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Coke Gets the Blame for Well Known Chinese Problem

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A disturbing trend may be emerging among Chinese regulators, as another respected American company is being accused this week of causing harm to Chinese children.

Chinese authorities had earlier said that American battery manufacturer Johnson Controls (NYSE: JCI) was responsible for a number of lead poisoning cases in Shanghai. Now they are accusing none other than Coca-Cola (NYSE: KO) of selling milk products that have caused the death of a young boy and sickened his mother in the city of Changchun, the capital of Jilin province.

According to China Daily the father of the boy said that his wife and son fell sick shortly after drinking a bottle of Minute Maid strawberry flavored milk. The boy died after being rushed to the hospital with his mother by ambulance and the mother fell into a coma before recovering consciousness. Authorities reportedly said that they found traces of pesticides in bottles of strawberry flavored milk consumed by the boy, his mother and two other people who were sickened in a separate incident.

Coca-cola spokeswoman Joanna Price said that Coca-cola tested samples from the same batch that the boy and his mother drank from and that they found them to be safe for human consumption. However, the company agreed to remove the product from store shelves while further investigations are carried out.

While it's easy to target a famous American company, if the milk product was contaminated, it's much more likely that one of Coca-cola's Chinese suppliers is responsible for the allegedly contaminated milk. Chinese milk producers have a horrible safety record and have gone so far as to attempt a cover up of unsafe milk products that sickened thousands of Chinese babies.

Chinese milk producers often put chemical additives into their products that are intended to fool regulators into thinking that the milk contains more protein than it actually does. Despite this, Chinese dairy producers have been successful in getting new safety regulations passed that are much weaker than international standards and even lower than the previous Chinese standards that proved unsuccessful in protecting Chinese consumers.

Now the same authorities that failed to protect consumers from Chinese dairy producers in the past seem to be targeting the world's most famous soft drink maker, which also has a great safety record. It's still unclear whether or not Chinese authorities are even investigating Coca-cola's Chinese suppliers.

The Coca-cola investigation comes at the same time that Chinese regulators are accusing American battery manufacturer Johnson Controls (JCI) of business practices that have caused lead poisoning in a number of children near its battery manufacturing plant. Johnson Controls is still under investigation by Chinese regulators despite the fact that an investigation by the China Electric Equipment Industry Association found that a nearby waste recycling facility was the source of the high lead levels. The company's Shanghai manufacturing plant was also named a national model enterprise for occupational health and safety.

The accusations against Coca-cola be shouldn't be taken lightly because cases like this can result in the death penalty in China. So it must be disturbing for foreign businesses in China to watch as two well regarded international companies find themselves under investigation for safety problems that are most likely being caused by local Chinese companies. The business environment in China has always been difficult for foreign companies but it looks like it could be getting worse.

ACTION ITEMS:

Bullish:
Traders who believe that Coca-cola and Johnson Controls will be vindicated might want to consider the following trades:

  • Traders could buy shares of either company if they feel that they will eventually prove their innocence.

Bearish:
Traders who believe that feel that the two cases are a sign of worsening business environment for foreign companies in China may consider alternate positions:

  • Chinese consumers and the Chinese economy will be the big losers if China tries to blame its long running safety problems on foreign businesses. If the trend continues, ETFs like the ProShares Short FTSE China 25 (NYSE: YXI), the ProShares Ultrashort FTSE China 25 (NYSE: FXP) and the Direxion Daily China Bear 3x Shares (NYSE: CZI) could climb higher as the Chinese economy suffers.

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