As China opens its markets to foreign investors, many are questioning the case for investing in its markets. From the difficult-to-measure risks of nationalization to the observable risks such as weak protections for intellectual property, investors worry that the downside outweighs the upside.
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In this clip from Industry Focus: Financials, The Motley Fool's Gaby Lapera and Jordan Wathen discuss the puts and takes of investing in China, and why a fake Goldman Sachs (NYSE: GS) exemplifies the risk of investing in foreign markets.
A full transcript follows the video.
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Gaby Lapera: I think there's also this fear, whichI think you have in most developing markets, which is that China could just up anddecide to nationalizewhatever it is that you own. It is a communist government in name. So that's always a possibility. It hashappened to investors before. It's happened in Mexico,it's happened in Venezuela, to name twojust right off the top of my head. So it's not anunreasonable fear to have about China. Additionally,something that's interesting about Chinais that the culture is obviously very different. It can be hard to parse through theregulations and figure out which ones they'reactually enforcing, which ones they care about. We were talking earlier about loans, andfiguring out which ones the government would definitely payand which ones the government wouldn't pay. It's something that's really hard to know unless you're in China, or, potentially, from China,and you understand all of this and you have connections back home to talk to about this. It'sdefinitely a little bit of a minefield for the foreign investor who doesn't have a lot ofexperience and has no way of knowing exactly what's going on internally.
Jordan Wathen:Right. Totake a step back, the kind of people that China wants to invest,they don't want small-time mom-and-pop Americans to open a $50,000 brokerage account and buy stocks. They want real, tangible, lots of money. And an institutional investor, if you have, say, you have theLondon exchanges, you have the Canadian exchanges,you have the American exchanges. What's the real reason you would go to China in light of all these matters? There are plenty of global markets where trading is more free and the rules are more well established andpeople take them very seriously. So there's kind of a high bar to be willing to go to China.
Lapera:Absolutely. And then, on top of that, you have the fact that it's both strictly regulated and not all at the same time. The example that comes to mind for me is that inShenzhen,which is a city that is situated right on the border with Hong Kong. Some people opened up theGoldman SachsShenzhenreal estate something or other -- I'm not 100% sure what the whole name was. They even spelled their name in Chinese. They spelled likeGoldman Sachs spells their name. So you have this company that could be mistaken forGoldman Sachs. Even in the same year, some guy opened up his own bank called The China Construction Bank, and there was already a China Construction Bank,and he just pretended to be part of the same bank, and he totally wasn't. He opened up a whole fake branch of a bank. Andthat's just something that you don't see happening in other countries.
Wathen:Right. That's an interesting risk, too, because that extends beyond even the financial area.I actually looked at this, the Goldman Sachs fake in China. It actually had a website that looked just like Goldman Sachs. They used a similar font and everything, to basically knock off the brand name. That extends even to apparel. ANikesweatshirt could easily be, they could throw a swoosh on a sweatshirt andbasically steal that IP, too. So that's something that, as investors, you have to worry about,because a lot of companies, not just financial companies,but a lot of companies survive on their brand name. If that can be easily lifted and used by someone else. There's not much value to it.
Lapera:Right. This story came out inAugust of 2015, and Goldman Sachs said they were looking into it, but I haven't heard anything on the news since then. If you happen to work forGoldman Sachs, and you know what ended up happening to Goldman Sachs Shenzhen,please let me know.
Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.