Dad’s communism

From the Telegraph:

The granddaughter of Mao Zedong has been ranked on a list of China’s richest people, with a personal wealth of £525million.

Kong Dongmei, 41, has been accused of hypocrisy after placing 242nd on the list alongside her husband - quite a feat in a country with a population of nearly 1.4billion.

Ms Kong, the daughter of Li Min, Mao's only surviving child with his third wife He Zizhen, is believed to have made part of her fortune from selling publications about her famous grandfather.

Ms Kong married insurance company boss Chen Dongsheng, in 2011 after a 15-year extramarital affair, according to Chinese financial magazine New Fortune which published the rich list.

After obtaining a masters degree at U.S. University of Pennsylvania, Kong returned to China and opened up her own bookstore in Beijing in 2001, set up to promote ‘New Red Culture’.

Wealth, and perhaps political clout, also translates to special privileges. From the same article:

Kong and her husband is also said to have three children, a son and two daughters, a violation of China’s one-child policy.

Kong's inclusion on the rich list triggered hot debate on Weibo - China's version of Twitter, with some accusing her of betraying her grandfather's status as the ‘great teacher of proletariat revolution’.

‘The offspring of Chairman Mao, who led us to eradicate private ownership, married a capitalist and violated the family planning policy to give birth to three illegal children,’ wrote Luo Chongmin, a government adviser in southwest China.

China has implemented the one-child policy for many urban residents for over 30 years, although there have been recent suggestions that the rules may be loosened.

‘Did Kong Dongmei ... pay any fines after being a mistress for more than 10 years and giving birth to three kids?’ asked another user with the online handle Virtual Liangshao.

But others argued that the millions were actually her husband's, who made his fortune before they were married.

Well Mao's Grand daughter's "great leap forward' to wealth epitomizes the universal essence of politics: "do what I say, but not as I do". Smoke and mirrors.

Wealthy Chinese Consider Emigration

Many say that the 21^st Century belongs to China.

While I certainly hope that China will, I am not entirely convinced, especially not if the Chinese themselves seem distrustful of their nation’s future.

This bleak news from the Wall Street Journal, (bold highlights mine)

More than half of China's millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country's fast-paced growth.

The U.S. is the most popular emigration destination, according to the survey of 980 Chinese people with assets of more than 10 million yuan ($1.6 million) published on Saturday by Bank of China and wealth researcher Hurun Report.

While growth has slowed, China's economic performance is still the envy of the Western world: It registered annual gross domestic product growth of 9.1% in the third quarter, and the International Monetary Fund has forecast growth of 9.5% for all of 2011.

Concerns are mounting, however, that China's growth could be derailed by a raft of problems, including high inflation, a bubbly real-estate sector and a sharp slowdown in external demand.

Many Chinese who have profited most from the country's growth also express increasing concerns in private about social issues such as China's one-child policy, food safety, pollution, corruption, poor schooling, and a weak legal system.

Rupert Hoogewerf, the founder and publisher of Hurun Report, said the most common reason cited by respondents who were emigrating was their children's education, followed by a desire for better medical treatment, and the fear of pollution in China.

"There's also an element of insurance being taken out here," he said, citing concerns about the economic and political environment.

He cautioned, though, that it was unclear if the survey results signaled capital flight as many high-net-worth individuals who were emigrating also said they were keeping much of their money invested in China.

China maintains capital controls that make it hard for rich Chinese to move their money out of the country, but there are substantial loopholes in the system.

Some economists say they have detected signs of large capital outflows in recent months, likely driven by a decline in global risk appetite and expectations of slower yuan appreciation.

A research report from Bank of America Merrill Lynch's strategy team in Hong Kong last month cited "hot-money outflows" as one of four systemic risks that could lead to a hard landing for China's economy. It said that a sign of such outflows were record gambling revenue in the gambling enclave of Macau, a former Portuguese colony near Hong Kong, where many mainland Chinese go to gamble.

In another indication of the jittery mood among China's rich, several Western embassies have also noted a marked increase this year in the number of applications for investment visas, a category that allows people to immigrate if they invest a certain amount of money, according to diplomats.

There is evidence, too, of an uptick in the number of Chinese people buying high-end properties in major Western cities, especially London, Sydney and New York, according to property analysts.

The recent economic success experienced by China has mainly been due to her embrace of globalization.

However, deepening tensions brought upon by rapidly expanding bottom-up economic forces has apparently come into conflict with the rigid political priorities of the China’s government aimed at the preservation of the incumbent structure.

And because of the attendant fear of social disorder arising from an economic bust, which may upset the current political balance, China’s political authorities have careened towards adapting short sighted Keynesian policies that has resulted to an inflating bubble economy that risks a massive bust, possibly in the near future.

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Yet, a substantial exodus from many of China’s productive sectors will likely put further strain on such tenuous relationship.

This is not to say that a China Century may not be ahead, instead this is to say that China must ultimately depend on market forces to determine the economic direction than rely on temporary nostrums from political diktat that only hastens erosion of the current political economic framework.

Eventually China’s political leadership will have to decide either to cope up with the swift and material changes in her economy or to revert to the old China model of a closed society. The success or failure of the goal of a China Century, thus, depends on the political choices taken.