If you want to list the risk factors of investing in companies based in China, the potential for government interference has to rank relatively high. The government is still trying to figure out a workable way to blend communism and capitalism, and much like the Osmonds trying to be "a little bit country, a little bit rock 'n' roll," it's far from perfect by either standard.
The most recent example of the trouble comes alongside the first-half earnings report for China Petroleum & Chemical, otherwise known as Sinopec
That's not to say that the first half of the year was a disaster. Revenue grew 32%, and the company posted a 17% rise in net profit. But all of that profit growth came from the company's smaller energy exploration/production and chemicals operations. The marketing and distribution business (gas stations, essentially) posted a drop in profits of more than 22%, a swoon caused in part by the price controls, while the refining business showed an operating loss as refining margins dropped by 43%.
I find it grimly amusing that politicians can be so utterly ignorant of economic history or so arrogant as to assume it doesn't apply to them. Throughout history, price controls have led to two very consistent results -- supply shortages and a thriving black market. In this case, the imposition of price controls on gasoline and diesel in China has resulted in gasoline shortages (along with hour-long waits for what gasoline there is), as well as power shortages, with companies and utilities lacking the diesel they need to run their generators.
Given that the Chinese government will probably not see the light on free-market economics, I'd be careful about Sinopec's stock. I actually think management has done all right, given the circumstances of uncontrollable oil prices and price-controlled refined products, but that doesn't change those circumstances.
I still like the notion of energy-related China plays, though, so I think it might be worth aggressive investors' time to check out CNOOC
For more highly refined opinions:
- The People's Republic of Hawaii
- Frontline Sails On
- Schlumberger Is No Schlub
- Sinopec Picks a Peck of Profits