Bad news for Charlie Munger and the China bulls
In February 2020, Warren Buffett’s right-hand man Charlie Munger gave a harrowing outlook on the news business to shareholders of the Daily Journal, a California legal news provider that he has chaired since 1977. “My best advice, I think you would be happier if you reduced your expectations,” he said.
Despite the dismal forecast, the Daily Journal was actually in an enviable position compared to its peers: the paper began investing in stocks after the 2008 financial crisis, and has managed to generate millions of dollars in dividends as its peers have struggled to stay afloat.
The portfolio has been so successful that on certain days it has overtaken the value of the entire company, which in addition to owning a handful of newspapers sells software to US courts and probation offices. But even the legendary investor is capable of making a bad bet, as the FT’s Eric Platt and Anna Nicolaou report.
Munger, now 98, stepped down as chair of the Daily Journal last year but continues to direct the publisher’s investment portfolio, which as of June has been sitting on $187mn of unrealised gains on a $342mn portfolio thanks to its investments in Alibaba, Bank of America, Wells Fargo and Chinese carmaker BYD among others.
The strategy hasn’t been without its risks. In 2021, the company went on a buying spree of Alibaba stock and had amassed shares worth nearly $72mn by the end of last year.
Munger himself executed many of these purchases, even as other investors were dumping their shares in response to Beijing’s regulatory crackdown on the tech sector. Alibaba stock has fallen 45 per cent this year, and is down 71 per cent since the Daily Journal first disclosed a stake in 2021.
“[We] invested some money in China because we could get more value in terms of the strength of the enterprise on the price of security than we could get in the United States,” Munger said at the Daily Journal’s 2022 shareholder meeting in February.
The Berkshire vice-chair isn’t the only one to have made a call on China that isn’t looking good. Chase Coleman’s hedge fund Tiger Global and Edinburgh-based investment group Baillie Gifford have also taken hits on their Chinese equity portfolios.
How so many famed stockpickers missed the signs is no longer the most pressing concern on investors’ minds. The more urgent question is how they intend to claw their way back.
‘Self-financing’ and the fall of an aluminium tycoon
When Chinese businessman Liu Zhongtian placed a bet on an Australian superyacht builder in 2017, the deal was supposed to help his aluminium powerhouse Zhongwang cruise into the marine sector “at full speed”.
Five years on, the wind has all but disappeared from its sails, leaving the company bankrupt with more than $60bn in debt, the FT’s Cheng Leng reports.
In September, a Chinese court approved an application for bankruptcy by creditors of Zhongwang, Asia’s biggest manufacturer of aluminium extrusions.
Its 252 affiliates and parent were “manifestly insolvent”, the court said.
Liu was once the richest man in China’s Liaoning province. As the economy cooled, and demand for Zhongwang’s products waned as the country’s property sector plunged, its business collapsed.
In a US judgment in April, six companies tied to Liu were ordered to pay $1.83bn in restitution after allegedly evading $1.8bn in import duties. But neither company representatives nor Liu appeared in court, the US Department of Justice said. It said China Zhongwang remained a “fugitive”.
In better times, Zhongwang had funded its own expansion. The company effectively financed itself, sourcing credit from its subsidiary Zhongwang Finance.
A crackdown on financial leveraging in China sent Zhongwang’s financial arm into bankruptcy on the same day as its parent, leaving Liu overleveraged and with limited options.
“The [lesson from] the fall of Zhongwang is the failure to crack down on these alleged self-financing activities,” said Shanghai lawyer Eugene Weng. “Such practices are a ticking time bomb and can hardly be tolerated by Chinese courts.”