Stock Investors Play The China Card
BY JONAH KERI
INVESTOR'S BUSINESS DAILY
Relaxed government controls and a rush toward industrialization have spawned an unprecedented economic boom in mainland China — and moneymaking manna for investors.
The boom is a long time coming for the nation of 1.3 billion people. Wall Street has banged the drum for China as a source of huge growth and investment possibilities for what seems like forever.
But after several false starts, China seems to have arrived. Government has started to stabilize, slowly but surely. Major corporations, while still largely controlled by the state, have parlayed relaxed controls into new growth.
The building of China's infrastructure has been the biggest boon. Stroll through Shanghai, Beijing and other major cities, and necks strain from gawking at cranes erecting skyscrapers. New roads and bridges are snaking in every direction. Dot-coms are popping up all over as pent-up Web demand mushrooms by the day.
The companies keyed into that building — the steel providers, petrochemical firms, power companies and tech upstarts — are rising. Their growth has spawned a new generation of industry and stock market leaders.
"We were recently in Beijing, Xian, Shanghai, and we were just amazed," said Tim Halter, head of Halter Financial Group. "I was at an intersection in a cab, so I just start counting; there were 14 high-rise cranes at one intersection that I could count. It's unbelievable the growth going on and people's optimism and understanding of what's happening to them. They're living in a historic moment, and they're aware of it."
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Image: China Syndrome: {This part did not copy: Brief descriptions, plus EPS and RS rankings for}: ASTT, ACH, ASIA, CEO, CEA, CHL, SNP, ZNH, CHU, CYD, CHINA, HNP, JCC, NTE, NTES, PTR, XING, SINA, BYH, SHI, SOHU
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Two weeks ago, Halter's firm launched the U.S. China Index. The index is comprised of 22 stocks, most based in mainland China and all doing the bulk of their business on the mainland.
It includes several market leaders. China Yuchai (CYD), which owns the bulk of Chinese diesel engine maker Guangxi Yuchai Machinery, has surged more than sixfold year to date. Sohu.com (SOHU), a leading Chinese Internet portal, has run up more than fivefold.
For now, the index can be watched — but not bought — by keying in USXC on Reuters and other wire services.
A spokesman for the American Stock Exchange, which trades exchange-traded funds (ETFs) for the S&P and Nasdaq, said the Amex offers Hong Kong and Taiwan index funds, but nothing that shadows China-based, U.S.-traded American Depository Receipts (ADRs). With investors reluctant to tackle the uncertain climate and arcane regulations of foreign exchanges, demand has surged for Western means to capitalize on China's growth.
Some mutual fund firms have jumped on the bandwagon. U.S. Global Investors' China Regent Opportunity Fund has vaulted 55% this year. The fund consists entirely of China-based companies, most from industries often considered old-economy laggards. Those include mining, metal and chemical stocks.
U.S. Global Investors Chief Investment Officer Frank Holmes sees multiple trends at work in China. Already armed with the fourth largest GDP in the world, the country has embarked on a series of policy and infrastructure efforts to jump-start the largely forgotten rural parts of the country, where 800 million Chinese live. China also has become the world's largest direct recipient of foreign investment. Warren Buffett, known as a risk-averse investor, surprised Wall Street when he plunked heavy dollars into PetroChina (PTR), the country's national petroleum company.
Meanwhile, China has a voracious appetite for raw materials.
"They need oil, copper and steel to build all this," said Holmes. "Steel prices especially have gone through the roof. All of our waste is their product."
Demand for excess materials has fueled huge growth for firms like Schnitzer Steel. Via joint ventures and its own operations, the Portland, Ore.-based scrap steel firm has found its sweet spot, suppin error scrap to China as fast as it can.
"Scrap is an international commodity, with a strong correlation between supply and demand," said Barry Rosen, Schnitzer's chief financial officer. "There's a finite quantity of it — you can't just mine it. So when there's an increasing demand for scrap, prices move, and China's the largest steel producer in the world, by a factor of two."
Many risks remain. Most of China's companies are wholly or largely state owned, notes Mark Mobius, president of Franklin Templeton's Templeton Emerging Markets Fund and the Templeton Developing Markets Trust. So a shift in China's economic policy makes everyone highly vulnerable.
At China's banks, most state-owned, 30%-40% of loans are non-performing. China hopes the nation's huge savings tendencies can cover those loans. But the government may end up bailing out banks.
"There's also the political risk," Mobius said. "Hard-liners could say, 'Hey, we don't like what's going on here' and decide to change things. Fortunately, that possibility is becoming more and more remote. Too many people are doing very well as a result of what's going on."
Also, financial reports in a developing nation like China may not be as accurate, complete or timely as those of U.S. companies. Some firms, like China Yuchai, release results once a year.
Then there are the same old risks you'll find in any company. Internet portal NetEase.com (NTES) missed profit views last week and watched its once highfin error stock plunge to 36% off its high. The government had cracked down on porn funneling through NetEase's portal.
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