When and Where to Go in China

The Shanghai Composite has gone on another run down and closed today at 2868 down 53% from the peak last fall and down 45% YTD.

I've disclosed being out for a while now with the intention of going back in and I think the time for me to go back in is quite soon. From 15,000 feet China will not go out of business and it has more than cut in half.

There are three stocks that I am willing to buy, but have not decided exactly how to move back in with these names. In most instances I weight a stock at 2 or 3% of the portfolio. I will not have 9% (three stocks at 3% each) in China and I doubt I would have 6% but I think I could go with two stocks each weighted at 2% but, in the interest of talking about process, that is where I am for now.

My preference is for individual stocks as opposed to ETFs because I am not thrilled with the composition of the ETFs. The iShares FTSE/Xinhua China 25 Index Fund (FXI) and SPDR S&P China ETF (GXC) are heavy in financials, and PowerShares Golden Dragon Halter USX China Portfolio (PGJ) seems to change its weighting often enough that I don't think you can get a real good handle on what you will own a few months from now.

Obviously I have no expectation of timing a bottom with this, but it is very likely that the bottom comes after a big decline at a time when far fewer people are interested and those who are interested would be very cautious about going in.

Comments

[p. smith:]

Get in when market is below 1200 iof you trust their accounting, I don't.

2008 Jun 13 12:36 PM

[rlirph:]

Price is determined by demand and supply.

For 2008 and 2009 the government has allowed the restricted shares to be released into the public. Depends upon when and where you read the figures quoted are like 30% of all shares outstanding are freely tradeable in the market which means 70% are still restricted. Or you figure there will be about two more times supply of stocks coming onto the market this year and next year.
Granted a substantial portion is held by government agencies and will probably not be sold.

Until the market has absorb this supply it will be difficult for the market to get any traction. I am looking at 1800 as a good entry point. Instead of getting into ETF I will stay with the major names such as China Mobile, China Life, Guangshen Railway, Huaneng Power, PetroChina, and Yangzhou Coal.

2008 Jun 13 01:06 PM

[longshort:]

even though I don't trust Chinese Accounting either, the market is not behaving according to accounting, especially the data showing previous performance. Just put this risk into consideration and give some deeper discount in your model. It doesn't mean 1200 would be the entry point

2008 Jun 13 01:20 PM

[Abe Mishima:]

I'll step into FXI when FXP goes over 100. Neither FXI or FXP holds its gains very long, but since FXP is a bit dicier, getting in FXI when FXP is bumping the top of its channel is the prudent thing to do. Why am I using a reverse ETF instead of looking at the core ETF? Because I trust neither, and see FXP as the tail that wags the dog. Heavy volume in that ETF invariably affects FXI. Funny how activities we engage in here in the US affect an index based on Chinese stocks. I am aware of the adr's traded on US exchanges, but they represent only a fraction of the shares in each of the corresponding PRC companies. Again, the tail wags the dog here too. Talk about magnification! Good luck to any investors in these etf's or adr's. You have a tiger by the tail.

2008 Jun 13 01:22 PM

[Mr. Zhao:]

You guys can't be serious. If you're convinced that Chinese A shares will go down to the 1800 level I'd love to write a few forward contracts with you. All jokes aside, the Chinese govt should use this opportunity to open up and integrate the market internationally. Now is a good time to combine H and A shares given the tight spread.

2008 Jun 13 04:56 PM

[Itsjustal:]

If you are just going to get one China stock, make it SDTH at its current price level. Strong numbers....and numbers will get stronger! Transparent financials. Really smart CFO. Just did an offering and raised $100 million for an acquisition and production capacity increase....

And...the company does exactly what it says it will do...faster than its shareholders expect. Due your own due diligence, but you will discover all that I said above is true. And yes, I am long on this one....

2008 Jun 14 12:14 AM

[James Lewis:]

The shanghai market will not see 1800 as Mr Zhao says.
For one the government would not let that happen (and if they really want havethe ability to support the market at any level around where we are now). Two the QDII investors would go wild if the market was even trading around 2200.

We all know that a lot of the chinese companies are over stating their accounts. But some are probably pretty accurate especially the bigger companies that list in Hong Kong/USA etc. In terms of accounting ratios at 2400-2500, there are some very very obvious bargains. Book Values will be higher than stock values if the market trades down here.

I think the most we could hope for is the amrket trading at 2400-2500 and then to be fair its a screeming buy.

2008 Jun 14 04:35 AM

[James Lewis:]

One stock that I would not buy unless the price of oil drops a huge amount is Petrochina. They will make ever increasing losses due to the governement using it as a subsidy tool to control inflation.

Its a no-go, the very reason why Buffet sold out when he did.

2008 Jun 14 04:37 AM

[notsosmart:]

i cant even trust our govt let alone a communist dictatorship govt.go to vegas.its easier &quicker.

2008 Jun 14 09:08 AM

[huangthomas:]

Last week Chinese stock market dropped 13.8%, which is the largest weekly drop since 1996. It wiped out $420 trillion of the market capitalization. The retail investor sentiment is extremely low. I think the market is still seeking the bottom. I would not care to guess where the bottom is or when I am going to do bottom fishing. Government policy do have profound short-term effect, but long-term outlook for the market is still murky. High inflation, hot money inflow, liquidity problem, earth quake reconstruction....etc will all limit the policy options of the Chinese government.

2008 Jun 14 11:56 AM

[huangthomas:]

To rlirph: You can find programs for "unlocking" remaining stocks of each and every companies in the following web site:

finance.sina.com.cn/st...

Good luck!

2008 Jun 14 12:07 PM

[huangthomas:]

Here is the internet address again:

finance.sina.com.cn/st...

2008 Jun 14 12:11 PM

[huangthomas:]

Correction: it wiped out $420 billion, instead of trillion. It is CNY 3.07 trillion.

2008 Jun 14 12:14 PM