Could be some good ss possibilities here -vbg-
Emerging Ways to Invest In the Wild, Wild East
Some Pros Tout Buying Chinese Stocks Directly, But Risks Are Immense
By JEFF D. OPDYKE and LAURA SANTINI
Staff Reporters of THE WALL STREET JOURNAL
March 9, 2005; Page D1
Up until now, American investors wanting to profit from China's
explosive growth largely have concentrated on the relatively small
lot of Chinese stocks that trade on U.S. exchanges. But some
professional investors are now pushing a more direct, and much
riskier, approach: buying shares of companies that are listed on
local Chinese stock markets.
Advocates of this strategy -- mostly hedge funds and mutual-fund
managers -- are convinced the best opportunities lie in the smaller,
entrepreneurial Chinese companies that trade on the exchanges in
Hong Kong and Singapore -- and the less-regulated exchanges in
Shanghai and Shenzhen. The most bullish tout the investing
environment as comparable with what America represented a century
ago, a risky place but an opportunity to invest early and for the
long haul in an emerging economic giant.
This option of buying Chinese stocks directly, or buying funds that
specialize in them, raises a broader question: For investors who
want some exposure to one of the world's fastest-growing economies,
what is the best way to play China? The answer depends in large part
on how much risk an investor is willing to accept.
To date, Americans have largely invested in China-focused mutual
funds, as well as American depositary receipts, the domestically
listed shares of individual Chinese companies. More recently,
another option emerged: China-focused exchange-traded funds, or
ETFs, such as the PowerShares Golden Dragon Halter USX China
Portfolio, which tracks an index comprised of U.S.-listed Chinese
stocks. These options come with some built-in protections because
American markets are so heavily regulated -- and they offer
diversity.
Investing directly in Chinese stocks is a significant departure from
all this. While Wall Street firms aren't broadly pitching this
approach -- after all, it's hard enough to pick stocks domestically,
much less in a country with nascent regulatory and accounting
practices -- they are increasingly offering such opportunities to
wealthy clients. J.P. Morgan Chase & Co. provides access to the
Jayhawk China Fund, a hedge fund that invests almost solely in
Chinese shares generally unavailable on U.S. markets. Morgan Stanley
has a relationship with Doric Capital, a Hong Kong firm that has a
hedge fund investing in small-cap Chinese stocks. In addition, a
variety of brokerage firms based in Hong Kong and Singapore provide
individual U.S. investors the opportunity to buy Chinese stocks that
aren't available in U.S. markets.
The risks are immense. Chinese stock markets are home to many young,
unproven companies that are susceptible to wild cycles of hype and
disillusionment. After a fivefold increase from March 2000 to June
2001, for instance, Shanghai's index of so-called B shares -- those
legally available to foreigners -- has fallen more than 60%.
Financial-reporting standards are lax at best. China's currency
doesn't yet trade freely on world markets, and its stock markets are
especially vulnerable to social, economic and political upheaval.
Just this month, Chinese Premier Wen Jiabao called for a sharp
reduction in China's investment growth this year, a sign the
government is fighting to keep the roaring economy from spinning out
of control.
"Just because some place is expected to grow doesn't mean that it
does," says Jack Caffrey, equity strategist at J.P. Morgan Private
Bank, citing Argentina and Russia as economies that were emerging
alongside the U.S. in the 19th century. "History is fraught with
examples where if you're not careful it doesn't always pan out."
The China bulls counter that China's experiences today aren't so
different from what European investors faced when considering
putting their money to work in a much younger America. At the turn
of the 20th century, "America was a horrible place," says Jim
Rogers, the investor-turned-author who is a strong proponent of the
coming China century. "We had no rule of law. We'd just come off a
Civil War. Presidents were being assassinated. And we'd had 15
depressions in the 19th century alone."
---
INVESTMENT OPTIONS
From the generally safest to the riskiest options, here are some
ways Americans can invest in China, beyond so-called A shares, which
for the moment are only available to Chinese citizens.
Category Comment
Mutual funds and exchange-traded funds (ETFs) U.S. based. Own
baskets of investments. Some funds, like Matthews China Fund,
generally focus on Hong Kong and Chinese markets; ETFs like the
PowerShares Golden Dragon Halter USX China Portfolio track indexes
comprised largely of ADRs (see below).
American Depositary Receipts (ADRs) Individual Chinese stocks that
are listed on U.S. markets and exchanges. Companies include Huaneng
Power International and China Life Insurance.
H shares and Red Chips Hong Kong-listed stocks of Chinese
companies, such as vegetable grower China Green and supermarket
chain Lianhua. They're under the eye of Hong Kong's securities
regulators.
B shares The stocks listed on the Shanghai and Shenzen exchanges,
such as property developer China Vanke. Much riskier and with less
regulatory oversight.
---
Below is a closer look at the expanding array of options for
investing in China, starting with what many experts consider to be
the least risky approach and ending with the riskiest:
• Mutual funds and ETFs. Mutual funds and ETFs own broad baskets of
Chinese stocks, offering investors diversity and thereby mitigating
the risks of owning any one particular stock. Most actively managed
funds own a mixture of ADRs, Hong Kong-based companies and Hong Kong-
listed Chinese companies. A smaller percentage own B shares of
Chinese companies, which trade in mainland stock markets. ETFs, on
the other hand, typically track an index of China-related stocks.
Mutual funds with a big exposure to Chinese stocks in Hong Kong and
China include the Matthews China Fund, the Guinness Atkinson China &
Hong Kong Fund, and the U.S. Global Investors China Opportunity
Fund. During the past three years, these funds have posted
annualized returns of 16.2%, 18.0% and 18.5%.
The downside to mutual funds is that they're so broadly invested
that a big price jump in a smaller, more rapidly growing company can
be lost inside a big portfolio. Though actively managed funds often
lag behind index funds in more efficient, developed markets like the
U.S., active management can sometimes make a big difference in an
inefficient market like China.
The Matthews China Fund, which invests in local Chinese stocks, is
one that has performed relatively well in its short history. In the
more than three-year span in which the Shanghai B-share index is off
more than 60%, the Matthews fund is up a cumulative 39.4%. "We
really think the smaller companies in China that are successful are
the more interesting investments," says Mark Headley, portfolio
manager of the Matthews Asian Funds in San Francisco.
• ADRs. ADRs and other U.S.-listed Chinese stocks that trade on the
New York Stock Exchange and the Nasdaq Stock Market are relatively
easy to buy and sell, given that they trade in U.S. markets and in
U.S. dollars. Moreover, those that are listed must abide by U.S.
generally accepted accounting principles.
That's a big plus: Nearly three-quarters of respondents in a 2004
survey of Asia-Pacific accounting standards gave China's accounting
practices a grade of C or D. Comments noted that "the accounting
standards are not strictly followed," that "outsiders can hardly get
the true message about the running of the company," and that "the
existence of insider trading, lack of regulation and a generally
opaque corporate culture" are commonplace. Yxa Bazan, a vice
president with J.P. Morgan's ADR Group, says that for individual
investors, ADRs "are just easier."
On the downside, the ADR universe is fairly limited -- only about 40
Chinese companies are included on J.P. Morgan's adr.com. Also, in
many cases, investors have bid up the shares. Many "trade at two or
three times what they otherwise would if they traded in China," says
Kent McCarthy, who runs the Jayhawk China Fund, which is based in
Prairie Village, Kan. Some China specialists also argue that many
ADRs represent old-line, formerly state-owned industries and don't
have the same degree of growth potential as do the smaller companies
that are expected to lead China's expansion.
• H shares and Red Chips. H shares and so-called Red Chips are
Chinese companies whose stocks trade in Hong Kong. (The former are
issued by Chinese-incorporated companies; the latter by Hong Kong-
incorporated ones.) They tend to be more stable, provide greater
corporate governance and financial reporting, and fall under the
jurisdiction of Hong Kong's securities regulators.
---
CHINA ONLINE
These Web sites are good starting points for researching potential
Chinese investment opportunities.
Web Address What You'll Find
irasia.com Broad access to annual reports, financial filings and
general news about regional companies.
listedcompany.com Much of the same, but also allows you to monitor
current and recent IPOs.
hkex.com.hk Home page of the Hong Kong Stock Exchange. Retrieve
complete list of Chinese H shares and Red Chips; performance data;
stock charts; company announcements and regulatory filings. Also has
links to the Shanghai and Shenzhen stock exchanges.
ses.com.sg Home page of the Singapore Stock Exchange. Convenient
links to company profiles and market data. Investors can register
for free research from local brokerage firms such as Kim-Eng
Securities and DBS Vickers.
sse.com.cn Home page of Shanghai Stock Exchange. Click on English
version, top right. Posts data on the B-share market.
shkonline.com, boom.com, kimeng.com All three sites feature market
data for investing in the region, including China.
Source: WSJ research
---
For investors willing to take on the significantly higher risks of
going overseas, brokerage firms such as Kim Eng Securities in
Singapore, and SHK Financial Group and Boom Securities, both in Hong
Kong, will open accounts for American investors -- often online or
via e-mail. You will have to wire the money into the account, or
deposit it in person if you are traveling in the region. All offer
online trading and provide access to Chinese stocks that trade in
Singapore and Hong Kong, home to more Chinese-company listings than
any other exchange outside mainland China. Some give investors
access to the B-share market directly in China, and many provide
research reports on Chinese companies.
There are other ways to research these stocks. There are a variety
of Web sites that provide access to Chinese-company financial
statements in English, including annual reports -- which are
typically audited -- and press releases. The Hong Kong Stock
Exchange site, in particular, has an abundance of data and links to
corporate reports. (See accompanying chart.)
But are H shares and Red Chips safe for small investors? Romeo
Dator, portfolio manager for U.S. Global Investors China Opportunity
Fund, says that individuals should stick to mutual funds because
they'll get the diversity they need to mitigate the company-specific
risks of owning individual Chinese stocks. "However, if individuals
really do want to buy Chinese stocks on their own," he says, "they
should be doing it in [H shares and Red Chips] in Hong Kong."
• Hedge funds. Hedge funds have their own special risks, let alone
the risks of investing in a volatile market like China: They are
lightly regulated and can pursue far more risky strategies than do
mutual funds and ETFs, including short-selling stocks, in which the
investor bets the share price will fall.
Moreover, hedge funds require big-dollar investments of often
$100,000 or more, are available only to wealthy investors, and
charge not only management fees of typically 1% of the assets, but
they also often keep as much as 20% of the profits in a performance
fee. Some hedge funds, like the Jayhawk China Fund, are U.S.-based.
Other hedge funds are based in Hong Kong and invest in publicly
traded shares exclusively in Hong Kong and mainland China.
• B shares. B shares represent the Shanghai- and Shenzhen-listed
companies that foreigners are allowed to buy. These shares are
priced in Hong Kong and American dollars but aren't subject to the
same degree of regulatory scrutiny as shares trading in Hong Kong,
Singapore and the U.S. Some Asia-based stock experts liken B shares
to penny stocks. That isn't universally true -- although they are
among the riskiest options for individual investors because they are
more loosely regulated, accounting standards are more lax, and the
shares can be more difficult to trade. Yet this is the place where
investors will find many of the small entrepreneurial companies that
could benefit from China's expansive growth.
• A shares. These represent the largest lot of domestic Chinese
companies, but are available only to local Chinese investors. Yet
the Chinese government is slowly changing that. Brokerage firm UBS
AG, for example, is allowed to purchase up to $800 million of A
shares on behalf of foreign retail customers. UBS is exploring plans
to eventually offer clients of its U.S. and European private banks
access to A shares, though the firm is offering them only to
institutional investors at the moment.
Meanwhile, Nikko Asset Management in Japan is poised to launch next
month the first mutual fund that will offer foreigners direct access
to China's A shares. Though open only to Japanese investors, Nikko
hopes to offer the fund to U.S. and other foreign investors later
this year. Once available, the A shares are likely to represent the
same level of risk as the B shares. |
