A Contrarian on China: Don't bet the bank on WTO membership
Mention China and the World Trade Organization in the same sentence and many investors get excited. They expect Beijing's entry into the global body to generate exceptional opportunities as mainland companies benefit from more trade and foreign investment. Jesse Yim, a portfolio manager at AXA Investment Managers Hong Kong, begs to differ. "The WTO presents more of a risk than an opportunity for China," he warns. "I can't put my finger on even one company and say it would definitely skyrocket because of WTO membership." The market's extreme volatility in the past year has trimmed the growth of Yim's Barclays ASF China Fund to 8.4% over three years, but it is still the second best-performing unit trust among Asia's many China funds. Yim tells Asiaweek's Yulanda Chung why he is bearish on China.
You are a contrarian on the benefits of China's entry into the WTO. Why?
I don't think membership is going to present {mainland} companies with unprecedented benefits as widely bandied. Investors have developed a unilateral infatuation with China shares. Changes in China as a result of WTO membership will be a gradual opening-up process. The key is how existing companies can adapt to outside challenges. Many Chinese companies have been hermits. I don't know if they can catch up. After the initial euphoria and once investors look at company earnings again, they are going to be disappointed. People will eventually realize not all of China's 1.3 billion population will be customers.
So you don't expect a good year for the Chinese economy?
I'm concerned about GDP growth. The growth of fixed assets largely drove last year's {8.2%} expansion. To continue fixed-asset growth, the government plans to raise 150 billion yuan {$18 billion} from bond issues this year, the same amount as last year. But you can't keep the momentum going with the same amount of money. If GDP growth stalls or slows, China will face the issue of stability. Every one-percentage-point growth in GDP creates half-a-million jobs. The xiagang {unemployed} would gear up for drastic protests.
Aren't red chips (China-affiliated companies listed in Hong Kong) and H-shares (mainland companies with secondary listing in Hong Kong) well-placed to capitalize on WTO membership?
Look at the track record of these companies. Only about five red chips are still above water {trading above their initial public offering}. They are {conglomerates} China Resources Enterprises and Shanghai Industrial, PetroChina, {computer maker} Legend and {telecom company} China Mobile.
Should investors focus on these five companies?
With the exception of China Resources, all have changed the nature of their business. China Mobile had a network in only three provinces when it was listed. Now, it has more than 10 because of asset injection. Its original business plan was not that attractive — except that it has a strong parent company {with many assets}. You buy into red chips not because they boast a {strong} business model. You are buying on expectations of what might happen in the future. Your guess is almost as good as mine. You cannot buy red chips or H-shares, hide the stocks under your mattress and expect them to be worth many times more after 20 years. They are not {Hong Kong blue-chip bank} HSBC.
Do you think the A-share (for domestic investors with shares denominated in RMB) and B-share markets (for international investors) are going to merge any time soon?
Prices in the A-share market have been increasing steadily. But the rise bears little relation to company earnings. The average price-earnings ratio is an unreasonably high 60 times. Stocks are rising because there is a big pool of savings with nowhere to go. It's a classic case of too much money chasing too few shares. On the other hand, the two B-share markets have a combined market capitalization of only $5 billion. Turnover is thin.
There is talk of merging the A-share and B-share markets.
It would require a fully convertible renminbi, and this is not possible until two to three years from now. A merger also requires a healthy banking system. But mainland banks have bad loans equivalent to 30% to 40% {of total lending}. You will need five years, at least, to see a merger.
China is expected to float some of its big state-owned enterprises in overseas markets this year. Are any worth buying?
Every initial public offering from China is cheaper and bigger than the previous one. The price-earnings ratio gets lower and lower. If you know a store is going to have a sale next month, you won't buy anything today. If that's the mentality, what's the market going to be like?
For a China fund manager, you seem really down on China shares.
There just aren't many good China companies. I cannot find enough of them to distinguish my fund from our Hong Kong fund. My portfolio consists of about 20% each red chips and H-shares, 10% B-shares and 50% Hong Kong companies. Really, we are only marginally a China fund. Perhaps that explains why we are outperforming most of our peers. In a way, we are not loyal to the original investment concept. But if the market is not yet mature, why insist on it?
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