Thursday, 22 March 2018

Review: The China Hustle

Dan David goes to Washington to ring warning bells, but no one listens
This documentary is required viewing for anyone who invests in China stocks. That practically means everyone. The producers of Enron: The Smartest Guys in the Room have made a film that complements The Big Short with a China angle.

The China Hustle talks about how the United States was barely recovering from the financial crisis of 2008-09 and the big stock traders needed to climb out of the red. What did they do? They looked to China.

Meanwhile Chinese companies were looking to the west for legitimacy -- or more importantly, money. How did they do it? Through reverse mergers. Reverse mergers are when a company finds a shell company that is listed on the stock exchange and buys it out but still retains the shell company's public listing. Boom! Overnight it becomes legit. Over 400 Chinese companies have done this in the US.

And with the keen interest in China, investors flocked to these stocks that promised crazy returns. Many people made lots of money, including one of the main characters, Dan David. He lists off several companies where he made 300, 500, 1,000 percent profit. He'd buy stocks at say US$1 and sell at US$5, and so on.

The film asks what is capitalism? Is it good or bad?
But then he gets curious and wonders if he and his partners are just lucky and decided to do some due diligence. He got some people to check out one of these Chinese companies and found that its real production numbers were no where near what it had claimed on paper in its filings with the Securities and Exchange Commission (SEC).

They surreptitiously set up cameras from outside the factory compound to monitor the traffic and assumed that there would be tons of trucks coming in and out, but in reality there was hardly anything going on.

One of their researchers posed as a man selling tea and wanted to give a sample to each staff member so he asked the guard outside how many staff there were. He said 40.

So David realized that there could be many more companies taking American investors for a ride and dug up more evidence. He start shorting those stocks and brought down those Chinese companies, and in the process won big.

Jim Chanos has been shorting China stocks for years
He wasn't the only one. There were a handful of others who realized the same thing, but did their research in different ways. That includes Carson Block, who named his company Muddy Waters after the Chinese saying, you cannot fish in clear waters.

The documentary also talks to Jim Chanos, who has called out the Chinese economy to be so laden with debt that it will collapse soon, but we have yet to see that happen. This is perhaps because the Chinese government is desperately trying to keep it all together, so much so that they detain the CEOs of companies and force them to get rid of assets to curb the risks, like in the cases of HNA and Wanda.

In the end these traders believe US$30 billion to US$50 billion was taken from American investors and the film names Chinese CEOs who have disappeared with hundreds of millions of dollars.

Where did that money go?

In real estate, particularly overseas like Hong Kong, Vancouver, New York, Sydney and shopping sprees for jewellery, art, cars, handbags, clothes and so on.

Carson Block of Muddy Waters brought down Sino-Forest
The China Hustle also exposes how the auditors, the SEC, the government, no one is really making these Chinese companies accountable; nor can the American authorities force Chinese CEOs to testify or give back the money. The Chinese government can't punish companies that have listed overseas either. There is no Chinese law against defrauding foreign investors.

Hong Kong gets some scenes in there when David addresses a room full of traders at the Asia Society in Admiralty, persuading them to help him short a Chinese stock. In the end it was his biggest win to date.

In the end, there is a big hint that more investigation needs to be done on Alibaba, though it's difficult to get a clear picture without all the paperwork available. One stock market blog says that even though Alibaba is trying to be more transparent, as of November 15 last year, it was the most heavily shorted stock in the world, with an open short position of US$23.1 billion according to financial analytics firm S3 Partners.

So -- it's a lesson that if something is too good to be true, it is. And we the general public need to be very careful about where we put our money. The China dream is just a mirage...

The China Hustle
Written and directed by Jed Rothstein
82 minutes

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