It’s getting hard to make any real money in China

I wrote here a few weeks ago about the slightly bonkers diversification strategies of some of China’s big companies

Today, Leo Lewis picks up the story in the Times. He notes, as I did, the weirdest one of all –  Wuhan Steel – a company which, while it hasn’t entirely abandoned its core business, now trades in wine and olive oil, and is in the middle of setting up a 10,000-pig farm. However, he also points to the fact that Wuhan is beginning to have significant competition in what it calls its “one flagship business, multi secondary business” operating strategy.

State-owned grains trader, Cofco, is building luxury hotels in Beijing; copper producer Tongling is moving into timber; and Ansteel is getting into coal. Most interesting of all, however, is the fact that Beijing Electric Power Company, a subsidiary of State Grid, is building a 180 hectare chateau and vineyard in Yanqing county. Hainan Airlines is doing something similar, and so are various power utilities and the state-run Shaanxi Coal Industry Company. 

So what’s going on? The wine making is probably part property scam: local authorities desperate for cash find it easier to justify selling land for productive purposes than for real estate, but once companies have the land they can then put the planned business on a small part of it and use the rest for the usual hotels, resorts and villas. After all, the returns from wine take a long time to appear, so other projects are obviously required to tide wine investors over.

However, these obvious property scams aside, a large part of the more general diversification move is about the fact that these big companies are not making much in the way of profits from their core businesses. Take Wuhan: in 2010 it made ¥185bn in revenue, but its profit margin was a pretty pathetic 2%, half of which came from the non steel businesses (which make up only about 8% of the business). No wonder it wants to expand.

The second point is the one that Lewis indicates. According to him, Beijing Electric, like the rest of State Grid, is “awash with cash” and “desperately looking for ways to invest it”. Clearly they can’t find any particularly good ways.

The lack of interesting investment opportunities in China is something several people have mentioned to me recently – in conjunction with this subject (alongside that of the rising cost of labour in China) but also in relation to capital flight from China. Hong Kong financiers report money flowing through Hong Kong and out, for example. A decline in renminbi deposits in Hong Kong backs this up (they fell 6% between November and December last year), as does a recent fall in the country’s foreign exchange reserves.

The very rich – unable to see a way to make more money in China, or perhaps to keep the money they already have safe –  are moving it out. That’s why gaming revenues in Macau – the obvious way to get money out of China (watch the video on it here) – rose 35% in January.

All these things suggest that it is getting harder to make a profit in China; that is also getting harder to find projects to invest in at all; and that those who have made their money aren’t prepared to risk another spin of the wheel. None of these are things you usually find in very fast growing economies. Another hint for those who still need one, is that China is no longer a very fast growing economy.