Beware the Dragon's Teethhttp://www.fool.com/investing/international/2007/06/25/beware-the-dragons-teeth.aspx Rich Duprey
June 25, 2007
Despite its growing economic power and rising importance in world markets, I'm still leery about investing in China. An increasing number of risk factors should encourage Fools to exercise caution when investing, whether in Chinese companies or domestic firms that rely on China for much of their business.
The state can also suddenly change the rules of any given economic game. That's what happened to Chinese Internet firms TOM Online (Nasdaq: TOMO ) and Sina (Nasdaq: SINA ) last year, when the Ministry of Information directed China Mobile (NYSE: CHL ) to change the imposition and collection of various fees. Both stocks tumbled, suddenly denied large swaths of revenue.
Although the government is permitting certain market reforms, it hasn't much loosened its iron grip. Rather than abandon a potentially lucrative market, Google (Nasdaq: GOOG ) ultimately kowtowed to the government's mandate to limit searches for subjects the state didn't like. The Chinese video game industry is also learning that it might have to limit the amount of fun it provides players, as the government imposes a moratorium on new Internet cafes.
A toxic revelation
The latest example of Chinese companies short-circuiting the country's alleged quality control mechanisms involves the use of lead paint on toys sold by RC2 (Nasdaq: RCRC ) , the maker of the popular Thomas the Tank Engine. Apparently without the company's knowledge, its Chinese manufacturer switched the chemical formulation on the paint the Thomas toys use. After a routine check by RC2 discovered the lead paint, the company notified the Consumer Product Safety Commission and announced a voluntary recall of