Considerations on Investing in China 30 comments
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The Shanghai composite is now down about 45% from its peak.
A quick bit of history on my position on China. I first got in in 2003 with PetroChina (PTR), swapped into China Petroleum & Chemical Corp. (SNP) shortly thereafter, sold the last of SNP last June because I felt it had gone too far too fast, and I was worried about a big drop.
I was four or five months and about 85% too early with the sale.
All along I have assumed I would get back in and although I am not getting back in today it makes sense to start thinking seriously about figuring a way back in. There is no realistic probability of a market going to zero, so after cutting in half what is the risk?
If China is/was a bubble, then should we compare it to the Nasdaq? I'm not sure that is right, but if it is then the risk might be another 25% down from the peak - or put another way, perhaps it could be cut in half again to a total of 75% down from the peak?
The reason I don't think comparing to the Nasdaq fall is right is that (1) the Chinese economy is not rolling over, (2) the companies that are part of the mania are the building blocks of the country (how many non tech stocks dropped by more than 50% from 2000-2002?), (3) the various surpluses make the country very sound - and there are others.
China does have all sorts of issues too. No one seems real comfortable with the numbers from the financial companies, pure capitalism is not their strong suit, if the oil subsidy every gets lifted it could be a game changer for the Chinese consumer, the pollution is awful, they're not scoring points for their ideas on humanitarian issues - and there are others.
Like every theme/investment destination there are pluses and minuses, but now down 45% the minuses don't seem to weigh as heavily. I am not saying it can't be cut in half from here (I'm not that pie in the sky), but I don't think it is the most likely outcome. If I go back in, it would be one company with only a 2-3% weight, so if I am wrong and the market cuts in half I might have a source of lag, but not something ruinous.
The bigger macro for China since before I first bought in is that the country will become more important globally and that a lot of money would be spent to modernize the country as a middle class develops. This bigger macro is no different than it was five years ago, no different than it was at the peak last October and is the same today. Regardless of what direction the next 1000 points is for the Composite, the story on the ground will be the same.
Disclosure: no positions in stocks mentioned
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This article has 30 comments:
This is something that Beijing has known for a long time and has still to get over the fear that the 'West' will know too much about the Chinese economy, especially companies with a government ownership component.
It will happen eventually, the question is when? When this does become the trend, especially for a serious number of mid-caps, then you will see the real boom.
For the time being the Chinese are saying that the rest of the world should rely on the Chinese system, but there is limited faith in how the current system works. The 'financial crisis' in the U.S. has sort of pushed things off a bit more into the future.
Previous highs were just the appetizer, the main course has yet to be served. This could take as much as eighteen months to begin to materialize. The exact timing is directly linked to actions from the centralized government...so it could change overnight.
Look for accounting transparency and credibility for the next wave. This was the one ingredient that was missing from the first. The rest of the necessary factors, as mentioned in the article, are in place.
consensus CrossProfit
Living here in China, I am free from visual pollution (i.e. the vandalism of everything and anything in America), cultural pollution (i.e. Oprah and her ilk), political pollution (i.e. the dems and the repubs), social pollution (people here do what they want here and raise their families in the way they want), and all forms of other pollution.
I am surprised to read that you are so free back in America.
I live here in China and am not an armchair scholar commenting from another country on the occurences in this soceity. I am a new immigrant but a well treated immigrant, nontheless, here in Shenzhen. I am also a law professor and lawyer licensed to practice law in California, DC and other jurisdictions.
Maybe in the US they don't want people to know about all the great things happening outside the US particularly in China.
I am interested to know from what great propaganda machine your opinions on China originate from?
If you really want to be a part of the 21st century (versus some guy in NY or Oklahoma or Cali talking nonsense about it) you should come to China.
Live here for 2 years and write us back-- China Expert.
Thank you Mr Petti for your disclosure! You are a great American
As to China, some stocks are undoubtedly inflated. But the blue chips like CHL have a ways to go. I sold CHL with a 20% profit and have been kicking myself ever since....
I am really surprised about your logic as a law professional.
As a former auditor in big four auditing Chinese public companies listing in US, HK, Singapore, UK and China exchanges, I really worry about the transparancy issues. Even audited by the prestigious firms, you could not trust the statements without any enforcement system. Let's say, what if you become one of victims in those accounting shenanigans. If they happened in one Chinese listing company, I would not expect there will be another Anthur Anderson. If you say you have the experience to handle that, I would say you now have tremendous opportunities to file class suit. When I used to be a lawyer practising in China, I didn't find there were any. So Law professor, do give me a call when you find some.
2. Chinese Accounting: There is reason to be suspicious – the general fear of the unknown. We have not yet seen any specific example of bad accounting. We (in US) have had our share of accounting and related scandals, so we should not be pointing fingers at China. Jim Rogers, (the famous investor and author of Bull in China) had once commented (paraphrased) “If you get caught in a scandal in China – you would be summarily shot dead – that puts a lot of fear in Chinese Managers”.
3. Chinese Pollution etc- I had visited China for a few weeks recently – I did not find any bad pollution. Just lot of economic activity – construction and cranes everywhere (really everywhere). Chinese economic growth is real and would last for some time – it has 1.5 Trillion Dollars in reserves for every possible rainy day.
4. Chinese Negatives – it is communist country, the govt. controls the economy. They change rules over night and profits vanish. Increasing or decreasing subsidies, export controls etc. The Chinese oil companies (like Petro China etc) can’t make profits because of price controls. Today PTR has gone below its IPO price, Buffet was a smart seller – even though he sold much below the peak.
Beware of Chinese stocks for now, play Taiwan or maybe Hong Kong.
Another problem for China is that many private companies would love to go public, and that has the potential to dilute the market to the point where you don't get the huge runups that you saw prior to late last year.
China is still growing rapidly, and there is still demand for stocks, since the alternatives are real estate, which is falling in my area (Shenzhen) and bank deposits, which don't offer a negative return viz a viz inflation.
Lack of transparency in financial statements, endemic corruption and theft of company assets, and government involvement in both regulation and ownership of the companies are all factors to look out for.
On the other hand, the RMB is rising vs. the US dollar, which gives American investors a hedge, and there is an arbitrage opportunity to investing in shares listed on the Hong Kong index (Hang Seng Index, or HSI) and one of the China exchanges (Shanghai and Shenzhen).
It's all to complex for me. BTW, my guess is that Duder is Chinese. No pollution in Shenzhen? Check out the river, the bay, and the sky the next time you're outdoors, Duder. Nasty stuff. And Shenzhen is way better than most Chinese cities. I've been here five years.
China has many problems on its own; but it's very ironic the red communists do not mind Mr Petti (who is paid salary by the Chinese communist run school) being so critical of everything in China even the air he breathes every day.
The iron rice bowl may crack. Historically govt cycles in China run for 15-20 years and there is current economic and social pressure which is increasing the probability for a significant political shift in 12-18 months. The outcome and implications for Chinese citizens is uncertain.
Just like the new medicine, FDA approval is a dilemma. Shall we use this medicine? For this, we must wait. Just like the patent dilemma, shall we wait years to get through approval procedure. this is not necessary.
My opinion is that we should not wait years to use those financial tech or inovations until every enforcement is in place. Otherwise, we can't get an efficient market, which costs more. So when there is situations, what would be the remedy? I think I havn't seen any in China.
BTW, people don't have to be perfect to criticize. If the prequalification for criticizing others is that you should be perfect. I think only GOD could do so.
There are people working on getting through credit crisis.
But as you said, wishing ill for other nation is not going to help get over your own problems. Don't waste your time arguing with others. If you could, please work out the plan to help China out, especially for those potential middle-class and ordinary working class. I really hope so because I am a Chinese
As soon as I got home I purchased a bunch of FXI. I've since sold it all as I feel alternative energy is a much better investment.
Long short, I do not care you are a Chinese or not; if you intend to wish ill for China and taking the news for truth before verifying them yourself ; You are shameful!
It is time for Mr Petti and his loyal pupils to disclose his relationship with the red Chinese government now!!! And all readers on this site should also make such a demand; otherwise it's an insult to the intelligence of all seekingalpha readers!
Like Jimmy Rogers says China is a great place to invest. There is a lot of money to be made here. China now is like Hong Kong in early 1970's.
In 1973 The Hang Seng index was in 150. Now the Hang Seng Index is 24000! China will go through the same process with lots of growth and pain along the way.
When you invest you invest in places where there is economic growth. The Chinese economy has averaged an annual growth rate of 9.6% in the past 26 years.
But be sure to spread your investment over many companies because some of them will blow up.
Neither do I wish China ill. If you like American history, please appreciate its tolerance of different opinions. I definitely agree with what you said about truth and news. What my points are based is what I experienced during recent 10 years. So please don't just call anybody shamful. Present your points based on the truth and logic. Did you verify the truth anyway? How? The obvious conflicts of interests doesn't mean Mr. Petti lies. I didn't see your logic. But you always taking something for granted. Criticizing the system in China doesn't mean getting out totally. Don't be so absolute. Actually the world doesn't exist in 1 or 0. It should be something else between 0 and 1. Filthy air and pollution is the price. If you'd like do business with China or travel in China, you should tolerate it. If you feel the risk not worthy, you could get out. But everybody has different tolearance of risk. As you can't tolerate the criticize. That's OK. But learn your logic.
I see a currency crisis coming at the end of summer 2008.
On Apr 18 12:53 PM User 142738 wrote:
> A quick note: "SOE" = "State-owned Enterprises." Putting a ceiling
> on commodities prices certainly didn't help the U.S. in the 1970's.
Word has been going around that there is a high possibility of a currency crisis at the end of summer 2008.
Any advice on protecting against currency crisis?
youtube.com/watch?v=JO...
The 19th century belongs to England, the 20th century to USA, can the 21st century belong to China?
Since I have silver positions, I am contemplating gold as it underwent a recent correction.
Clients own a little gold, foreign debt from Oz, Norway and the UK, FXA and quite few foreign stocks/ETFs.