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Chinese Public Company Profits Up 48%

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Although given the regime's reputation for "facts," skepticism is warranted.

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A lot of things don't seem to add up in China. This week's release on nation-wide public company profits is one of them.

Profits for the 1,181 publicly listed Chinese companies that have reported third quarter earnings grew 48% as a whole to RMB 197.7 billion. Cash flows for the first three quarters fell 49% to RMB 119.84 billion.

Transparency isn't a strong point here in China, so it's not always easy to determine what's legit and what isn't. But I'm thinking that kind of mismatch should raise a red flag in the earnings quality department.

The Shanghai Composite Index coincidentally fell 1.46% on Wednesday as the data was released, although it was said to have been profit taking from the sharp month to date 14% gain and concern over future Fed moves rather than questionable accounting practices.

On a brighter note, a few positive points of news came out of China the past few days:

  • A 13-year ban on trading bonds on exchanges was lifted, giving way to greater liquidity in the public debt market and diminishing the dependence on bank lending.

  • Tying up loose ends to the 12th Five-Year Plan, officials released a new document highlighting goals to boost employment, raise minimum wage standards and improve the salary mechanism of government employees; the last one being a key point. Corruption among underpaid officials is rampant, creating a very weak law enforcement environment, which ultimately hinders economic development.

  • Trade volume is set to rise 20% to $300 billion at the end of 2010 to rank China fifth worldwide, indicating significant improvement in its overall quality of service sector areas such as IT, consultation and consulting.

Both Intel (INTC) and Apple (AAPL) made headline news with major Chinese investments:

Intel announced plans to invest $2.5 billion in its first chip plant in China, suggesting its faith in the Chinese government's pledge to transition from a cheap manufacturing hub to a leading innovative economy -- a goal that doesn't always appear to be attainable.

Apple announced it will offer online shopping for Chinese customers -- a move that places it ahead of the pack, but may prove ineffective. E-commerce is very primitive here, even in Shanghai, as consumers place a high emphasis on the experience of buying the product and are fanatical about paying cash. Online shopping is mostly done through Taobao, which uses local couriers to deliver products that can be bargained for online, creating a mindset that online shopping may not always be a legit purchase. Thus, while the online shopping option may help Apple standout among other stand-alone high-end electronic retailers in China, it's unlikely to budge sales.

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No positions in stocks mentioned.
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