Buyer Beware: A Bleak View Of China From A Tiger Woman On Wall Street

By Heng Shao

Junheng Li, author of Tiger Woman on Wall Street: Winning Business Strategies From Shanghai to New York and Back.

The glorious veneer of China’s growth machine can easily entice an outsider, but the view is not so pretty for someone who has seen how the gears operate on the inside. 

Despite the strength of its hardware, China suffers from malfunctioning software that discourages innovation, collaboration and honesty. 

The profound implications for China’s investing environment can be summarized into two words: “buyer beware,” writes Junheng Li in her autobiography, Tiger Woman on Wall Street: Winning Business Strategies From Shanghai to New York and Back.
A Shanghai native, Li spent her first 20 years in China with her working-class family. 

After attending Middlebury College in Vermont and working in the finance industry in New York, Li started her own equity research firm, advising on investments in China. 

She holds an extremely bleak view of China’s economy, which she compares to an athlete on steroids who inevitably faces “a long period of underperformance.” 

There is little chance of success in holding long-term investing positions in China, she has found. 

But as a mindful investor who is well-versed in Chinese culture and conducts relentless due diligence, Li sees a way to make money amid all the gloom: short-selling. 

This book, to be released on Nov. 8 by McGraw Hill, is a treasury of her knowledge on how to exploit rampant market inefficiencies to make a profit in China.
All of the problems she outlines here have long been highlighted by China experts, but Li adds a personal touch with telling tales of their impact on herself, her family and her business dealings. 

She sees few bright spots to what the 35-year-takeoff has created, despite obvious improvement in her own family’s standard of living. 

For the bottom 99% in China, she argues, the perceived major difference is that they now have “far wealthier people around to compare themselves to.” 

The glitzy Park Hyatt on the Bund is just a cover for rows of old-fashioned apartments where the majority of her old neighbors still live. 

Rising sales of Gucci or Swiss watches have little to do with a growing middle-class, but instead come from the fattened pockets of corrupt officials. 

Shadow banking is rampant as the state banks neglect small and medium-sized enterprises in the private sector. 

She goes on and on.
But unlike many China bears who look at the country from a distance, Li—who is a Forbes.com contributor—is a well-informed insider who has lived through and even embodied China’s problems. 

Her pessimism would easily be shared by anyone growing up in an unprivileged Chinese family, clawing their way up and gaining exposure to a place such as America, where the education system and business environment are much more mature. 

As someone 15 years younger than Li, I found my educational experience to be nearly identical as hers. 

This unfortunate resonance shows what little progress the country has made on that front—what Li calls “China’s Achilles’ heel.”
To understand her bleak view, start with Li’s upbringing by a tiger parent in China in the 1980s, when the country was finally beginning to recover from the “lost decade” of the Cultural Revolution that left a generation scarred and impoverished. 

A first-class college education was seen by most families as the only key to a bright future. 

The result was a fiercely competitive education system where nothing but high scores and a conformist ideology mattered – not original thinking, not doubts, not virtues. 

Cheating was rampant, as Li recalls. 

“I never felt guilty about it. If bad students hoped to climb up the class rankings by cheating, good students like me wanted to make sure we stayed on top.” 

No surprise that later, at Middlebury, she found unproctored exams a bizarre idea.
Similarly, circumventing rules became a pre-condition to success in business. 

As if releasing a flood, once Deng Xiaoping unblocked the path to wealth creation, there was simply “no stopping the Chinese people from surging ahead.” 

With everyone “under the influence of short-term greed,” money-making began with cutting corners. 

Most commonly, people scalped whatever they could lay their hands on, skipped work at state-owned enterprises, and stole company assets. 

The garment factory that Li’s mom operated was a case in point. 

Instead of purchasing new materials, the factory’s managers lied and squandered RMB 10,000 at karaoke bars. 

When the factory had to be closed down, they stole all the valuables, even the sewing machines. 

The lesson that Li’s family learned was “seeing and believing.” 

Every penny they earned, Li writes, “was a result of hard work and extra caution.”
These childhood memories left an indelible mark on Li’s perception of China, even after she found her way to an American education and received investment training at Aurarian Capital, a $100 million hedge fund. The results-driven mentality that lifted many Chinese out of poverty has a downside, it turns out. 

As Li observes:“Chinese people at all levels of society had grown used to this rapid pace of transformation and come to see it as a goal in itself. Everyone from corporate managers to local government officials was racing to build empires.”
But the software that has been thrown aside in this race — innovation, honesty, a long-term horizon — is desperately needed for moving up the value chain and enhancing the country’s global competitiveness. 

“Investors outside China often fail to appreciate this dangerous imbalance between the country’s hardware and software,” Li writes. 

“Everything I saw in China convinced me that both Wall Street and the rest of the world had gotten the China growth story wrong.”
To support that bold claim Li presents incisive analysis of some 20 American and Chinese companies in her book. 

She shows how she made money by short-selling in two well-known fraud cases, China Little Fertilizer and Longtop. 

With juicy details from her original research, she also hammers such name brands as KFC, Baidu and Sina, and hot sectors such as renewable energy and banking. 

For one example of her unconventional findings, Li discloses that 80% of Sina Weibo’s 500 million registered accounts are primarily used for “spamming or third party marketing.”
Li is not a fan of investing gurus such as Warren Buffett and Singapore-based Jim Rogers. 

She believes that their top-down approach in China — emphasizing macroeconomic and industry analysis rather than focusing on individual companies — is prone to error in an economy with unreliable macro data. 

Buffett’s investment in BYD, “a Chinese company whose valuation was largely driven by electric vehicles, a product yet to be commercially proven” in China, was a surprise to Li. 

She believes that with the exception of Buffett himself, “whoever bought into the Buffett bubble was likely sitting on a loss.” 

The company’s stock price is up 400% from his purchase price in September 2008, but is down 50% from the peak price in 2010. 

Its revenue has also shrunk in the past two years.
Referring to Rogers’ late 2007 book — A Bull in China: Investing Profitably in the World’s Greatest Market — as “200 pages of empty-calorie analysis,” Li succinctly summarizes his strategy: “buy every stock in every industry in China.” 

That all-out approach to China still holds today, even though the Shanghai and Shenzhen Stock Exchange Composite indices have slumped 50% and 15%, respectively, since the publication of his book.
Li laments that many institutional investors fall into the camp of Rogers and Buffett. 

The common attitude is succinctly captured by Brian, a portfolio manager at a $5 billion hedge fund: “Everyone and his mother are looking at and buying China. Don’t miss the boat.” 

But rather than digging up the truth on the ground, these investors sit behind Bloomberg terminals “daydreaming of hitting the gold mine,” Li says. 

Their “greed, ignorance and laziness” feed into and inflate hot investment themes. 

That isn’t necessarily a bad thing from her point of view. 

It creates a slew of shorting opportunities.
For investors who are feeling tipsy at “The Red Party,” Tiger Woman on Wall Street is a much-needed sobering up. 

For those new to the country, this book is China 101, covering not only the business but also the social and political landscape. 

Li’s simple, explanatory language makes the book an easy read even for those without an investing background.
The autobiography is coming out right before the CCP’s Third Plenary Session, where decisions on major economic and financial reform are anticipated. 

Li’s view resonates with many politics and economics experts, Chinese or Western, who argue that the country cannot make an economic breakthrough without upgrading its software—education, shared ethical beliefs, rule of law, political accountability, etc. 

As the Chinese idiom goes, the illness must be pulled out from its root.