The first position is not associated with XIN but rather the market shorting China. The numbers produced out of Mainland companies are either poor quality, at best, or bogus. The market is unwilling to risk any money until those issues are resolved.
Consider today’s environment for a micro or small cap manger considering a Chinese bet. The bet goes south a plaintiff attorney will have a field day pointing at the gross negligence of the manger. A fund manager embraces risk but is it risky to play Russian roulette without an empty chamber?
After the Chinese hurdle, whether XIN is a good bet depends on how much China will fully embrace capitalism or depends on guanxi to drive the economy. What will actually happen will be somewhere between these extremes but guanxi is not going away quickly, and in China quickly is measured in hundreds of years.
Our company position is not ideal for a China economy based on guanxi. There is no mention of the chairman’s membership in influence building activities, such as the party congress. There is no mention of his membership in the Communist Party, a good thing for the shareholder.
There is a caveat. Wives can exert a significant amount of behind the scene pressure. The XIN chairman’s wife has every indication of being such a woman.
I love my company on the Chinese capitalism end of the spectrum. In a market unfettered by regulatory risk, my company’s cost of capital should be superior to the competitionbecause of the regulations in China in the real estate market that is huge. My company should outperform in a bear or bull real estate market in China.