Playing Ball in the People's Republic
Editor's note: TheStreet.com's Ronna Abramson takes a look at the risks and rewards of investing in the booming economy of China. She also looks at IBM's venture capital plans and how Microsoft aims to gain a toehold there.
Just say the word "China," and investors and companies seem to start frothing at the mouth these days.
But be careful, because investing in China is not for the faint of heart. While the opportunities in a developing nation of 1.3 billion are undoubtedly mammoth, don't forget this is a Communist country, and consequently it presents some unique risks, seasoned experts caution.
"Investors beware," said Lip-Bu Tan, founder of the venture capital fund Walden International, which has been investing in China since 1994. "I think there is some hype here. People get too overexcited by China."Start with Baidu.com (BIDU), a company with operating cash flow of $4.5 million that was quickly crowned the Google (GOOG) of China. As if living up to its name, Baidu's stock soared to a dizzying $122.54 on the first day of trading -- $95.54 above the price it was sold at by underwriters. "Clearly there's a lot of hedge funds and retail buyers that get excited about China and a search engine like Google, but this is a very small company," Tan said. Apparently, investors started coming back to their senses, because the stock has recently declined to the $82 range. Similarly, Tan argued that Yahoo!'s (YHOO) subsequent $1 billion investment for a 40% stake in Chinese e-commerce company Alibaba was way too high. But that deal may only feed the Chinese frenzy. As Piper Jaffray senior analyst Safa Rashtchy noted earlier this month: "A major deal like Yahoo!-Alibaba is an endorsement of what otherwise might seem to be risky or unproven areas, and thus, investors are likely to feel more comfortable investing in the Chinese Internet sector."
Economies of ScaleTan acknowledged the growth potential for Internet companies in China, noting some projections that the Chinese Internet population will surpass that of the U.S. within eight years. But he warns that the risk of government intervention is "very high."
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV