China Remains a Compelling Buy via PowerShares Golden Dragon ETF 26 comments
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An expansive stimulus package and an increase in lending have helped China’s economy, as well as the PowerShares Golden Dragon Halter USX China ETF Portfolio (PGJ), surge in recent months. PGJ has been solidly within the top 10 funds on the ETF International Momentum Table since mid-April, reflecting the rebound in China’s economy. Despite some long-term inflation fears, China’s economy could continue to grow quickly in the short term, and PGJ offers investors a balanced way to access this expanding market.
PGJ tracks the Halter USX China Index, which is composed of the U.S.-listed securities of companies that derive a majority of their revenue from the People’s Republic of China. 
Currently, 45.93% of the fund is giant cap, 32.65% is large cap, 4.19% is medium cap, 12.01% is small cap and 5.23% is micro cap. While PGJ’s assets are noticeably weighted toward the larger-cap stocks, access to the smaller-cap holdings helps investors keep a more balanced portfolio. The largest three economic sectors represented in the fund’s portfolio are information technology, energy and telecommunication services, with 22.28%, 18.88% and 13.86% allocations, respectively.
China has good long-term fundamentals, and the country is rich in resources and consumer growth. The population is booming, and the Chinese are stockpiling the raw materials necessary to meet future demand. Recent stimulus measures have led to growing reserves of steel, necessary to meet growing automotive demand. The stimulus funds have also helped to spur a number of infrastructure-related IPOs. Since the beginning of June, eight companies have gone public in Hong Kong as investors predict a resurgence for China.
A 4 trillion yuan ($585.42 billion) government-led stimulus plan and an explosion in bank lending have helped to fuel the Chinese economy. Interest rates are nearly zero, and people are beginning to use funds to buy equities and real estate to keep their money from depreciating. The influx of “easy” money has also prompted a spike in retail. Sean Darby, a strategist with Nomura International in Hong Kong, recently noted that “there’s lots of cash and no demand from the real economy, which is perfect for asset prices.”
PGJ’s top component, China Petroleum & Chemical Corp., now known as Sinopec Corp. (SNP), has been looking to expand reserves. In late June, Sinopec made a $7.22 billion takeover bid for Addax Petroleum, an international oil and gas exploration company. State-owned SNP would gain access to oil fields in Africa and Iraq through the deal, adding to fields in Gabon and Sudan. More recently, SNP took over two strategic petroleum reserve depots under the first-phase reserve program. China’s government recently raised petroleum prices in an attempt to bring the cost more in line with international oil fluctuations. The price increase is positive for SNP, which was burdened under the old system.
The second largest component in PGJ, with 5.01% of assets, is China Life Insurance Company Limited (LFC). This firm operates in three parts: individual life insurance, group life insurance, and accident and health insurance. The large network of agents who are employed by China Life Insurance are able to reach a broad audience in the provinces, while competitors are confined to metro areas. As China’s population grows, the demand for life insurance and the price of China Life shares could continue to surge in the long term.
While the recent uptick in China’s economy has been positive for equity holders and PGJ, some investors are concerned that this emerging market is moving too fast toward recovery. China’s central bank recently raised concerns about the expansion in bank lending, noting that it would adjust its policy as the economy improves. In the meantime, the influx of capital into the Chinese market should continue to make PGJ an attractive buy over the next few months.
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This article has 26 comments:
I wish I were able to go along with this recommendation as I believe China’s long-term growth story is real, but in the intermediate term I was on the fence, balancing the above with their severe ethnic strife, horrible pollution, lack of fresh water, poor corporate governance, the need to create 24 million new jobs a year just to keep the lid on the economic pressure cooker, etc. Then I read further…
<< …an explosion in bank lending [has] helped to fuel the Chinese economy. Interest rates are nearly zero, and people are beginning to use funds to buy equities and real estate to keep their money from depreciating. The influx of “easy” money has also prompted a spike in retail. >>
I could have easily have mistaken these words for a bullish analysis written in the summer of 2007 about the US economy. Easy credit, low rates, huge buying of real estate and stocks, and a spike in retail sales! That helped me decide. For now, I’ll stay out of China until I see if they are heading down the same idiotic path our nation chose less than 24 months ago.
This looks to me like a financial bubble waiting to burst. Bidding up stock prices with borrowed money is what investors have done in USA before the 1929 stock market crash. It's a disaster waiting to happen. Because investors can't afford to loose the money they've borrowed. They'll have to sell quickly once the selling begins. Once the lending in China runs out of steam. A stock market crash there won't be long in coming.
And I'm not that optimistic about China's long term future either. Due to their one-child policy, the population of China is set to start aging in a few years with more and more old people being dependent of fewer and fewer workers. And without any reasonable pensions and help from the government. That kind of dependence of many old people on their younger and fewer relatives doesn't bode well for consumer spending in China.
George Soros knows bubbles and has stated that when he sees one, he jumps on it for the ride. But he made a telling statement recently questioning the herd mentality (of course he knows when to jump off before the bubble bursts):
"Maybe we're making the same mistake again by thinking that China and India will decouple from the developed world," Mr. Soros says.
Some sober facts:
1. China is a communist country ruled by 1 party with iron grip. Party bosses pick the politicians and many private company managements since many private companies are ex-SOE (communist state owned enterprises).
2. Corruption in China is rampant and one of the worst even down to lower ranking employees. Even factory canteen chef gets "envelopes" in scheme where he claims he received 10 bags of rice when only 8 bags are delivered.
3. There is almost no "law" since law itself is written to support the communist party or corrupt local communist bosses. Judges are appointed by the local communist boss and few if any understand law. Many judges got job thru "guanxi" or connection and of course bribes.
4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of trouble for discussing hidden bad and uncollectible debts. Local communist cadres dictate banks to lend to their pet projects and of course friends who bribe them not to mention COMPLETE lack of transparency.
5. No one except pea size brains trusts the communist government's statistics which are MANIPULATED.
6. Many of the listed companies numbers are COOKED. Auditors and their management can be bribed and extorted. It's beyond me how anyone would trust Chinese companies' financials unless audited by Big 4. And even Big 4s audited numbers are suspect since most Chinese companies carry multiple books including one for taxation and another for real book with slush funds.
7. Latest Chinese share and commodity appreciation have lot to do with communists pumping money to the economy by directing the banks to make loans. This kind of stimulus cannot go on.
Now is good time to buy FXP when all the moron investment gurus in unison are recommending Chinese stocks.
On the other hand, I must agree that LFC is a great long term play. Great dividends, huge market (1.4 billion chinese.... wow!), brand name.... etc etc. Chinese are great money savers, and life insurance is a must have. I would rather wait for the price to drop to 50 before going in.
You were spot on when you decided to focus on china. After that, I'm going to mostly have to throw up my arms and say that I think you're missing the real opportunities out there.
This article would have been better if you wrote it 6 months ago. But, I won't hold that against you.
To make money in China, the companies already worth 100s of billions will have to be valued in the range of trillions. Not happening.
The Australian government(bless their timid little hearts) stopped the sale on Security grounds.
So what did the Chinese government do?
They Arrested Rio tinto's china based head of operations ,Mr Stern Hu.
Also arrested were three other Rio employees who have all been charged with stealing state secrets.
11 days in custody ,no charges,no lawyers allowed,sounds like Gitmo but this was an act pure vengence because chinelco wasn't able to take over their supplier.
On this point China is Running out of iron ore and Australia and Brazil are it's only suppliers.
www.watoday.com.au/wa-...
business.smh.com.au/bu...
Invest in China ,but Caveat emptor...
On Jul 16 08:28 PM doubleshortetf wrote:
> Been to China over 30 times since 1998 while working for 3 multinationals.
> It's amusing to see "experts" who has not been to China or spent
> few days in the big Chinese cities recommending Chinese stocks...
> Wonder if they ever spent weeks at a time in gritty factory towns
> or poor interior areas...
>
> Some sober facts:
>
> 1. China is a communist country ruled by 1 party with iron grip.
> Party bosses pick the politicians and many private company managements
> since many private companies are ex-SOE (communist state owned enterprises).
>
> 2. Corruption in China is rampant and one of the worst even down
> to lower ranking employees. Even factory canteen chef gets "envelopes"
> in scheme where he claims he received 10 bags of rice when only 8
> bags are delivered.
> 3. There is almost no "law" since law itself is written to support
> the communist party or corrupt local communist bosses. Judges are
> appointed by the local communist boss and few if any understand law.
> Many judges got job thru "guanxi" or connection and of course bribes.
>
> 4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of
> trouble for discussing hidden bad and uncollectible debts. Local
> communist cadres dictate banks to lend to their pet projects and
> of course friends who bribe them not to mention COMPLETE lack of
> transparency.
> 5. No one except pea size brains trusts the communist government's
> statistics which are MANIPULATED.
> 6. Many of the listed companies numbers are COOKED. Auditors and
> their management can be bribed and extorted. It's beyond me how
> anyone would trust Chinese companies' financials unless audited by
> Big 4. And even Big 4s audited numbers are suspect since most Chinese
> companies carry multiple books including one for taxation and another
> for real book with slush funds.
> 7. Latest Chinese share and commodity appreciation have lot to do
> with communists pumping money to the economy by directing the banks
> to make loans. This kind of stimulus cannot go on.
>
> Now is good time to buy FXP when all the moron investment gurus in
> unison are recommending Chinese stocks.
On Jul 16 08:28 PM doubleshortetf wrote:
>
> Now is good time to buy FXP when all the moron investment gurus in
> unison are recommending Chinese stocks.
And it's contrarian bet against what I consider as "China the Savior" herd mentality by the investment community with little clue on real Chinese stock market. I mean since when did China with puny GDP and GNP (much lower than most Asian tiger countries) become the "savior"?
BTW - People living in China treat their market as some kind of rumor driven gambling market and frankly don't care for the fundamental numbers at all. AKA dumb emotional driven gamblers.
Check out the TA here from free and decent TA site:
www.stockconsultant.co...
On Jul 17 09:50 AM Dave Dorgan wrote:
> Sorry, one other thought. The chart of FXP screems high risk. Given
> all of the unknowns, one might proceed more cautiously with out of
> the money bear call spreads with four weeks to expiration.
Please explain any advantages or disadavanges of investing in PGJ versus FXI. They appear to be tracking closely
I can see not wanting to buy and hold but is there any evidence that (1) the bubble is ready to burst within the next couple of months as opposed to 2 years from now? (2) the bubble will burst overnight as opposed to a slow leak as suggested by a reader
Therefore, Chinese Communist bosses are trying their darndest to pump up the economy and general mood like in 2008 Olympics. Their magic bullet is to lend freely and not so concerned about another bubble as long as Oct marks ode to Communist Party.
Lemmings are lining up in China and now outside investors eager to participate in another bubble so let it be. Haven't we seen this all before with the tech and excess liquidity bubbles of 2000 and 2008 here in US?
On Jul 17 10:43 AM jimrogersfan wrote:
> Great responses by everyone.
> I can see not wanting to buy and hold but is there any evidence that
> (1) the bubble is ready to burst within the next couple of months
> as opposed to 2 years from now? (2) the bubble will burst overnight
> as opposed to a slow leak as suggested by a reader
BTW - this happens quite often to multinational companies operating in China. Rio's public case is unusual as it rarely escalates to that level but multinational companies are targeted for tax audit and other local government souped up infractions/extortions if bribe is not paid.
One multinational I worked paid the bribes indirectly by bringing hundreds of communists (including children of communist bosses) for opulent sight seeing and extravagant gifts (even to those bosses who could not make the trip). It also hosted the children of the communist bosses with funny job titles at the corporate level to get them green cards. They rarely came to work and spent time at local ESL school (free of course). One funny task asked to do was find a successful ABC (American born Chinese) husband for major city mayor's daughter!
Now you folks really trust Chinese companies financials?
On Jul 17 09:12 AM I am not a number.. wrote:
>
> Invest in China ,but Caveat emptor...
>
Best part is the last sentence:
"Investors ought to consider that the bubble's certainty is now the consensus. Surprises then, will be of the unpleasant variety."
online.wsj.com/article...
For those without WSJ subscription:
HEARD ON THE STREET
JULY 17, 2009, 7:34 A.M. ET
Riding China's Stock Market Bubble
By MOHAMMED HADI
Bubbles are forming in China. Worrying about their risks is so much less rewarding for investors than trying to profit from their inflation.
A consensus along those lines has taken shape among market strategists. As long as cash from China's now-$1 trillion large bank-lending spree keeps finding its way into the markets, prices are destined to rise.
Beijing isn't going to interfere while the lending, and spending, keeps generating results like the 7.9% second-quarter economic growth rate reported Thursday.
It won't all be hot air. Earnings growth will rebound along with China's economy, and the wealth effect of rising stock and real-estate prices could spur consumption.
But with stocks up sharply this year, valuations are already high. Ten of 13 sectors in the MSCI China Index are now above their long-term price to earnings averages, says Morgan Stanley.
No matter. Chinese companies have proven themselves willing to invest excess cash into stock and real-estate markets -- a practice exposed as the last Chinese stock market bubble formed in 2007. Evidence points to this happening again. The winners of some recent land auctions have been cash-rich companies with no real-estate business, JP Morgan says.
Individual investors too are piling in. In the mainland, more than 1.6 million stock trading accounts were opened in June – 68% more than the year before.
This buying could go on for some time. If easy money is the main driver of stock market gains, then predicting Beijing's efforts to turn off the taps is key to knowing when it'll all end.
For now, economists expect little in the way of tightening – with consumer prices in China still falling, and the economy far from secure in its recovery – until next year some time.
Investors ought to consider that the bubble's certainty is now the consensus. Surprises then, will be of the unpleasant variety.
Some reasons:
1. It is US interest to continue to dominate the world order. US managed to break down USSR and won wars against rising unfriendly rising powers like Japan and Germany. Japan in particular challenged the presence of US and Europeans in Asia. No other countries other than China and Russia can challenge US dominance now or foreseeable future.
2. China in newly found nationalism is exerting its power. China is US's biggest debtor and has rights to demand how their money is spent. China loaned US money so US consumers will buy the cheap goods. This trend has changed and pace of foreign reserve will dwindle due to slowing export market.
China also faces severe male/female ratio due to 1 child policy and history shows that such imbalance results in war. Too many angry testerone charged males will either cause trouble at home or better sent to fight a war and bring some booties back.
3. China will try to influence US politics and economy and why not as the biggest debtor? All they have to do is pull the money out literally destroy our USD. US will not yield to suck blackmail.
4. War against China will be limited air/sea affair and US can and will teach them a lesson or 2. Japan, South Kore and neighboring countries like Vietnam and India will be on US side.
China will be whipped by US forces with overwhelming prowess and naval blockade. Chinese forces have not seen any combat since late 70's Vietnamese invasion which was disastrous defeat for them. Most conscripts and officers are bunch of sole spoiled mama's boys. Their parents will encourage them to surrender to save the family lineage than to fight. US forces are well greased fighting machines from current wars in middle east. Chinese communist leaders will try to save face by ending this limited war and US will demand that Chinese forgive the debt.
Far fetched? Not really as I see this happening in next 5 to 10 years.
Remember that we came out of Depression by World War II.
Unless you are as nimble as a Chinese gymnast, putting a client's money in China today seems a little more than risky.
On Jul 16 08:28 PM doubleshortetf wrote:
> Some sober facts:
>
> 1. China is a communist country ruled by 1 party with iron grip.
> Party bosses pick the politicians and many private company managements
> since many private companies are ex-SOE (communist state owned enterprises).
>
> 2. Corruption in China is rampant and one of the worst even down
> to lower ranking employees. Even factory canteen chef gets "envelopes"
> in scheme where he claims he received 10 bags of rice when only 8
> bags are delivered.
> 3. There is almost no "law" since law itself is written to support
> the communist party or corrupt local communist bosses. Judges are
> appointed by the local communist boss and few if any understand law.
> Many judges got job thru "guanxi" or connection and of course bribes.
>
> 4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of
> trouble for discussing hidden bad and uncollectible debts. Local
> communist cadres dictate banks to lend to their pet projects and
> of course friends who bribe them not to mention COMPLETE lack of
> transparency.
> 5. No one except pea size brains trusts the communist government's
> statistics which are MANIPULATED.
> 6. Many of the listed companies numbers are COOKED. Auditors and
> their management can be bribed and extorted. It's beyond me how
> anyone would trust Chinese companies' financials unless audited by
> Big 4. And even Big 4s audited numbers are suspect since most Chinese
> companies carry multiple books including one for taxation and another
> for real book with slush funds.
> 7. Latest Chinese share and commodity appreciation have lot to do
> with communists pumping money to the economy by directing the banks
> to make loans. This kind of stimulus cannot go on.
> unison are recommending Chinese stocks.