FT: Investing in Chinese equities
- From: Papadillos <papadillos@xxxxxxxxxxx>
- Date: Fri, 29 Feb 2008 17:38:53 GMT
Investing in Chinese equities
Financial Times
Published: February 19 2008 12:10
Burton Malkilel Q&A
Few markets have grown as quickly as China¹s A-share market - many fear to
overvalued levels. The Shanghai Composite index surged 130 per cent in 2006
and almost 100 per cent in 2007, and the Shanghai market alone has a market
capitalisation of nearly $3,000bn.
Including the Shenzhen stock market, foreign currency-denominated B shares
and Chinese shares listed in Hong Kong, or H shares, the total market for
Chinese shares is worth about $4,200bn.
However, 2008 has started poorly for initial public offerings in China and
Hong Kong compared with the record year of 2007, suggesting Chinese shares
are becoming more correlated to the volatility in global markets wrought by
fears of US recession, inflation, and higher oil prices.
While China continues to gradually liberalise flows of capital entering and
exiting the mainland, it remains conservative, leaving international
investors few options to gain exposure to Chinese companies.
Burton Malkiel, economics professor at Princeton University, author of the
classic investment study A Random Walk Down Wall Street and leading advocate
of the efficient market hypothesis, proposes several ways international
investors can access the Chinese stock market in his new book From Wall
Street to the Great Wall.
However, Professor Malkiel warns: ³If you think Chinese investments are the
way to get rich quick, with all gain and no pain, you may be in for a rude
disappointment.² Read an excerpt from the book.
Professor Malkiel believes most investors will be better off participating
in Chinese investments through mutual funds and that exchange traded funds
(ETFs) dedicated to China are particularly attractive. He answered your
questions on Friday, February 29.
Disclosure: Professor Malkiel is chief investment officer for Alpha Shares,
which along with S&P, provides the index for the HAO and TAO funds mentioned
below. He also has a small holding in the Templeton Dragon Fund (TDF).
.............................................................................
..........................................
Given the nature of the Chinese market, would you agree with the statement
that the Chinese stock market is much less efficient than, say, the US
market? If so, are there opportunities for sophisticated investors to take
advantage of?
Clement Loh, Toronto
Burton Malkiel: The local Chinese stock market the so called A-share
market is not an efficient market. Managed equity funds tend to outperform
the market averages and a number of anomalies characterize that market.
However, the Chinese stock market is quite complicated. There are shares of
Chinese companies that are also traded in Hong Kong. This is called the
H-share market. In addition, shares trade in New York (N-shares), London
(L-shares), Singapore (S-shares), etc. I find that the markets that are open
to international competition (that is, markets other than the A-share
markets) do tend to be more efficiently priced.
One anomaly that illustrates the inefficiency of the A-share market is that
when some companies trade both in the Shanghai A-share market and in the
Hong Kong in the H-share market (as well as in the United States N-share
market) the prices in Hong Kong and New York tend to be the same, but the
prices of the same shares typically trade at premiums between 50 and 100
percent in the A-share market. These inefficiencies, however, do not present
an opportunity to international investors unless one has one of the limited
number of QFII quotas. The A-share market is not generally available for
either buying or selling. The market is essentially restricted to Chinese
nationals living on the mainland. Local Chinese institutions do take
advantage of unsophisticated investors and that is why managed funds in
China tend to outperform the market indices.
.............................................................................
..........................................
If the renminbi is going to appreciate by least 10% per annum against the US
dollar in the next few years, wouldn¹t that in itself be a reason to have an
exposure to China?
Robert King, Malaysia
Burton Malkiel: I believe the Chinese Yuan (RMB) is the most undervalued
currency in the world today. A good example of that undervaluation is the
London Economist¹s ³Big Mac² index. The London Economist¹s prices a Big Mac
in nations all over the world to estimate purchasing power parity. A Big Mac
sells for $3.00 in New York, over $4.00 in London, and $1.31 in Shanghai.
I believe the Yuan will continue to appreciate against other currencies. The
Chinese government is not letting the Yuan float freely, but it has allowed
an annual appreciation during the past two years of more than 5 percent
against the US dollar. I believe there will be upward pressure on the Yuan
for many years to come and I believe that the undervaluation of the currency
is one of the many reasons why investors should have some exposure to
Chinese equities.
.............................................................................
..........................................
How likely is a major downward correction (>30%) in the China equity markets
in the next three years? Can the Chinese government do anything to prevent
or mitigate this?
Vincent Siang, Beijing, China
Burton Malkiel: The Chinese stock market is one of the most volatile in the
world. It is even more volatile than the Brazilian stock market. A major
correction is not only possible, but likely in any three year period. The
Chinese government can take some actions to mitigate the volatility. For
example, they can restrict the number and amount of new issues, they can
release government owned shares to the market more gradually, etc. But I do
not believe that the government can prevent market corrections.
.............................................................................
..........................................
Will hot foreign money push up the market first, and then run away, as
happened during the Asian crisis in 1997?
Andrew
Burton Malkiel: Foreign money can move quite rapidly into and out of
different countries. Having said that, however, there are two differences in
the Chinese situation from those that existed during the Asian crisis of
1997. First, China¹s currency is tightly controlled. Second, unlike many of
the Asian currencies in the 1990s, the Chinese currency, in my judgment, is
undervalued. If markets were completely free, I would expect that a run on
the Chinese Yuan would be one of the least likely events in international
capital markets, because the Yuan is so undervalued and China has about $1.5
trillion in reserves.
.............................................................................
..........................................
Given the many distortions in China¹s stockmarkets - e.g. small free floats,
widespread expectation of government intervention if indices drop too low,
low standards of corporate governance - to what extent can investors
actually make informed decisions about value? And what are they actually
buying when they buy a Chinese stock?
NRT, Beijing
Burton Malkiel: There is no question that transparency of Chinese accounting
standards, standards of corporate governance, etc., are problematic.
However, shares traded in Hong Kong and in other international capital
markets must conform to international accounting standards and Hong Kong
listed companies have somewhat better corporate governance. Even so, buying
Chinese stocks is risky. This is why in my book, From Wall Street to the
Great Wall, I recommend a mixed strategy. Perhaps half of one¹s exposure to
China should come from buying Chinese companies¹ stocks that are traded in
international markets and the other half by buying international companies
with better accounting and governance standards, but whose business is
importantly affected by the growth of China. This indirect strategy (buying
companies traded in international markets and domiciled abroad that benefit
from China) should include an important exposure to commodities. China has
had a voracious appetite for raw materials and I believe that will continue
as China continues to grow.
.............................................................................
..........................................
I believe the Chinese government will slowly but surely lift controls on the
renminbi. What is the best way to deriving benefit from the eventual removal
of exchange controls? I have a significant investment in the Power Shares
Golden Dragon fund. Drew D Pettus, Bellingham, Washington
Burton Malkiel: As indicated above, an exposure to the better governed, more
transparent Chinese companies traded in international markets, will tend to
benefit the investor as the Chinese Yuan appreciates.
.............................................................................
..........................................
The Chinese stock market seems to show excessive volatility intraday. Is
this a true observation and if so why does it occur?
Chris Stewart, Cape Town
Burton Malkiel: The Chinese market does show excessive volatility, not only
intraday, but also from week to week and year to year. This is especially
true of the A-share market and this does indicate a lack of efficiency.
.............................................................................
..........................................
With its swollen foreign exchange reserves, it wouldn¹t make much sense for
China to woo portfolio investors, as this would only add upward pressure to
its appreciating currency. Is it under any obligation to liberalize its
capital market?
Umnuay Sae-Hau, Bangkok
Burton Malkiel: China is not obligated to liberalize its capital market and
free its currency. However, there are considerable political pressures from
both the US and the European Union to have them do so. For example, during
the recent debate between presidential candidates Barack Obama and Hillary
Clinton, Clinton again repeated the often heard claim that China is a
currency manipulator and must let its currency appreciate more rapidly.
.............................................................................
..........................................
Do you think the premium A share market is enjoying now compared with H
share market is reasonable considering the liquidity in A share market?
Jessica Zhang
Burton Malkiel: I do not think the premium in the A-share market over the
H-share market is justified. It violates ³the law of one price.² There is no
reason to think that China Life should sell for double the price in Shanghai
than it does in Hong Kong. The only reason for this is that Chinese citizens
cannot exchange their Yuan for Hong Kong dollars and buy China Life in the
Hong Kong market. Moreover, currency restrictions prevent an arbitrage
between the two markets.
.............................................................................
..........................................
Is there any correlation between the Olympics and Chinese stocks?
Johnny Zhang, UK
Burton Malkiel: I think there could be a correlation between the Olympics
and the Chinese stock markets. I do not make short term predictions about
any stock market, but I do believe, as we get closer to August 2008, there
will be increasing publicity about the Olympics and possibly considerably
more international interest in China and in Chinese stocks.
.............................................................................
..........................................
Do you think it would better to own a few Chinese ADS/ADRs traded on the
NYSE for two to three years, or buying the China-focused ETFs for the same
period?
Angelo Park, Chicago
Burton Malkiel: I believe that the Hong Kong market and the market for
Chinese stocks in New York are reasonably efficient. I do not find that
managed funds investing in H and N shares do better than some of the indexed
ETFs. I therefore favor low cost ETFs that give investors a Chinese
exposure. Such ETFs include: FXI, an index fund that tracks the FTSE/Xinhua
large-capitalization index; GXC, an ETF of H and N shares; TAO, an ETF of
Chinese property development companies; and HAO, an ETF of Chinese small
capitalization companies. It is also the case that recently some closed in
China funds have been selling at substantial discounts. If a fund such as
the Templeton Dragon Fund is selling at a 20 percent discount, this would be
a useful way of accessing a portfolio of H-shares. I would not, however, buy
the ETF CAF, even though it does trade at a substantial discount. This ETF
invests in A-shares, which I believe are overvalued relative to H-shares.
.............................................................................
..........................................
I invested £5000 in November in a unit trust which has now lost £1300. This
was previously the best performing China fund sold in the UK. Should I sell
or hold?
J Philpott, Dymchurch, Kent, UK
Burton Malkiel: Because of the enormous volatility of Chinese stocks, I do
not recommend that any investment be made at a single time. If one had £5000
to invest, I would much prefer to put £1000 into the market every one or two
months, rather than investing it all at once. Investing it all at once runs
the risk of putting one¹s investment into the market at a peak in market
prices. I also believe that investors in Chinese stocks should plan on a
very long holding period. Over the next five to ten years, I believe even an
investment made in November 2007 will prove to be profitable.
.............................................................................
..........................................
I have seen numerous articles on Bloomberg about maids in Shanghai giving up
their day-jobs to trade stocks. Is this not the surest sell signal there is?
Steven Dutaut, London
Burton Malkiel: There is no question that the A-share market in Shanghai and
Shenzheng is extraordinarily speculative and inefficient. This is why I do
not recommend a purchase of Chinese A-shares.
.............................................................................
..........................................
Significant numbers of companies traded on London¹s Alternative Investment
Market claim to have significant exposure to China, especially the growth of
private, entrepreneurial companies rather than giant industrial concerns
subject to constant state meddling. How viable do you think these companies
are as a way of investing in China? Are they truly China proxies, or do they
just move in lock-step with other UK small-caps (and right now, that¹s
down)?
Jonathan Eley, UK
Burton Malkiel: As indicated above, I do believe that an indirect strategy
of purchasing non-Chinese companies that benefit from China¹s growth is a
useful low risk strategy for investors. These companies could be small
entrepreneurial companies or even large international firms such as General
Electric, LVMH, and BHP Billiton. It is also the case that there are a
number of private smaller entrepreneurial Chinese companies, where
government ownership tends to be low or non-existent. As indicated above,
these kinds of companies can be accessed through the HAO exchange traded
fund. Recently, all markets have been under stress and have tended to move
together. In the long-run however, I believe investors will be rewarded by
having some direct and indirect exposure to the growth of China.
http://www.ft.com/cms/s/2/358a8b30-e106-11dc-a302-0000779fd2ac.html
.
- Prev by Date: Re: BTP.V HALTED BY REGULATORY SERVICE PENDING NEWS
- Next by Date: Re: BTP.V HALTED BY REGULATORY SERVICE PENDING NEWS
- Previous by thread: BTP.V Beartooth Platinum Hits Huge High Grade Strike Next to Stillwater Mines Platinum Mine
- Next by thread: Mid-Day Performers Fri 02/29/08
- Index(es):
Relevant Pages
|
Loading
