Chinese Stocks, Global Laggards, May Draw Overseas Investors
Nov. 8 (Bloomberg) -- China's stocks, among the only ones to miss a 20-month global rally, may reward investors prepared to venture into the nation's partially opened equity market.
``We see value emerging in a range of stocks,'' said Chris Ruffle, manager of the China A-Share Fund of Martin Currie Investment Management Ltd. in Edinburgh, Scotland. ``There's an advantage in going in when the market is down. Prices are cheaper.''
Ruffle's $80 million fund has gained 18 percent since its inception a year ago, beating a 5.8 percent drop in prices of Shanghai-traded shares, according to data compiled by Bloomberg. He holds stocks such as Beijing Yanjing Brewery Co., China's third-largest beermaker, and plans to invest $30 million more in the market.
Funds such as Martin Currie and banks including UBS AG, Citigroup Inc. and Morgan Stanley have received approval from the government to invest $3 billion in shares and convertible bonds since China opened its $460 billion of domestic equities to selected overseas investors in May 2003. For the first time, outsiders can buy yuan-denominated A shares, which account for 99 percent of the stock traded on China's two exchanges in Shanghai and Shenzhen.
The Qualified Foreign Institutional Investor program now has 27 approved investors, each restricted to an investment limit agreed with the government. Zurich-based UBS, Europe's largest bank, was the first to be approved and holds the biggest quota, at $800 million. Citigroup is second with $400 million.
Scandals, Lending Curbs
So far, the inflow hasn't revived the market. China's indexes are the only ones among 60 national benchmarks tracked by Bloomberg that haven't gained since March 2003, when Morgan Stanley Capital International Inc.'s World Index began a 57 percent advance. The Shanghai and Shenzhen composite indexes are down 12 percent and 22 percent respectively in dollar terms.
Financial scandals at companies such as Guangxia (Yinchuan) Industry Co., fined last year for China's biggest securities fraud, helped drive the declines.
Investors have also been spooked by government efforts to slow the economy, which grew 9.3 percent last year. China curbed bank lending to selected industries in May and last week raised interest rates for the first time in nine years.
Undeterred, Martin Currie will apply for a QFII license ``very soon,'' Ruffle said. Up to now, the company has bought stocks under agreements with UBS and other banks to use part of their quota. Licensees must have at least $10 billion in assets and $50 million to spend. Martin Currie manages $13.9 billion globally, according to its Web site.
Asking for More
Credit Suisse First Boston, the securities division of Credit Suisse Group, has applied to increase its $50 million investment quota by $700 million, said Josephine Lee, a spokeswoman in Hong Kong.
UBS also plans to ask for a higher limit, said Nicole Yuen, the bank's head of China equities in Hong Kong. ``We have more client demand than our quota,'' she said.
The lure is a country of 1.3 billion people in which urban disposable incomes have surged 27-fold in the past 25 years, according to the National Bureau of Statistics. Increasing wealth is driving a consumer boom and boosting corporate profits. Even with more interest-rate increases to come, the economy is likely to grow 8.4 percent in 2005, according to the median forecast of eight economists surveyed by Bloomberg.
Liu Yang, who oversees $1.8 billion as managing director of Atlantis Investment Management Co. in Hong Kong, said she's also planning to invest $30 million in yuan shares.
Focus on Retailers
``We may pick up a few retailers who are good local brand names'' as well as port and power operators, said Liu. Stocks she likes include Yibin Wuliangye Co., a unit of Wuliangye Group, China's largest spirits maker, and China Yangtze Power Co., owner of the world's biggest hydropower project.
China's domestic market comprises 868 Class A and B stocks traded in Shanghai and 574 in Shenzhen, a city next to Hong Kong. The 109 dollar-denominated B shares were created in a previous move by China to allow overseas investors restricted participation in its capital markets.
The A-share menu offers a broader choice than the 94 ``H shares'' and ``red chips'' floated in Hong Kong by mainland companies such as China Mobile (Hong Kong) Ltd., the world's largest cell-phone operator.
At the same time, investing in A shares means taking the risk not only of scandals and official efforts to steer the economy but also of the government's plans to divest as much as $300 billion of stakes in state companies.
`Critical Problem'
At least twice in three years, China has announced plans to start converting its holdings into traded shares, only to retreat as prices slid on investors' concerns the market would be swamped with new stock.
``The overhang of state shares is a critical problem,'' Martin Currie's Ruffle acknowledged. Other political and regulatory risks include a ``lack of corporate governance and disclosure,'' he said.
China's domestic stocks are also expensive compared with alternatives. Shanghai-listed A shares trade at 27 times past earnings, exceeding the 15-times average for the Hang Seng Mainland Composite Index in Hong Kong and 18 times for the 33 companies in Hong Kong's main benchmark, the Hang Seng Index.
``The main problem is the high valuation and quality of the companies,'' said Flavia Cheong, who manages about $3.3 billion at Aberdeen Asset Management in Singapore. ``We haven't found any stocks that meet our price or quality criteria.''
Aberdeen will keep looking, though. The size and potential of China's market makes it too big to ignore, Cheong said.
``Everything in China is interpreted negatively,'' said Ruffle of Martin Currie. ``If the growth is high, it's too high. If it's slow, we're about to have a hard landing. I wouldn't be too pessimistic about this market.''
APPROVED QFII INVESTORS
Limit ($m)
UBS AG 800
Citigroup Inc 400
Morgan Stanley 300
Nikko Asset Management 250
Deutsche Bank AG 200
Bill & Melinda Gates Fnd 100
HSBC Holdings Plc 100
ABN Amro 75
Barclays Bank 75
BNP Paribas 75
Lehman Bros Int (Europe) 75
Merrill Lynch 75
Standard Chartered 75
CSFB 50
Daiwa 50
Goldman Sachs Group Inc 50
Hang Seng Bank 50
ING 50
J.P. Morgan & Chase Co. 50
Nomura Holdings AG 50
Societe Generale 50
Calyon *
Dresdner Bank *
Fortis *
Invesco *
Power Corp. of Canada *
Templeton Asset Mgmt *
* awaiting quota
To contact the reporter for this story:
Janet Ong in Shanghai at jong3@bloomberg.net
To contact the editor responsible for this story:
Teo Chian Wei in Tokyo at at cwteo@bloomberg.net.
Last Updated: November 7, 2004 11:01 EST
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