It’s been a while since we last updated the “China: Don’t Look Now, But. . .” series (you can find the previous three installments here, here, and here), but a terrific op-ed in today’s Wall Street Journal by Joseph Sternberg suggests that China has finally succumbed to the “greater fool” theory, as evidenced by its recent decision to buy A123 Systems, the ailing, Obama-backed (which means taxpayer-backed) car battery company whose dim prospects we’ve tracked here before. Chinese investors are also paying way over market prices for a number of energy plays that look a bit dubious on an expected return basis:
Consider last week’s announcement that a Chinese company will pay $450 million for an 80% stake in a struggling battery maker. A123 Systems, which produces high-tech batteries for electric cars, has received roughly half a billion dollars in U.S. government grants and aid in recent years. It was still on the skids despite the help. Now Wanxiang Group Corp., one of China’s largest auto parts manufacturers, will essentially bail out American taxpayers by offering the company a financial lifeline.
This follows last month’s announcement that state-owned Cnooc Ltd. will pay $15.1 billion in cash for Canada’s Nexen, an oil and gas firm. That’s a more than 60% premium over Nexen’s pre-deal stock price, for an acquisition target that was reeling from leadership turmoil and technological problems at one of its marquee oil sands projects.
I’ve been predicting for a long while that China’s crony capitalist economy would eventually succumb to the Japanese disease—remember all the predictions in the late 1980s that Japan’s economy, brilliantly planned and managed by its government, would pass the United States by the year 2010 to become the world’s largest economy? That was just before Japan hit the wall and was never heard from again. One of the signs of impending doom from the Japanese was the way they were spending their huge trade surpluses buying American assets (especially real estate) at grossly inflated prices. My favorite example was Minoru Isutani, who bought the Pebble Beach golf course for more than $800 million in 1990—and then turned around and sold it again just a few years later for $500 million after the U.S. real estate market collapsed. Japanese investors turned the same trick with Rockefeller Center, declaring bankruptcy in 1995 after plunking down $2 billion for the old art deco fixture of midtown Manhattan.
Now it seems to be China’s turn. Sternberg notes that China is buying western technology and energy companies chiefly to loot their technological know how (think A123 Systems will still be making its batteries here in a few more years?). But he rightly cautions:
China’s admirers say the country is playing a long game. Car batteries are commercially useless today but will be critical one day. Nexen engineers will get that company’s projects to work and China will be there to learn from their solutions, and to exploit that know-how when conventional supplies become less reliable.
Maybe. But a very fine line separates such notions and the rationalization of the greater fool who, even if he knows something is worth less than he’s paying for it today, believes events beyond his control will eventually lead someone else to pay more for it tomorrow. China’s buying spree could be the making of an economic juggernaut. It could also be stocking the world’s greatest technological junkyard.
There are other signs. Yesterday it was reported that sales of heavy equipment to China—one of the bright spots of American exports over the last few years—have fallen sharply this year, as construction activity in China slows. I say batten down the hatches. When China crashes, it will be sudden and hard. It will make the unraveling of the Euro look like a picnic.