Stock Investors Play The China Card
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."
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, which owns the bulk of
Chinese diesel engine maker Guangxi Yuchai Machinery, has surged more than
sixfold year to date. Sohu.com, 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, 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, supplying 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 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 missed profit views last week and watched its once
highflying stock plunge to 36% off its high. The government had cracked down
on porn funneling through NetEase's portal.
Investor's Business Daily 11-03-03 |
