Good but not good

A very important consideration when investing in almost any SOE is the ownership structure whereby the listed entity is controlled by an unlisted parent. The parent is 100% owned by the state and has significant operating assets in addition to those held by the listed entity. One of the peculiar aspects of the current popularity of Chinese stocks is the recent phenomenon of "asset injections". This is where the parent company "sells" some or all of it's operating assets to the listed entity. This is viewed by investors as a positive development and of course, in one sense (assuming the price is fair), it is. It is a move towards less ownership complexity - generally a good thing. But, on the other hand, who determines the price? The parent company does, and it's a take it or leave it proposition for shareholders of the listed company. For Hong Kong listed entities, there are some minority shareholder protections but one ought be a bit skeptical about these given the power of the parent and the fact that all the assets are in China. A slight variation on the asset injection is the recent announced deal between Chalco, the largest Aluminum producer in China, and another listed entity which is controlled by Chalco's parent. Think of it as an arranged marriage. Reuter's gives the details. The point is that 1. it is impossible to evaluate or analyze or forecast any of this and 2. the price of the asset purchases is not determined in an arm's-length fashion. This is a generic example of the type of risks that investors in China need to be aware of.