Why I'll Never Invest in China

I pointed the beach cruiser down the road and started pedaling. Within five seconds, the little computer on the handlebar said I was going 20 miles per hour. The dust was making me squint, and my shirt was billowing in the wind. I wished I had sunglasses. This was the fastest bicycle I've ever ridden...

The Chinese love bicycles. They love electric bicycles even more. There must be 10 million electric bikes in Shanghai. "'Booming' is maybe too mild a word," said an electric bicycle industry spokesman. According to Tim Johnson, of Post Carbon Cities, "In many major [Chinese] cities, electric bicycles now make up 10 to 20 percent of all two-wheeled vehicles on the roads."

Electric bikes are silent, and they're as fast as mopeds. Watch out before you cross a street in Shanghai. I almost collided with one on my first night here. The rider was going 20 miles per hour in the dark, without lights... in total silence. I didn't see him coming and stepped into his path. He almost ran me over.

Mr. Ching makes the best electric bicycle in the world, the eZee. When you get on an eZee bike, you become stronger than the world's top cyclists. A couple of years ago, American cyclist Floyd Landis took a power meter on the Tour de France. He averaged 232 watts. The silent motor on Mr. Ching's eZee bike generates 350 watts of power... And that's without pedaling.

The eZee bike has won the world's most prestigious electric bike race – the Tour de Presteigne – for the last three years. It was the fastest electric bike in the grueling Jurassic Test in the Swiss Alps. In Holland, they've even started using Mr. Ching's bikes as ambulances.

Mr. Ching has a factory near Shanghai. I visited it last week. While I was there, I rode one of Mr. Ching's beach cruisers. Beach cruisers are designed for comfort, not speed. This one had huge "balloon" tires and a wide, bouncy saddle. Pedaling gently, I was able to cruise at 25 miles an hour on a flat road. A full battery charge lasts 40 miles. At current U.S. power prices, it costs about $0.10 to recharge the battery overnight. 
 
You'd think Mr. Ching would have a roaring business selling his bikes in China. But he hasn't sold a single bike here. He only sells his bikes to foreigners. He refuses to supply the Chinese market.

"Many years ago, I swore I'd never do business in China again," explained Mr. Ching. He told me his first attempt at business in China – manufacturing PVC pipe for the construction industry – left him bankrupt when his customers refused to pay him what they owed.

Then there's the problem of forgery. Mr. Ching says if he sold bikes in China, they'd make forgeries of his bike and flood the market. Besides, Mr. Ching's electric bikes are 10 times as expensive as the common electric bikes people buy in China.

I take Mr. Ching's decision not to sell his bikes in China as a warning about China investments. First, doing business in the Chinese market is incredibly difficult. The Chinese are not wealthy. Forget Shanghai and Beijing... or what you saw on television during the Olympics. This is a carefully crafted illusion to make foreigners think China is rich. In the countryside, they live on a couple of dollars a day: 99% of China can't afford McDonald's, never mind Apple laptops. And they won't be able to for decades.

Second, Chinese entrepreneurs will copy business models and steal intellectual property. So it's impossible to keep ahead of the market. There's no respect for copyright or patents. Fake goods are everywhere in China... from TaylorMade r7 golf drivers to Rosetta Stone language courses.

Finally, I don't trust the Chinese system to pay me what it owes. Every time I analyze Chinese stocks, I worry I'm playing in a casino where the house has a 15% edge.

Mr. Ching's business is exploding overseas, so it's not a problem. He's building a new, larger factory on a plot of land next door to his current operation and says sales will triple next year. As for me, I'm going to spend $2,000 for one of Mr. Ching's eZee bikes.

Good investing,