Conversation with a Chinese Property Developer

A week ago, the Chinese government instituted a new set of anti-corruption rules, specifically aimed at local government officials.

Of course, giving bribes and other forms of corruption were always illegal, but about as enforced as copying DVDs. Under the new law, officials will annually vote on each other's trustworthiness: how does one say "backstabbing" in Chinese?

Today's article is a short excerpt from a conversation with a property developer from Nanning, and a few of the problems (or opportunities, depending on your point of view) with regard to bribery and business in China. For obvious reasons, the name of the developer is not revealed. The conversation took place on July 17th, 2011.

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Frost Report: "First off, how does one go about doing business - that is, securing a contract - in China? I've heard that it's all about 'who you know,' rather than about a good reputation or good pricing."

Property Developer: "It's tough. You have to bribe officials 1-2 years in advance of a (major) project, when you put in your bid. A year later, all the officials may have changed, and you have to start all over again."

Frost Report: "So, when you give a bribe, do you just hand someone a red envelope?"

Property Developer: "That's too obvious. But, you can't just give a gift, either. It's not enough. You have to hide money inside a gift."

Frost Report: "So basically, whoever gives the biggest bribe gets the contract, is that right?"

Property Developer: "Yes. Sometimes you sign everything - all the papers are signed. Then, a few weeks later, you find out that the contract went to someone else."

Frost Report: "So after you signed the paperwork, someone came along with a bigger bribe?"

Property Developer: "Right. This business is like (American) football. You get one big play and it changes everything. It's not like basketball, when you keep getting points one at a time."

Frost Report: "What if the official won't take a bribe from you? These days, I guess they are careful. How do you win the contract then?"

Property Developer: "There are always ways. If you can't get in touch with the officials directly, sometimes you can give money to their kids. For example, at New Year, you can give a kid an envelope with 2000 yuan (equivalent to a month's salary in rural China). Holidays you have to give away a lot of money."

Frost Report: "Do you think that things will change as a result of the new laws?"

Property Developer: "No."

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See also:

China issues anti-corruption regulation targeted at village officials

More Chinese cities see property prices fall as result of cooling policies

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“Few men have virtue to withstand the highest bidder.”

George Washington

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China's SEC Visit

Just two posts back, I wrote about a problem of Chinese publicly-listed companies; namely, that many of them don't exist.

Well, it seems like their party is one step closer to ending.

The American Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission (SEC) is sending over a delegation to establish oversight of Chinese auditing firms. At the same time, Canada's Ontario Securities Commission (OSC) will be "reviewing" emerging market companies listed on Canadian exchanges.

Although China forbids US auditors from exposing, um, I mean, inspecting Chinese companies directly, the US auditors are hoping to create a list of companies willing to be inspected voluntarily with Chinese government consent. Presumably, most of those willing to be inspected would be legitimate.

When I was in India a few years ago, I saw a "steel products manufacturing company" that consisted of one skinny guy with a small pile of coal, a bellows, a hammer, and an anvil. He was seated inside a cubicle made of sheet metal at a New Delhi marketplace, hammering out a kitchen knife. A sign behind him proudly announced that his company was publicly-traded on an Indian stock exchange.

Companies in China already hire white people with no qualifications or job descriptions, so that their offices can look international and important. Predictably, shell companies will hire people off the street to play the roles of office employees during the audit visits; or, they will just try their luck with red envelopes full of cash. Nonetheless, I suspect that the paperwork will not be so easy to fake. Since the Chinese government cannot afford to lose face, many more companies will be de-listed.

Yet another nail in the coffin of the bloated Chinese market.

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"The superior man understands what is right; the inferior man understands what will sell."

Confucius

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Stocks I Like - New Millennium Iron

New Millennium Iron (stock symbol: NML) is the revised name for New Millennium Capital. This change is appropriate, since the fortunes of the company are now firmly in iron.

New Millennium’s DSO (Direct Shipping Ore) project in Canada is scheduled to start producing ore in 2012, and ramp up production through 2013.

Of course, mining companies commonly give estimated completion dates for their projects even if they haven’t secured funding, and even if the mine has virtually no chance of ever being constructed. Giving a completion schedule is an old trick to increase the stock price. So what makes New Millennium different?

When a mining company signs up a multinational end-user of their product as a partner, this shows that the property has serious potential. It also means that the project will likely be developed with minimum dilution of shares. When Copper Mountain Mining, for example, announced that it was partnering with Mitsubishi, I bought shares immediately and have been very pleased with the result.

New Millennium’s partner is the massive Tata Group (you may be most familiar with Tata Motors, makers of low-cost cars in India). Tata Steel Minerals Canada has acquired 80% of the DSO project, and has an agreement to purchase 100% of its production. In other words, Tata Group’s industrial companies will be using the iron produced by New Millennium, and have a vested interest in seeing the project’s timely completion.

In addition to the DSO project, New Millennium has other nice properties making up the “Taconite Project,” which contains an estimated 9+ billion tonnes of iron ore. In fact, NML’s total projects are so interesting that Tata Steel has acquired 27.1% of the entire company, and has 3 members on the board of directors.

If you buy NML now, I recommend holding it through every conceivable credit crunch or world disaster until about 2017, since this is when all of NML’s current projects are likely to have been completed and producing cash. Any time after 2017, you have my blessing to sell.

NML promises to be a long-term cash flow giant.

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"Blood, iron and gold promise victory. But even the greatest material resources do not avail, if the human qualities necessary to animate them are lacking."

John Keegan

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For further information, see: New Millennium Iron's official website.
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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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PS - In case any directors from NML are reading this website...

Please don't do the same stupid s**t that so many other mining companies do after they become successful. That is, once you start raking in the cash, do not immediately look for new acquisitions to spend your money on. With estimated mine lives in the decades, you can afford to wait. Pay out dividends instead. Thank you.

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