Investing in China via the U.S.

| About: Bona Film (BONA)

The Shanghai Composite Index is down 14.2% YTD compared to a rise of 10.6% for the S&P 500 (NYSEARCA:SPY). Chinese stocks have lagged behind their emerging peers such as India, Brazil, etc. as well this year, as investors avoid investments in the country due to fears of a massive bubble.

However, many Chinese IPOs continue to be listed on the U.S. markets, making China one of the hot markets for investment banks. While some of the IPOs have performed well, many have not met expectations. Yesterday Chinese movie distributor Bone Film (NASDAQ:BONA) opened flat at the IPO price of $8.50, and then lost 22.4% to close the day at $6.60. According to Dealogic, this decline was the worst this year.

Despite most investors’ worries about China, one U.S. fund manager likes Chinese stocks. From a report in U.K.-based Trustnet:

Investors and managers are at risk of missing investment opportunities as they get distracted by the “noise” of economic data, according to RENN Universal Growth Investment Trust’s manager Russell Cleveland.

“There is a lot of noise around Ireland, Greece, and China, and that can mean you miss the melody of what’s really happening,” he said.

He added: “Economic policy from the U.S., worries on the eurozone and fears on a China bubble dominate the news, but often these factors have very little impact on my portfolio.”

The Dallas-based manager invests in small, innovative Chinese companies which are listed in the U.S. He prefers companies which are led by their founders, and who have a significant holding in their own business.

“There are more than 300 China-based companies which are traded in the U.S., so it’s a good universe we’ve got to pick from. Accessing China through the U.S. is a more stable way to get exposure to the growth in the emerging markets country,” he said.

Speaking on the possibility of a bubble in China, Cleveland says property might be cyclical, but it won’t necessarily mean anything to investors.

“There are too many apartments in China, that much is true, and real estate will be a cyclical sector, but not the whole country. China is very strong financially. The rate of growth might slow, but that’s not a bad thing,” he said.

One way to identify some of the promising Chinese companies is to use the recently-launched BNY Mellon China "Xia Yi Dai" Index (BKXYD), also known as the “Next Generation” ADR Index. This index is comprised of the “Next Generation” of Chinese growth companies from sought-after industries, including Internet, alternative energy and media.

Some of the "Next Generation's" features include:

  • Companies’ primary listing is to be in the form of Depositary Receipts (DRs) traded on a U.S. exchange.
  • Constituents are subject to both liquidity screens and a minimum free-float market capitalization of at least $100 million.
  • The index is modified capitalization-weighted and adjusted for free-float.

The 30 constituents of the BNY Mellon China "Xia Yi Dai" Index are listed below with their DR tickers:

S.No. Company Ticker
1 51job JOBS
2 7 Days Group SVN
3 Baidu BIDU
5 China Medical Technologies CMED
6 China Real Estate Information CRIC
7 CNInsure CISG
8 International CTRP
9 Duoyuan Global Water DGW
10 E-House (China) EJ
11 Focus Media FMCN
12 Giant Interactive Group GA
13 Home Inns & Hotels Management HMIN
14 JA Solar JASO
15 LDK Solar LDK
16 Longtop Financial Technologies LFT
17 Melco Crown Entertainment MPEL
18 Mindray Medical International MR
20 New Oriental Education & Technology EDU
21 O2Micro International OIIM
22 Shanda Games GAME
23 Shanda Interactive Entertainment SNDA
24 Solarfun Power SOLF
25 Spreadtrum Communications SPRD
26 Suntech Power STP
27 Trina Solar TSL
28 VanceInfo Technologies VIT
29 VisionChina Media VISN
30 Yingli Green Energy YGE

DGW and VISN are down about 65% YTD. Hotel-chain operator SVN is up about 92% YTD. A company such as China Real Estate Information can be avoided, as it is a real estate play.

Disclosure: No positions

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