Commentary: The China stampede
William Pesek Jr. Bloomberg Monday, December 22, 2003
Investors can no longer afford to dismiss China." That view, voiced by Geoff Lewis, a financial services manager at JF Asset Management in Hong Kong, encapsulates what will probably be the biggest market story of 2004: investors scrambling to China.
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Until now, foreign companies have been rushing to the world's most populous nation, but many institutional investors haven't. Their wait-and-see approach to the most exciting economy anywhere reflects concerns about China's underdeveloped financial system - its shaky banks, lack of transparency and questions about social stability.
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Such caution is becoming less of a luxury after last week's headline-grabbing initial public offering by China Life Insurance. More than 27 times subscribed, the $3 billion IPO was a watershed event. No longer can professional investors approach China as warily as they have. They must be there or answer to shareholders.
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It is China's version of the "Jeff Vinik Effect" that pervaded stock markets in the 1990's. And here is where the trouble begins. Vinik, as some readers may recall, used to manage Fidelity Investments' flagship Magellan Fund. He grew bearish on technology stocks in 1995 and loaded up on bonds. The bond market soured, technology shares boomed and Vinik resigned in May 1996 as Magellan's performance plummeted.
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The episode became all too common for skeptics of the dot-com era. Even if they didn't buy into the stock mania coursing down Wall Street, fund managers had to hold their noses and hold shares in dodgy companies. Those who dared question the wonders of the New Economy and its creative accounting techniques were dismissed as dinosaurs and pushed aside.
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That is exactly what is likely to happen with China. The China Life IPO was the world's biggest this year and served as a huge advertisement for Asia's second-biggest economy. Its success augurs well for Ping An Insurance, China's second-biggest life insurer, and for China Construction Bank, which are both planning IPOs worth a combined $6.5 billion next year. It also could open the floodgates - both in terms of encouraging more companies to float shares and pulling more investors to China.
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It is important to remember, though, that investing in China isn't a no-brainer. Even with its explosive growth, the equity markets are a work in progress. Its bourses are fragmented, at times illiquid and vulnerable to speculative mania. There is little correlation with China's growth rates and the performance of its equity markets.
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In theory, making money in China should be easy. With an economy growing at least 7 percent, cheap labor and 1.3 billion people hungry for capitalism, it has been nirvana for multinational companies. Rising demand there is driving commodity markets and pulling in more and more Asian goods.
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Yet large numbers of institutional investors are only now clamoring to China. Many have gotten their feet wet; few have jumped in wholeheartedly, worried that China's promise would again turn out to be a temptress. That is changing - even Warren Buffett, a man not known for risky international bets, is there. His 13 percent stake in PetroChina, the country's biggest oil producer, has raised many eyebrows.
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So has this year's rally in the so-called H-share market, comprised of mainland Chinese companies whose shares are listed in Hong Kong. Those shares are up 117 percent this year. And "red chips," subsidiaries of Chinese companies listed in Hong Kong, are up nearly 41 percent this year.
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Is there a China bubble afoot? Maybe. Long-time Asia observers also are wondering if China is ready for a huge inflow of hot investment - or whether investors are ready for what they'll find there. The risk is that the "buy-anything-China" dynamic in markets will push some investors to put money in untested and potentially dodgy companies.
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"What disturbs me the most," the fund manager Marc Faber wrote to clients last month, "is that every magazine or paper I open has some favorable comments about China's economic development and China's positive impact on commodity prices. And that there has been widespread speculation in just about any stock that has something to do with China."
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In some ways, China has become the economic equivalent of sex - it sells. If you want headlines and investors calling for prospectuses, stick the word "China" in the name of your company or product. It is not unlike the rush to attach ".com" to the end of anything four years ago.
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There is even a role in all this for Henry Kissinger, who is again making introductions in China. Not by brokering talks between government leaders, as he did in 1972, but between U.S. investment bankers looking for a role in China's booming markets and officials in Beijing.
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As Bloomberg News reported last week, the former U.S. secretary of state is helping J.P. Morgan Chase lobby for a role in managing a $5 billion overseas initial public offering by a Chinese financial institution. Kissinger, a member of J.P. Morgan's international advisory board, last month accompanied bigwigs of the No. 2 U.S. bank on a visit with executives of China Construction Bank.
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Kissinger was once quoted as saying that power was a great aphrodisiac. It seems that China, too, is becoming an aphrodisiac of sorts for foreign investors.
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Bloomberg News
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