China - Main index touching 8 year lows, is this the moment to enter?

Quote from optionpro007:

Thanks Steve.

What does this mean to the "B and H" shares ?
Are they well priced or seriuosly undervalued ?
More...

Well they used to be undervalued, but the discount has narrowed substantially over the last year or two, so many now seem to be quite fairly priced.

Naturally A and H/B prices will eventually converge.

Two things that would speed it up would be if they allow A shares to be shorted (not going to happen), or mainland money is allowed to freely travel outside the country - in which case it's first port of call will likely be HK. This flow has already started, but it's only a trickle compared to the potential. Personally I wouldn't go anywhere near most of the A shares even if I was allowed to.
 
China ¨C with the main index touching 8 year lows, is this the moment to enter the market?

Part IV - Conclusion

First, thank you all for the comments posted and the healthy discussions that followed.

After an Chinese stockmarket historical summary on Part I, a brief about the regulatory framework and the companies listed on Part II, and a comprehensive view of the share categories available and who the investors are on part III, lets us finish today with some thoughts about the future of China's stockmarket and the prospects and dangers for the foreign investor as well as some suggestions.

The Future of China's Stockmarket

Although a strong and independent regulator might help matters, it is by no means sufficient. Other things are needed to ensure trading occurs on a fair basis. Firms must police themselves, motivated not only by the stick of prosecution but also by the carrot of retaining their reputation.

Pressure from civil society expressed through independent courts and an independent media is vital. Both relieve pressure on the regulator by enforcing the law and monitoring behavior. Political institutions such as the legislature, full of members ambitious to be seen to protect their constituents' rights, help to provide the necessary legal basis for regulation and diminish the executive's ability to intervene in the market. Many of these institutions (free press, independent courts, a legislature independent of the executive) are best nurtured in a liberal democracy.

While financial institutions remain state-owned, they will continue to relay, in part at least, on government support (rather than their reputations) for growth, and government officials will continue to be able to interfere in their operations.

There is nothing peculiarly "Chinese" about China's stockmarket. Its problems are tied up with the transition from a socialist to a market economy and the continued influence of an authoritarian political system: nothing more, nothing less. It is these institutions that create the challenges. Hong Kong, Taiwan and Singapore, all with rich Chinese traditions, host vibrant capitalist economies and well-developed capital markets. Institutions ¨C not culture ¨C are the issue here, and institutions, fortunately, can be reformed, given sufficient political will.

Government support for the SOEs and other state-controlled firms is being eroded, constrained and eliminated on a scale unimaginable even five years ago. Hundreds of SOEs have been closed or sold off. According to the State Economic and Trade Commission (SETC), by August 2001 81% of 63,490 small and medium-sized SOEs in existence at the end of 1996 had undergone "structural reform", most involving buy-outs by employees.

The government has agreed to strict limits on its use of subsidies (even when they are used to facilitate privatization): any subsidies that predominantly benefit SOEs will now be actionable by WTO members. It will not be allowed to award contracts to state-owned firms without a competitive, transparent and fair bidding process. Cheap financing through state-owned banks ¨C is now being constrained. State banks are now under pressure to reduce NPL (non-performing loans) and so are becoming reluctant to lend to SOEs.

The government's retreat from the market is not unlimited. The senior leadership is still committed, at least in theory, to actively supporting a group of 500 or so major state-owned conglomerates operating in sectors such as telecommunications, transport, utilities and financial services. Only a third of these firms have been listed so far, which means that the stockmarket may well continue to be used to support them.

The Government Debt

The government is spending more than it collects in tax revenues, and is running a deficit of some 3% of GDP, which it funds through issuing bonds to domestic investors. Official liabilities, mostly T-bond debt, are currently worth some 16% of GDP. This is not a problem: it is well below the generally accepted 40% of GDP danger level. However, this official debt figure is misleading. Instead, the government's implicit financial commitments should be considered. For one thing, the government will have to recapitalize the four state-owned banks. The sums involved are huge, however. The official estimate for NPLs at the end of 2001 was 25% of GDP. At present the level is under 10%.

The government will also have to pay pensions, for which the World Bank estimated an unmet liability of around 70% of GDP in 1997. The current pension liability if the government is difficult to calculate since it is still unclear how the new pension system will be funded.

Total government debt, most probably now exceeds 140% of GDP. If the economy does not continue to grow, if the generation of NPLs in the banking sector is not stemmed and tax revenues are not boosted, in 5-10 years' time the government will experience severe difficulties in meeting all its financial obligations.

China's advantages are that it is not facing a financial crisis, it is mostly insulated from financial events overseas, and that public confidence in the banking system ¨C and in the government's ability to sort it out ¨C is surprisingly resilient.

The nightmare scenario, however, involves economic growth slowing and debt expanding. If this occurs, what will the government do? One response would be to print money. This would rapidly deflate the debt, but it would cause inflation to rise and would most likely trigger social instability.

Another equally unsavory option for the government would be to cut back on spending: pensions would also be problematic in terms of its social impact. The one solution that would dovetail nicely with the shift already apparent in industrial policy would be for the government to aped up its sale if assets. There are signs that this is already occurring. Listed companies' LP shareholdings are already being sold and the sale of state shares is now a technical issue rather than an ideological one.

But privatization also augurs a massive surge in the supply of equity, and this means that the government will have to carefully nurture demand. The current ability of the market to absorb new shares is limited.

Even at its peak in 2000, the stockmarket could supply only the equivalent of 1.7% of GDP in funds.

Please see the continuation on the next post
 
China ¨C with the main index touching 8 year lows, is this the moment to enter the market?

Part IV - Conclusion

Continued from the previous post

Foreign Investors' Entry: the Prospects and Dangers

Since joining WTO in December 2001, China's financial sector has at lest started to open up on a significant scale to foreign involvement. Indeed, WTO membership portends China eventual integration into the world financial system. However, although foreign retail banks are guaranteed treatment equal with national banks by 2006, the speed of the opening of the stockmarket will be much slower.

The key provisions of the agreement, detailed in CSRC regulations issued in June 2002, are as follows.

Joint-venture securities firms (JVSFS). A foreign party may own up to 33% of the stock capital of a JVSF. These companies may, without hiring Chinese intermediaries, underwrite A-shares, and underwrite and trade B-shares, H-shares and government and corporate bonds. They cannot, however, broker or deal in A-shares on a proprietary basis.

Joint-venture fund management firms (JVFMFS). The foreign party may, again, initially own 33% of the company, a percentage which will be allowed to rise to 49% in the future. Such firms may manage funds raided in China.

Registered foreign securities companies may directly engage in B-share trading without using Chinese intermediaries.

Joint-venture securities firms

A few foreign firms are intent on setting up JVSFs. However, in general, neither side, foreign or Chinese, appears to be particularly keen on the JVSF idea. This, at first, appears strange since the size and rapid development of China's financial sector should make it an attractive target for international players. The reasons for their reluctance are threefold.

First, the market is still small in absolute terms: China's stockmarekt is less than 2% the size of that of the United States. Second, the major international banks will continue to be involved in, and profit from, deals round the edges of the sector. Money and reputation is to be made underwriting the international IPOs of major Chinese companies, which foreign firms can handle just as well from their Hong Kong offices.

Joint-venture fund management firms

Foreign firms are much more bullish on JVFMFs for a number of reasons. First, China's fund sector is underdeveloped. The 15 or so firms operating in 2002 only accounted for some 10% of market capitalization, meaning that there is ample space for additional firms to be established and to grow fast. The huge amount of bank savings, plus the prospects of enormous growth in pension and insurance fund assets, mean that demand for fund management is also sure to grow large fast. In mid-2002 urban households were committing less than 10% of their financial assets to shares, down from 14% during 1998-2000.

Foreign involvement in listed companies' M&A

China attracts a lot of FDI, over $50bn a year. However, only some 5% of this investment is involved in cross-border acquisitions. The rest goes into starting new firms, either party or wholly foreign-owned, so-called Greenfield investments. In contrast, 40-60% of FDI going into Indonesia, Thailand and South Korea during 1998-99 went into acquisitions. However, as rules relax, the M&A component of China's FDI will inevitably rise.

In November 2002 the CSRC announced that it would follow Taiwan and various other developing countries and implement the scheme. QFII (Qualified Foreign Institutional Investor) will allow foreign investors, including banks, insurance companies, fund management institutions and any other institution meeting the criteria to import and export funds into the Mainland, even while China's capital ¨C account controls are maintained. These funds will then be exchanged into renminbi, kept in a special account managed by the PBOC, and the foreign investor will be free to buy and sell A-shares within certain limits.

The rules governing the new QFII scheme are strict. A fund manager who wants to take part will need assets of more than ¡ç10bn. Bank must rank in the word's top 100 in term of asset value. Each QFII will be able to invest only $50m-800m and can buy no more than a 10% stake in a single listed company. The total permitted foreign stake in a listed company will not exceed 20%. The remittance rules are also tough: capital will be locked in for one year for qualified institutions, and three years for closed-ended investment funds (through this lock-up is on remitting money out of China, rather than on selling shares).

How to Invest?

Mutual funds and exchange-traded funds (ETFs) are the only practical way you can get unfiltered access to China's boom. Since China is a hot item with U.S. investors, investment managers are rolling out new funds and ETFs (a portfolio of stocks that replicate the performance of a stock index) to capitalize on the trend. Here's a list of 3 ETFs:

- FTSE/Xinhua China 25 Index (FXI) tracks 25 of the largest Chinese companies.
- MSCI-Hong Kong Index (EWH) tracks the overall Hong Kong market.
- PowerShares Golden Dragon ETF (PGJ) tracks an index of U.S. listed stocks that derive a majority of their revenue from China.

Here's a list of the leading 10 performers Chinese Equity Funds (by % return 1 year) published in the Asia Wall Street Journal on August 8:

- First State Grtr China, 41%
- First State China Grow, 37%
- HSBC China Momentum A, 36%
- SISF Greater China A A, 36%
- ING(L)Inv Greater China, 34%
- Schroder Sel Gr China, 34%
- Pioneer Grtr China Eq, 32%
- CAF Greater China (EUR), 32%
- CAF Greater China (USD), 31%
- EMIF China & Hong Kong, 31%

Conclusion

China's stockmarket is still extremely immature and does not yet hold comparison with markets in more developed economies or, if truth be told, with many in emerging markets. China's is not especially large, its firms are overvalued and it has more than its fair share of regulatory problems.

China's stockmarket needs much more than time if it is to mature and serve the economy as it should. Its problems are not simply a function of its small size and the limited instruments traded there. State shares, the subordination of the stockmarket to industrial policy, the political control of the regulator ¨C these are all institutional problems that need solving before China's stockmarket can develop as it should. Until then it will remain an inefficient way to allocate capital and a corrupt place in which to trade.

China's fast growth, political structure and uneven disclosure make investing there a risky business. All sorts of things, from currency revaluations to economic overheating, could go wrong. Thus, successful investing in China requires a long-term view. That will give you time to ride out the inevitable downdrafts.
 
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Quote from Epiphany:

Name one country China has ever attacked in the past

Even when China was at the peak of its power, they never sought to conquer other countries

I've talked to Chinese people and they admit that their military is crap, so I'm not sure what the US is worried about

Yes they have nuclear weapons but so do a host of other countries, including the US.

Why would China, which is developing so rapidly risk a nuclear war? That would be sheer stupidity on their part.

North Korea on the other hand, which has nothing to lose, would be more likely to use them.
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How about :

(1) Vietnam in February 1979?
(2) Tibet?
(3) East Turkistan which is now Xinjiang?



korea
 
China has its share of border disputes with its neighbors, and as happened with many countries, military conflicts occurred.


Quote from RXIS:

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How about :

(1) Vietnam in February 1979?
(2) Tibet?
(3) East Turkistan which is now Xinjiang?



korea
More...
 
Quote from Steve_IB:

Foreigners can buy property in the major cities quite easily.
Foreigners can't buy A shares but can buy the B-shares. Not all A shares have a B share equivalent. Most B-shares are trading at a discount to A shares by as much as 70%. Similarly for the H shares which are listed in Hong Kong, most of these are trading at substantial discounts to the A shares.
More...


Steve,

can we trade individual asian stocks through IB in the US, specically A, B & H Chinese shares & HK shares, not ADRs? I've searched IB's site several times, looks like we can't, but need to verify. If not through IB, is there a way a retail investor can buy those shares directly?
 
I have been investing in Mutual Funds for years, and currently looking for a newsletter that is specialized in selecting Asia and emerging growth mutual funds.

Can you suggest any newsletter that is specialized in that?

Thanks in advance,
Blade2000
:)
 
the best way which is the only way for individual investors/speculators to invest in China is buy those H-shares or A-shares listed in Hong Kong.

after all foreign investors are not allowed to hold chinese shs directly, except a few QDII institutions.


p.s. i am holding a bunch of H-shs.
 
Thanks vinrouge for your reply.

I am not familiar with H-shares or A-shares listed in Hong Kong. Are these ETFs? If so, what is the ticker symbol?

Thanks again,
B.
 
Blade2000,

The answer to your question is below. Have a look on page 6 for more information. Hope that helps.

Individual A-shares

Shares of Mainland (PRC, not including Hong Kong, Macao or Taiwan) companies traded in Shanghai and Shenzhen that are denominated in renminbi (RMB) and owned by individuals and LPs. They make up about one-third of a typical listed company's equity capital.

Individual B-shares

Shares of Mainland companies traded in Shanghai and Shenzhen that are denominated in US$ in Shanghai and HK$ in Shenzhen. Only a small number of companies have issued B-shares. Their advantage is that a company can raise hard currency; the disadvantage is that the B-share market is highly illiquid. Initially reserved for foreign investors, domestic individuals and companies quickly found ways of buying them. The market is now open to domestic individuals (though not institutions).

H, N and L shares (commonly known as H-shares)

Shares of Mainland-registered companies listed in Hong Kong, New York and London. The State Council has chosen some of its most important and impressive SOEs to list in Hong Kong and elsewhere. These companies are taking advantage of the greater capital available in more developed capital markets, but are forced to undergo more radical restructuring than they would if they listed domestically and are held to higher standards of corporate governance and disclosure. Mainland Chinese firms listed in New York and London are sometimes called N-shares and L-shares (though the term H-shares is also used).

CN
 
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