China has finally given a green light for Disneyland to build a theme park in Shanghai. Negotiations that started when Bill Clinton was in the White House have concluded just before President Barack Obama is due to visit. The approval looks like a coup for Walt Disney Co, but it will take all of Mickey’s magic to prevent the park from becoming another government-financed loss maker.

Disney’s last theme park in the region was anything but a hit. Hong Kong Disneyland was created in 2005 in an effort to boost employment in the epidemic-stricken region, but attendance numbers have fallen short of target. This hits the Hong Kong government harder than Disney, because the former not only took an initial 57 percent equity stake in the venture, but also spent $1.75 billion building related infrastructure like a metro line and ferry piers.

Shanghai Disneyland is likely to be financed in the same way. Estimates for the park’s price tag are around $4 billion. The government and a group of Chinese companies will contribute about 60 percent of equity, with Disney paying for the rest. The Shanghai government is also likely to pay for the roads leading to the park.

The Hong Kong park has been a disappointment for a number of reasons, some of which might equally be relevant in Shanghai. It is the smallest Disneyland in the world, so it is crowded and not worth visiting for a second day. Culturally, locals identify more with the Ocean Park, which features pandas and sharks and is cheaper. Hong Kong Disneyland’s public image has also taken a hit from a bout of food poisoning and accusations that it has exaggerated visitor numbers.

The Shanghai park will be 3-4 times bigger than the one in Hong Kong, making space for more visitors. But this will also increase the cost of relocating current residents. Some locals are busy adding a second floor to their homes so they can demand more compensation when they move out.

Shanghai has twice Hong Kong’s population, but average income is only about a quarter that of its wealthier neighbour, so it’s far from clear how many visitors will be able to afford a ticket that will cost the equivalent of two days of earnings for a college graduate. Then there is the possibility that the Shanghai park will divert visitors from Hong Kong.

There is also a risk of a culture backlash. Chinese children are less familiar with Disney characters than their counterparts in, say, Japan, home to Disney’s most successful overseas theme park. That said, the Chinese have so far appeared to be receptive to the American cultural icon: Mickey Mouse Clubhouse appears on national TVs and Disney has opened a chain of language schools in Shanghai.

China’s decision to relent after ten years says a lot about its changed priorities. Before, the government was concerned about the economy overheating, but now growth has become the top priority. While it is probably better to build a theme park than more empty highways, a second Disneyland might prove to be one too many.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow — or shrink less than — exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China’s trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China’s large imports number and jump to the conclusion that China is a big end-user of the world’s goods. China’s imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

On average, net exports contributed 1.4 percentage points to annual GDP growth between 1979 and 2007, according to the Statistics Bureau, much less than the contribution from the other two drivers — consumption and investment.

The transition to a more balanced trade account will take time. In particular, it will need a push from foreign exchange reforms, as the currently undervalued yuan encourages exports and discourages imports. China allowed the yuan to rise gradually for a few years after 2005, but has re-pegged it to the dollar since the start of the credit crisis.

It will take time before Beijing is confident enough to remove some of the export incentives, or at least not pile them up as it has done in response to the crisis. A more equalised trade account will probably not hurt China’s overall growth that much, but will help in making the world economy more balanced.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest businesspeople and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?

Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors.

Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics Inc., Legend Group, New Oriental Education and venture firm WI Harper Group.

They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize.

Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with funding from his venture, whiling hiring new people to make up for the loss. However, it looks like his company, called Innovation Works, has yet to line up ideas or engineers.

This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded. Lee and his backers believe that China’s market is more favorable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding.

The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base.

Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who grew up in the United States, has won a loyal following from Chinese students through his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.

An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.

Nimbler local rival Baidu now dominates China’s search market with 75.7 percent in terms of total search queries, dwarfing Google’s 19.8 percent share, according to iResearch. At Google, Lee was caught between the Beijing authorities who insist that foreign web companies censor the Internet and his U.S. bosses who demanded he drum up more business in China.

He has wanted to break away from his corporate role to start his own company for a decade, but it looks as if he is stuck in the corporate mindset. Lee is adopting an almost a planned economy approach to an industry that has always relied on markets to determine who is the fittest to survive. Indeed, he is even promising to tailor-make companies for interested foreign investors.

A factory model lowers the risk for investors as they will enjoy more control, but that also means less incentive and ownership for entrepreneurs, since their roles are reduced to that of employees. Why would young people take their ideas to Lee rather than make a go of it themselves?

Unlike Silicon Valley, China does not have an ecosystem where start-up companies can easily find angel investors. Even though China is a hotspot for venture capital, with $50 billion chasing mid- to late-stage projects, less than $1 billion in total is earmarked for early-stage projects.

Lee prides himself on his doggedness in chasing after talent. One year while at Google he made offers to graduates, only one of which was initially rejected. He called the student, found out that his girlfriend thought Google was a bit of a start-up, then asked for his girlfriend’s number and called her up. That year he achieved a 100 percent offer acceptance rate.

Nevertheless, it remains to be seen whether Lee can retain his ability to attract and inspire the best young people now that he is no longer at Google. He needs a lot of them to make his dream come true.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

]]> http://blogs.reuters.com/great-debate/2009/09/11/ex-google-china-chiefs-dream-factory/feed/ http://blogs.reuters.com/great-debate/2009/09/04/china-finds-tricky-export-niche-amid-global-slump/ http://blogs.reuters.com/great-debate/2009/09/04/china-finds-tricky-export-niche-amid-global-slump/#comments Fri, 04 Sep 2009 18:29:44 +0000 Wei Gu http://blogs.reuters.com/great-debate/?p=5193 – Wei Gu is a Reuters columnist. The opinions expressed are her own —

As exports of manufactured goods slow, China has found a new niche — exporting its construction boom.

With many countries in the world adopting stimulus plans to drive demand, China has been scrambling for these public spending dollars. And it is well placed to do so.

Infrastructure investment has powered Chinese growth in the past three decades. The nation has deep experience in building roads and bridges quickly and cheaply.

Moreover, it isn’t just construction expertise China is offering to clinch the deal. Its state-controlled banks such as the Industrial & Commercial Bank of China (ICBC) and Bank of China are eager to throw in some cheap loans too.

China’s big advantages are the scale of its companies — 51 of the world’s largest 225 contractors hail from China — and its substantial capital reserves, which allow its banks to provide long-term, low-cost credit for projects abroad.

The surge in construction revenue from overseas looks remarkable against a 22 percent drop in total exports during the first half.

Services revenue from overseas amounted to $32.2 billion, up 52 percent from last year, outpacing the average growth of 30 percent over the past few years. Chinese companies signed new contracts worth $64.6 billion, an increase of 38 percent from last year.

Chinese construction companies were the biggest beneficiaries. China Railway Construction said the value of newly entered overseas contracts surged 98 percent in the first half, representing one fifth of the total new contracts signed.

Support from the highest authority in China has helped seal deals abroad. In February, witnessed by President Hu Jintao and King Abdullah, China Railway signed a $1.78 billion contract to build the first phase of a special railway for Muslin pilgrims in Saudi Arabia.

It marks the first time that Saudi Arabia, one of the biggest oil exporters to China, gave the country a major public works agreement, although Huawei, a private Chinese telecommunications company, is already a main supplier there.

The success of Chinese contractors is not limited to emerging countries. China’s Gezhouba Group is involved in Australian mining projects. An aircraft technology company has got a big contract for wind power projects in the United States. And a Chinese contractor won a bid to build the Hamilton Bridge in New York.

Winning the services contract opens the door to other export opportunities. Just as IBM and Hewlett Packard promote system integration services to sell more of their hardware, when a Chinese contractor builds a bridge abroad, it is also likely to source the great majority of the materials from China.

Every dollar increase of contracted work will lead to a 4.9 dollars increase in the gross domestic product, according to the Ministry of Commerce. Taking that into consideration, overseas contracted work and related equipment exports accounted for more than 7 percent of total GDP last year. (Total exports were about a third of GDP)

Services exports have started to move the needle. Without the services jump, China’s export decline during the first half would have been two percentage points more. Service exports have helped create 450,000 jobs domestically during the first half, said the government.

The benefit of exporting migrant workers to lower the unemployment rate might not be big — every year China only exports about 150,000, or less than 1 percent of the new workers it adds — but the habit of importing Chinese labour for projects can cause a lot of friction.

The most recent and serious case was in Algeria, a country where seven out of every 10 adults under 30 are unemployed. About 100 locals and Chinese workers fought with knives and bludgeons. Russia, which has been hit hard by lower oil prices, is coming up with ways which make it harder for Chinese contractors to bid for deals.

Although China likes to stress the complementary nature of its relationship with other emerging countries, the reality is developing countries directly compete against each other because their competitive advantages, namely low wages, are similar.

Beijing has seen some backlash from its largest export markets, namely Europe and America. As China steps up its investment activities overseas, the drive to export more people and services to Africa and Latin America could cause headaches if pursued too aggressively.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. –

Just as Chinese stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.

Fears about a policy shift towards tighter liquidity are blamed for the 22 percent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.

There are encouraging signs that corporate profits — the fundamental basis for share prices — are on the turn.

Chinese companies’ earnings for the past quarter rose 36 percent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.

The purchasing managers’ index, released on Tuesday, confirms that China’s manufacturing sector is keeping up its steady recovery.

Stocks are now trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but Chinese companies enjoy higher growth rates: earnings are projected to grow by 20 per cent this year.

And compared with historical valuations, which range from the low teens to as much as 50 times earnings, current prices do not look excessive.

Premier Wen Jiabao this week tried to ease concerns when he said China’s economy was at a crucial juncture in its recovery and the government would not change its policy direction. But investors are taking their cue from the rising chorus of alarm sent by lower-level government officials, academics, and law-makers.

China’s parliament, usually a rubber-stamp organization, was unusually vocal in its late August session about the need to balance short-term relief with long-term development and structural reforms.

Meanwhile, the banking supervision commission has been cracking down on bank loans that make their way into stocks and property. In an effort to rein in excessive lending, it has also made it harder for banks to pass capital adequacy tests.

But even if Chinese banks stop lending in the second half — China’s largest bank ICBC even reduced its loan book in August — the swath of loans made in the first half will continue to work their way through the system during the rest of the year.

New lending in the first half amounted to an eye-popping 50 percent of gross domestic product on an annualized basis. Even if the ratio slumps to 10 percent in the second half, on average new loans as a percentage of GDP this year will still be double the 15 percent annual growth rate of the past three years.

In addition, as the flood of short-term bills — which banks accepted from companies to boost their lending volumes — start to mature, banks are diverting the cash into long-term loans tied to real projects that should help the economy in the coming months.

China’s monetary fine-tuning still looks marginal, even with July’s abrupt credit slowdown and a similarly subdued number expected for August. That’s because rising foreign capital inflows will offset some of the drop in bank credit.

Technical indicators also suggest the stock market has fallen too far. Chinese stocks had more than doubled between October and August and were ripe for a correction. Trading volumes have fallen substantially since the recent peak.

It is hard to call the bottom. But one thing that looks certain is that China’s companies and economy have proven to be stronger than many expected.

Lou Jiwei, chairman of China’s sovereign fund, said over the weekend that both China and America are dealing with past bubbles by creating new ones. Given how growth-minded Chinese policymakers are, it would be a mistake to bet on Beijing undermining the economy and the stock market by tightening too early.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —

The People’s Bank of China’s ambitious plan to settle foreign trades in yuan has been given the cold shoulder by companies both at home and abroad. The failure of this experiment shows the difficulties China faces in internationalising its currency.

Launched by the PBOC with a fanfare almost two months ago, the pilot scheme has so far seen only thin volumes of yuan trade settlement. Guangdong province, the country’s export hub, was supposed to be the cornerstone of the plan, but local officials said they found few willing counterparties.

This should not have come as a surprise. Foreign importers either have little access to the yuan, are reluctant to part with it, or do not want to commit future payment in a currency that is expected to appreciate. More surprisingly, domestic exporters, who would benefit from lower currency risks, are put off by the logistical headache of receiving domestic currency for their exports.

These concerns aside, there is a more fundamental reason why the yuan is not catching on. The Triffin Dilemma, named after the Belgian-American economist who rose to prominence in the 1960s, stipulates that it is hard for a country running a large trade surplus to demand that others buy goods using its own currency.

The world now suffers from an oversupply of the manufactured goods that are China’s specialty. Thus it is hard for China’s millions of small exporters to demand that Wal-Mart pays them in yuan, or for thousands of small Chinese steel mills to persuade Rio Tinto and BHP Billiton to accept the Chinese currency.

Only exporters in countries such as Indonesia, which has a limited amount of foreign reserves, have an incentive to sell goods such as timber to China in exchange for yuan, which can be used to buy imports from China later. But given the lack of convertibility of the yuan, it is probably not worth going through the hassle.

It is understandable that the PBOC, which counts fighting inflation as a main task, wants to push some yuan offshore in order to address the problem of domestic oversupply of the currency. But others may have different ideas. China’s Ministry of Finance, for example, has championed for the use of a pan-Asia currency. The Ministry of Commerce may not deem now the best time for struggling Chinese exporters to demand that buyers take on their currency risks.

It also appears that the PBOC had not worked out some of the logistics before launching the pilot scheme. Exporters had problems navigating customs under the new scheme, as well as claiming export tax rebates if they didn’t have foreign currency receipts.

The PBOC this week hosted a web conference with the bureaus of finance, commerce, customs, tax and banking regulation to iron out the kinks and unveil some new incentives. One of them is allowing yuan earned from exports to stay abroad to encourage more use of it outside China, instead of it having to be repatriated immediately. But by loosening capital controls on trade settled in yuan, the PBOC faces heightened risks of money laundering as exporters can overstate the value of their goods to get the Chinese currency offshore.

As China’s economy rebalances over time, the prospects of currency appreciation subside, and Chinese companies start to have more negotiating power, there might be more interest in using yuan as a settlement currency. But this remains a long shot for the PBOC.

Japan, which has fewer capital controls as well as a more developed domestic bond market than China, has been pushing the yen abroad for 20 years. Even so, the currency is still rarely used to settle international trade. The PBOC is facing a long struggle to realise its master plan.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

If market performance is anything to go by, Taiwan is the biggest beneficiary of China’s economic stimulus.

Because of Taiwan’s heavy dependence on exports to Western consumers, it was assumed there was little Beijing could do about its downturn. But Beijing has gone out of its way to take care of the recession-hit island. This year, it sent several procurement missions to Taiwan to buy billions of dollars of goods, even though Taiwan’s trade surplus with China is already approaching as much as a fifth of its economy.

China might be pursuing its unification agenda. After all, it has vowed to bring the island under its rule, by force if necessary. But money is a lot better than missiles. The whole point of inter-dependency is that there will be less chance of confrontation. Taiwan could use more investment, particularly in properties and infrastructure, while China is looking for new areas in which to invest its excess liquidity.

In the short run, increased purchases from Taiwan may come at Korea and Japan’s expense. For example, computer maker Lenovo <0992.HK> is increasing its orders from Taiwan companies, probably also because Taiwanese firms are happy to stay as contract manufacturers.

But in the long run, warmer cross-strait ties not only  benefit Taiwan and are a positive for China, but also are a very bullish development for the region, which should lead to lower risk premiums in Asia.

The wall of Chinese money has pushed Taiwan stocks up almost 50 percent this year, making it the second best performing market in the world after China itself and followed a decade of underperformance. Taiwanese stocks are currently valued at 26 times of 2009 earnings — a premium versus the rest of the region.

Taiwan has seen a $250 billion retail capital outflow since 1996, but the trend reversed in the second half of last year with a $17 billion capital inflow after President Ma Ying-jeou took office in May and signed trade deals to open up tourism and transport sectors to China.

Gross domestic product rose 20.7 percent in the April-June period on a seasonally adjusted, annualised basis. Export orders to China stood out as the destination with the strongest growth momentum. This eased the pain in Taiwan, where GDP in the first quarter had plunged by a record 10 percent.

The first major deal since cross-strait relations started to thaw — China Mobile’s purchase of 12 percent of telecom operator Far EasTone — is an example of cash-rich Chinese firms scooping up Taiwanese assets for both commercial and political reasons.

China Mobile said that it hoped to learn from Taiwan’s experience with third-generation technology. A $529 million acquisition may appear to some a very expensive way of learning, but Chinese buyers know that valuations at home are even higher.

State-owned companies are eager to respond to government initiatives because establishing a foothold in Taiwan and playing a private-sector ambassadorial role will help them gain political clout in Beijing.

Investors are pinning their hopes on more mainland money flowing into the 100 sectors in Taiwan that are open to Chinese investment. They are also eyeing a landmark agreement that promises to open the two sides’ banking markets to each other.

While Taiwan has suffered from over-banking, lending in China is still a good business, and Taiwanese firms will have an advantage lending to fellow Taiwanese firms in China. The signing of that agreement has been delayed though — a sign that while deals such as direct flights between Taiwan and the mainland can be done, deeper breakthroughs will be harder.

As more Chinese investment flows into Taiwan, there will be a bigger risk of a backlash. Fearing that Beijing might withdraw all its investments if things do not work out as planned, Taiwan has scrutinised every goodwill gesture from China.

Most recently Taiwan irked Beijing by testing prefab houses — donated by China to house typhoon victims — for toxic materials. And previously, it rejected a pair of pandas whose name if said together meant “unification”.

China’s economy is ten times bigger, so there will always be concerns that Taiwan should not be too dependent on China. But that concern is overblown. It will be hard for China to pull out all its foreign direct investment at once. Moreover, Taiwanese firms are already exerting a big influence in certain sectors in China, such as electronics components and retail.

Taiwan backed itself into a corner in the past decade. It is time for a change. For China, the peace dividend it gets from Taiwan will be worth a lot more than the returns it makes on U.S. Treasuries. So it is probably a reliable bet that goodwill will continue to flow before Beijing even thinks about withdrawing.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

Please don’t call it a liquidity crunch, but it rather looks as though China might have had to sell a sliver of its vast hoard of U.S. Treasury paper to fund its private sector’s big overseas foray.

China’s holding passed $800 billion in May, sparking speculation that it could reach $1 trillion within a year, but the net June figure, published on Monday, showed a 3.1 percent drop to $776.4 billion, the biggest percentage fall in nearly nine years.

It’s clear that China has been keen to use more of its reserves to secure strategic resources supply overseas, as well as diversifying them into emerging markets such as Africa to help create demand for Chinese exports. The unwinding of global imbalances also means China might have fewer dollars to invest, as its July trade surplus more than halved from a year earlier.

In the past, almost all outflows from China come from the government, which by default put the money into U.S. Treasuries. But now the private sector needs more foreign currency.

Just this month, China’s Yanzhou Coal Mining agreed to buy Australian coal miner Felix Resources for $2.9 billion, and Sinochem Corp. spent $878 million buying British oil and gas explorer Emerald Energy.

The government itself also seems to be getting more adventurous. Its $200 billion sovereign fund finished 2008 with almost 90 percent of its assets in cash, but is determined to put more money to work this year.

This week Reuters reported that the fund will soon invest up to $2 billion in U.S. mortgages as it eyes a property market rebound, and last week Reuters revealed the fund’s talks on a $1 billion-plus convertible bond investment in Fortescue Metals Group.

Not all the June sales of U.S. Treasuries were turned into cash. Half the sales of $51.8 billion short-dated debt were rotated into longer-dated maturities, indicating that Beijing now cares more about yield and worries less about the safety of its investment, reversing an earlier trend of reducing the average life of the holdings.

These monthly reports do not tell the whole story, because they exclude trades through London intermediaries. The more accurate numbers are not revealed until February, in the annual survey. Even so, China appears keen to diversify away from U.S. Treasuries, and as the authorities allow more private sector investors access to dollars, this process will accelerate.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

China’s bubbly stock market is making heroes out of some unlikely companies. And none more so than BYD Co. , in which Warren Buffett plans to take a 10 percent stake.

BYD has a much-hyped project to manufacture electric vehicles. Its shares have surged 140 percent in the past three months and 440 percent in the past year. They now trade at 74 times of current year profit and 54 time of next year earnings. That is double the level of capital goods companies and four times the multiple on which Chinese automakers trade.

BYD seems to have become the “poster child” for environmentally friendly transport. For all that, it has not yet sold any electric cars in its home market, though it has hundreds of trial customers in the government. The project may have real substance and it’s fair to say that Buffett has probably done his homework. But meaningful earnings are at least two to three years away, assuming those trials are successful.

Meanwhile, BYD’s real business is producing conventional cars and cell phone components. These do not support the company’s stratospheric multiple. Investors seem to have bid up the shares, taking their lead from Buffett. But they should remember that Buffett bought in at around HK$7 a share, and now the stock is trading at HK$42. Moreover, Buffett’s investment is under consideration in Beijing, and the company does not expect a decision until October.

But that doesn’t seem likely to puncture the bullish mood. BYD’s stock surged as much as 9 percent this week after it bought a bus maker in a pretty uninspiring deal. This is a sector where there is overcapacity. BYD’s deal got pulses racing because — surprise, surprise — the company talked about using its electric propulsion technology to power buses.

Of course, Buffett may be on to something and BYD’s chairman Wang Chuanfu may be right when he says he sees BYD as the largest auto maker in China in 2015 and the leading player in the world in 2025, with annual output surpassing 10 million vehicles. But this remains a mid-sized, highly geared company.

When stock markets bubble up, investors lose the ability to discriminate between hype and reality. And so it seems with China. Investors in BYD might ponder how much more bullish they are than the Sage of Omaha in the prospects for what remains a car and battery maker, and fasten their seat belts.

–Wei Gu is a Reuters columnist. The opinions expressed are her own–

Chairman Mao used to say the truth is always kept by the minority.

A little-known private Chinese machinery company’s bid for a GM marque has been sneered at by even the patriotic Chinese media, but the deal could succeed where mightier plays like Chinalco’s for Rio Tinto have failed.

True that private sector firms face an uphill battle in China against more dominant state-backed firms, but it seems like double standards when Western observers, who extol the virtues of the private sector taking the driver’s seat, praise Chinalco’s deal but dismiss Tengzhong’s bid for Hummer.

Chinese media’s disapproval of Sichuan Tengzhong Heavy Industrial Machinery’s move has tempered concerns about technology and job transfers to China, as well as questions whether China’s military was behind the bid.

This could give Tengzhong more bargaining power with bankrupt General Motors. Underestimation of Tengzhong could prove beneficial to the buyer in an environment where there are worries about Chinese deals not being completely driven by commercial interests.

No matter how carefully the now busted Rio deal was structured, Chinalco should know that buying pricey and highly political targets like resource companies is going to be greeted by the rest of the world with a great deal of suspicion.

Beijing’s promotion of Chinalco’s former boss Xiao Yaqing to the State Council, or cabinet, only served to reinforce that perception.

In contrast with the outspoken Xiao, the man behind the Hummer bid Li Yan, who now goes with a Buddhist name Suo Lang Duo Ji, tries his best to hide from the limelight, but that does not mean he does not have a plan.

HUMMER LIFT

If the deal goes through, the key question is whether Tengzhong has good strategy to turn around a tarnished GM brand.

China has shown success in the past - GM is already selling more Buicks in China than in the United States.

What Tengzhong could do is negotiating full rights to the Hummer brand and extending Hummer’s powerful brand image to a broader line of industrial vehicles.

Industrial vehicles from airport trucks to oil-field trucks are selling like hot cakes, riding the country’s construction boom.

If the Sichuan company, which already makes fuel tankers, dump trucks, tow trucks and fire trucks, wants to compete against the likes of Caterpillar in this niche market, will it have a better chance branding its vehicles as ‘Tengzhong’ or ‘Hummer’?

While the Hummer brand has indeed become a lightning rod for critics of America’s love for SUVs, the brand has also won acclaim as outperformers on rugged roads.

By using Hummer for industrial vehicles, Tengzhong can bypass Hummer’s gas-guzzler image problem. Will you care how much gas a fire truck uses?

The company is talking about selling a greener version of Hummer and extending to emerging markets.

If Tengzhong could further broaden Hummer’s offerings to include small SUVs, their sales are likely to jump in China, a country just starting to fall in love with big cars. China’s SUV sales rose 25 percent in 2008, outpacing the 18 percent increase of passenger cars.

Hummer might have a reputation of being a millionaire’s toy, but they are still coveted in China. An online survey by Sina.com shows that more than 60 percent people want to own a Hummer that costs more than half a million yuan (about $70,000).

Of course, the global auto industry has had its fair share of cash-rich investors who tried to revive ailing brands and failed, but Chinese entrepreneurs should not be underestimated.

Critics had scoffed at Geely Automobile’s founder Li Shufu some 15 years ago.

After Li dropped out of school, he made refrigerator parts, then refrigerators and motorcycles, before pushing to make cars for the masses.

Today, Geely is one of the few Chinese automakers that export - Geely now supplies London’s black taxis.

Defying media reports that regulators in China might block the Hummer deal, China’s Ministry of Commerce said on Monday that Tengzhong’s bid for Hummer is normal behaviour for a company seeking to take advantage of the global downturn to broaden its horizons.

This makes sense. The acquisition has the potential to meet China’s strategy to move up the manufacturing value chain.

Moreover, the repeated disappointment by state-backed acquirers should have taught Beijing that buyers like Tengzhong are their best bet to drive China’s great wall of money to global markets.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

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