The economy is ballooning in the world's most populous country, thanks to consumer spending, new foreign investment and fewer restrictions on markets. But with the potential, investors may find big risks.
By Michael Brush
If you?e tired of the debate over whether the U.S. economy will stumble again this year, consider shifting your focus to a part of the world where healthy economic gains look like a sure bet.Check out your options.
Record low rates
could save you a bundle.
China is a great place to start.
Thanks to a newfound interest in capitalism and a huge inflow of foreign investments, China looks poised to continue posting impressive annual economic growth of 5% to 8%, depending on whose numbers you believe.
?he economic backdrop for China is probably better than anywhere else in the world right now,?says Robert Conlon, the chief investment officer for Investec Asset Management Asia. ?t a time when everyone is worried about growth in the Western world, the Chinese economy is doing very well.?BR>
Individual investors can purchase shares of companies doing business in China that are listed on Hong Kong and U.S. exchanges. There are also hundreds of mutual funds offering exposure to the country. Before we get to that, here? a brief look at why China? economy will continue to grow so fast.
3 forces for economic growth
First, the communist government continues to open up the country to free markets and privately owned businesses. ?he impact is going to be huge,?says Guang Yang, a fund manager who knows the changes firsthand because he grew up in China. Yang now helps run Franklin Templeton? Global Opportunities fund (TEGOX), based in California. He stays in touch by traveling to China several times a year. ?he change is so profound I wouldn? be surprised if the Communist Party changes its name at some point.?And the party isn? likely to reverse course, as many of its prominent leaders now enjoy the benefits of capitalism through stakes in private companies.
Second, China has entered the global markets by joining the World Trade Organization. Foreigners are all too happy to invest money there to build plants and take advantage of the cheap labor. Last year they put about $55 billion into the country, more than foreigners invested in the United States.
While labor conditions can be harsh and Chinese manufacturers are pressuring Western competitors, it all adds up to healthy domestic growth and greater consumer spending in China. Auto sales grew by 40% last year, for example. China? producing much more than plastic toys. It? making gains in areas like auto parts, electronics and semiconductors. ?t? important to understand how competitive China is becoming in the manufacturing sector,?says Paul Matthews, who runs the Matthews China fund (MCHFX) and Matthews Pacific Tiger fund (MAPTX).
Third, the country continues to spend to build out infrastructure, like new highways, power plants and phone networks. That? good for the economy. One motivation is the need to prepare for the 2008 Olympic games, says Romeo Dator of the U.S. Global Investors China Regional Opportunity fund (USCOX).
How to invest in China
There are three basic routes you can take:
1. The Chinese exchanges. Your best approach: Avoid them. While China hopes to modernize its stock and debt markets -- right now shareholder rights get trampled and the exchanges are mainly for government-run companies anyway -- it still has a long way to go. So foreign investors turn to the U.S. and Hong Kong exchanges. In Hong Kong, Chinese companies are known as "H" shares. "Red chips" are Hong Kong-based companies that get most of their profits from China. The ticker symbols can look odd to American investors, as the Hong Kong exchange uses both numbers and letters in them. U.S. ticker symbols, of course, contain only letters.
2. Your broker. If you want to invest in Hong Kong listings from the U.S., you?l need a full-service brokerage.
3. Mutual funds. We?l get into these in a moment. But if you are looking for specific stock plays, here are some of the favorite investing themes of the pros:
Domestic consumption plays. Chinese people still only earn about $1,000 per year on average -- and around five times that much in the more prosperous coastal cities like Shanghai. But wages are growing quickly, and the savings rate is high. So consumer demand for everything from cell phones and cars to trendy clothing is strong, says Conlon.
To get exposure, Conlon? Investec Mainland China Fund (ICHNX) recently held a position in Denway Motors (203HK). Matthews?funds have positions in Giordano (709HK), a clothing company similar to The GAP (GPS, news, msgs), and Tsingtao Brewery (168HK), the largest brewery in China, with an 11% market share. Tsingtao has partnered with Anheuser-Busch (BUD, news, msgs), and it? growing by purchasing struggling state-owned breweries and turning them around.
The U.S. Global Investors China Regional Opportunity fund owns shares in Citic International Finance (183HK) as a play on the housing market. The market should continue to develop as the government keeps allowing more private ownership of homes. Another holding is Travel Sky (696 HK), a play on growing tourism, which supplies software systems used by airlines. ?hey have monopoly status with China? aviation agency,?says U.S .Global Investors?Romeo Dator. ?here is no competition.?BR>
Many analysts look for the development of consumer debt and credit-card services to add a kick to domestic consumption in the medium term. Under international trade agreements, China will open its banking sector to foreign banks gradually over the next 10 years.
The basic industries. If the Chinese economy continues to grow rapidly, that will support demand for the basics like energy, says Franklin Templeton? Yang. That? why his fund owns shares in two large-cap petroleum companies, China National Offshore Oil (883 HK) and Petro China (857 HK). As government-run companies, they have exclusive rights to oilfields in and around China. On the other hand, says Yang, since they?e owned by the government, they?l be less likely to make shareholder-friendly moves such as laying off workers to bring down costs. This helps explain why these companies trade at a discount to other oil producers.
Matthews likes utilities for exposure to Chinese economic growth. What? more, the government is deregulating and privatizing parts of the system. ?o private companies can buy government generating companies and improve the efficiency,?he says. His funds own Beijing Datang Power Generation (991 HK), Huaneng Power (HNP, news, msgs) and Hong Kong China & Gas (3 HK).
Investec Asset Management Asia? Robert Conlon believes demand for transportation services will increase as more goods are made in China and shipped elsewhere. His funds own China Merchants (144 HK) and Cosco Pacific (1199 HK).
For exposure to China? edge in low-cost manufacturing, Conlon likes Techtronic Industries (669HK), which makes hand tools sold through outlets like Home Depot (HD, news, msgs) and Sears Roebuck (S, news, msgs). Conversely, it makes sense to consider shorting U.S.-based competitors like Black & Decker (BDK, news, msgs). U.S.-based furniture makers such as Furniture Brands International (FBN, news, msgs) and La-Z-Boy (LZB, news, msgs) also face pricing pressures from China.
The telecom plays. Because of the sheer size of telecom giant China Mobile (CHL, news, msgs), most fund managers own shares of it. Despite its name, China Mobile remains a play on basic voice services because cell phones are not yet widespread in the country. ?t? not about people taking photos with cell phones and sending them to friends,?says Todd Henry of T. Rowe Price. But Henry says that valuations look rich compared to wireless service providers in other emerging markets. Besides, prices in China are falling because China Mobile faces competition from other providers such as China Unicom (CHU, news, msgs).
Timothy Ghriskey, of Ghriskey Capital in Greenwich, Conn., likes the outlook for UTStarcom (UTSI, news, msgs), which sells personal access system (PAS) equipment used in local wireless networks, and gear used for DSL broadband services. ?he company has great earnings visibility, and they are constantly announcing new contracts in China. None of them are huge, but taken together it all adds up to a really a nice number.?Ghriskey thinks the company has opportunities to expand in India, Vietnam and Latin America.
Mutual funds. Morningstar fund analyst William Rocco thinks it makes the best sense to go with developing market funds that cover a broad territory. ?merging markets are generally quite volatile, and focusing on one market is far more risk than people should take,?he says. Rocco also favors emerging market funds with annual expenses of 2% or less. His three favorite funds for exposure to China and the region as a whole are: T. Rowe Price New Asia (PRASX), Matthews Pacific Tiger fund and Liberty Newport Tiger (CNTAX).
Investors looking for the most exposure exclusively to China and Hong Kong should consider: Investec China & Hong Kong (ICHKX), Investec Mainland China, Matthews China fund, Liberty Newport Greater China A (NGCAX), Alliance Greater China '97 Advantage (GCHYX), Dreyfus Premier Greater China A (DPCAX), U.S. Global Investors China Regular Opportunity and Fidelity China Region (FHKCX).
China's unique risk issues for investors
Despite the conversion to freer markets, China is still a place where a large -- and sometimes market-unfriendly -- government plays a big role. That raises several potential issues for investors, even in areas as basic as reported economic data. For example, few investment analysts really trust the government numbers on growth. ?t may not be 8%, but it? probably at least 5%, so it is still darned good,?says Arjun Divecha, of GMO Emerging Markets funds and GMO Asia III fund (GMASX).
More serious government-related risks loom. Pension plans are underfunded. State banks have lots of bad loans to government entities. If you add them to the national debt, questions arise about how much more the country can borrow to support all the spending that? juicing the economy. If global protectionism picks up because of a continued slump in the Western world, that would hit Chinese exports.
Any of these factors could spark a financial or political crisis that would sink the shares of companies doing business in the country, warns Marc Faber, a China expert who pens an investing newsletter called The Gloom, Boom & Doom Report. That? why he thinks one of the best ways to play Chinese growth is to be long commodities such as metals, oil and food. Strong economic growth in China will support demand for them in the medium term, he says.
But direct exposure to the country may be too risky for now, he believes. ?apidly growing countries go through numerous economic and financial crises,?Faber says. ?ventually China will have a massive economic, financial and political crisis. I cannot tell you when it will come, but I am quite sure they can? grow at 8% without a crisis. As a foreigner, I would wait for this to happen, and then move into China in a big way.?BR>
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
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By Michael Brush
If you?e tired of the debate over whether the U.S. economy will stumble again this year, consider shifting your focus to a part of the world where healthy economic gains look like a sure bet.Check out your options.
Record low rates
could save you a bundle.
China is a great place to start.
Thanks to a newfound interest in capitalism and a huge inflow of foreign investments, China looks poised to continue posting impressive annual economic growth of 5% to 8%, depending on whose numbers you believe.
?he economic backdrop for China is probably better than anywhere else in the world right now,?says Robert Conlon, the chief investment officer for Investec Asset Management Asia. ?t a time when everyone is worried about growth in the Western world, the Chinese economy is doing very well.?BR>
Individual investors can purchase shares of companies doing business in China that are listed on Hong Kong and U.S. exchanges. There are also hundreds of mutual funds offering exposure to the country. Before we get to that, here? a brief look at why China? economy will continue to grow so fast.
3 forces for economic growth
First, the communist government continues to open up the country to free markets and privately owned businesses. ?he impact is going to be huge,?says Guang Yang, a fund manager who knows the changes firsthand because he grew up in China. Yang now helps run Franklin Templeton? Global Opportunities fund (TEGOX), based in California. He stays in touch by traveling to China several times a year. ?he change is so profound I wouldn? be surprised if the Communist Party changes its name at some point.?And the party isn? likely to reverse course, as many of its prominent leaders now enjoy the benefits of capitalism through stakes in private companies.
Second, China has entered the global markets by joining the World Trade Organization. Foreigners are all too happy to invest money there to build plants and take advantage of the cheap labor. Last year they put about $55 billion into the country, more than foreigners invested in the United States.
While labor conditions can be harsh and Chinese manufacturers are pressuring Western competitors, it all adds up to healthy domestic growth and greater consumer spending in China. Auto sales grew by 40% last year, for example. China? producing much more than plastic toys. It? making gains in areas like auto parts, electronics and semiconductors. ?t? important to understand how competitive China is becoming in the manufacturing sector,?says Paul Matthews, who runs the Matthews China fund (MCHFX) and Matthews Pacific Tiger fund (MAPTX).
Third, the country continues to spend to build out infrastructure, like new highways, power plants and phone networks. That? good for the economy. One motivation is the need to prepare for the 2008 Olympic games, says Romeo Dator of the U.S. Global Investors China Regional Opportunity fund (USCOX).
How to invest in China
There are three basic routes you can take:
1. The Chinese exchanges. Your best approach: Avoid them. While China hopes to modernize its stock and debt markets -- right now shareholder rights get trampled and the exchanges are mainly for government-run companies anyway -- it still has a long way to go. So foreign investors turn to the U.S. and Hong Kong exchanges. In Hong Kong, Chinese companies are known as "H" shares. "Red chips" are Hong Kong-based companies that get most of their profits from China. The ticker symbols can look odd to American investors, as the Hong Kong exchange uses both numbers and letters in them. U.S. ticker symbols, of course, contain only letters.
2. Your broker. If you want to invest in Hong Kong listings from the U.S., you?l need a full-service brokerage.
3. Mutual funds. We?l get into these in a moment. But if you are looking for specific stock plays, here are some of the favorite investing themes of the pros:
Domestic consumption plays. Chinese people still only earn about $1,000 per year on average -- and around five times that much in the more prosperous coastal cities like Shanghai. But wages are growing quickly, and the savings rate is high. So consumer demand for everything from cell phones and cars to trendy clothing is strong, says Conlon.
To get exposure, Conlon? Investec Mainland China Fund (ICHNX) recently held a position in Denway Motors (203HK). Matthews?funds have positions in Giordano (709HK), a clothing company similar to The GAP (GPS, news, msgs), and Tsingtao Brewery (168HK), the largest brewery in China, with an 11% market share. Tsingtao has partnered with Anheuser-Busch (BUD, news, msgs), and it? growing by purchasing struggling state-owned breweries and turning them around.
The U.S. Global Investors China Regional Opportunity fund owns shares in Citic International Finance (183HK) as a play on the housing market. The market should continue to develop as the government keeps allowing more private ownership of homes. Another holding is Travel Sky (696 HK), a play on growing tourism, which supplies software systems used by airlines. ?hey have monopoly status with China? aviation agency,?says U.S .Global Investors?Romeo Dator. ?here is no competition.?BR>
Many analysts look for the development of consumer debt and credit-card services to add a kick to domestic consumption in the medium term. Under international trade agreements, China will open its banking sector to foreign banks gradually over the next 10 years.
The basic industries. If the Chinese economy continues to grow rapidly, that will support demand for the basics like energy, says Franklin Templeton? Yang. That? why his fund owns shares in two large-cap petroleum companies, China National Offshore Oil (883 HK) and Petro China (857 HK). As government-run companies, they have exclusive rights to oilfields in and around China. On the other hand, says Yang, since they?e owned by the government, they?l be less likely to make shareholder-friendly moves such as laying off workers to bring down costs. This helps explain why these companies trade at a discount to other oil producers.
Matthews likes utilities for exposure to Chinese economic growth. What? more, the government is deregulating and privatizing parts of the system. ?o private companies can buy government generating companies and improve the efficiency,?he says. His funds own Beijing Datang Power Generation (991 HK), Huaneng Power (HNP, news, msgs) and Hong Kong China & Gas (3 HK).
Investec Asset Management Asia? Robert Conlon believes demand for transportation services will increase as more goods are made in China and shipped elsewhere. His funds own China Merchants (144 HK) and Cosco Pacific (1199 HK).
For exposure to China? edge in low-cost manufacturing, Conlon likes Techtronic Industries (669HK), which makes hand tools sold through outlets like Home Depot (HD, news, msgs) and Sears Roebuck (S, news, msgs). Conversely, it makes sense to consider shorting U.S.-based competitors like Black & Decker (BDK, news, msgs). U.S.-based furniture makers such as Furniture Brands International (FBN, news, msgs) and La-Z-Boy (LZB, news, msgs) also face pricing pressures from China.
The telecom plays. Because of the sheer size of telecom giant China Mobile (CHL, news, msgs), most fund managers own shares of it. Despite its name, China Mobile remains a play on basic voice services because cell phones are not yet widespread in the country. ?t? not about people taking photos with cell phones and sending them to friends,?says Todd Henry of T. Rowe Price. But Henry says that valuations look rich compared to wireless service providers in other emerging markets. Besides, prices in China are falling because China Mobile faces competition from other providers such as China Unicom (CHU, news, msgs).
Timothy Ghriskey, of Ghriskey Capital in Greenwich, Conn., likes the outlook for UTStarcom (UTSI, news, msgs), which sells personal access system (PAS) equipment used in local wireless networks, and gear used for DSL broadband services. ?he company has great earnings visibility, and they are constantly announcing new contracts in China. None of them are huge, but taken together it all adds up to a really a nice number.?Ghriskey thinks the company has opportunities to expand in India, Vietnam and Latin America.
Mutual funds. Morningstar fund analyst William Rocco thinks it makes the best sense to go with developing market funds that cover a broad territory. ?merging markets are generally quite volatile, and focusing on one market is far more risk than people should take,?he says. Rocco also favors emerging market funds with annual expenses of 2% or less. His three favorite funds for exposure to China and the region as a whole are: T. Rowe Price New Asia (PRASX), Matthews Pacific Tiger fund and Liberty Newport Tiger (CNTAX).
Investors looking for the most exposure exclusively to China and Hong Kong should consider: Investec China & Hong Kong (ICHKX), Investec Mainland China, Matthews China fund, Liberty Newport Greater China A (NGCAX), Alliance Greater China '97 Advantage (GCHYX), Dreyfus Premier Greater China A (DPCAX), U.S. Global Investors China Regular Opportunity and Fidelity China Region (FHKCX).
China's unique risk issues for investors
Despite the conversion to freer markets, China is still a place where a large -- and sometimes market-unfriendly -- government plays a big role. That raises several potential issues for investors, even in areas as basic as reported economic data. For example, few investment analysts really trust the government numbers on growth. ?t may not be 8%, but it? probably at least 5%, so it is still darned good,?says Arjun Divecha, of GMO Emerging Markets funds and GMO Asia III fund (GMASX).
More serious government-related risks loom. Pension plans are underfunded. State banks have lots of bad loans to government entities. If you add them to the national debt, questions arise about how much more the country can borrow to support all the spending that? juicing the economy. If global protectionism picks up because of a continued slump in the Western world, that would hit Chinese exports.
Any of these factors could spark a financial or political crisis that would sink the shares of companies doing business in the country, warns Marc Faber, a China expert who pens an investing newsletter called The Gloom, Boom & Doom Report. That? why he thinks one of the best ways to play Chinese growth is to be long commodities such as metals, oil and food. Strong economic growth in China will support demand for them in the medium term, he says.
But direct exposure to the country may be too risky for now, he believes. ?apidly growing countries go through numerous economic and financial crises,?Faber says. ?ventually China will have a massive economic, financial and political crisis. I cannot tell you when it will come, but I am quite sure they can? grow at 8% without a crisis. As a foreigner, I would wait for this to happen, and then move into China in a big way.?BR>
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.
Resources
Read/Post comments on the Start Investing message board
Find a problem in this article? Send us e-mail
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