Re-Entering China: A Plan Comes Together

Many months ago I decided that I would probably get back into China, one way or another, when/if the Shanghai Composite dropped 60% from its high.

Monday morning, Shanghai got within a few points of 60% down and I bought in on Monday by swapping out of a mega cap telecom name from Western Europe and going into China Mobile (CHL). Not every client of mine owns China now, but many do.

To be clear - my net long exposure is the same, save for rounding up or down.

Earlier this summer in a video, I said I might go in this summer, and that I was mulling three names of which CHL was one. I was also mulling a toll road stock and a broader infrastructure stock listed in Hong Kong. I'm not going to disclose those names as I can see going from what is now about 2% up to 4% (not sure when at this point, but I'm talking months), and for now those two would be my best candidates for doing so.

As an administrative note I am aware that CHL is not listed in Shanghai. What I bought is an ADR of a company listed in Hong Kong -- but not an H-share. CHL simply has a lot of customers on the mainland.

The thinking for 60% was very simple. I have been out of China since Q2 2007, as I thought it was overheating (too early, I know), but I have never thought the mania in China was worse than the bubble in tech stocks, so I have always felt the decline would be less than 75%. 50% declines don't occur that often and so 60% seems like a reasonable overshoot of cutting in half.

Looking out over any length of time, what part of the world seems poised for a lot of growth, regardless of the reasons? Asia probably needs to be in the top two answers. This has been true all the way down for China, and now the markets are much cheaper than they were. Much cheaper.

The market could obviously go lower here - that would be easy - but it is down a lot now and it is becoming a center of the universe. I could easily envision this purchase being uncomfortable for a while, but that just goes with the territory with some purchases.

There are plenty of bearish points to make about China and they are probably all true - but the market is down 60%.

Disclosure: Long CHL

Comments

[Focus Advisory:]

CHL took a big hit today and panic selling may ensue, but I agree with Roger. China is being greatly underestimated.

The single greatest reason to buy China after a 60%+ correction is because only 8% of all Chinese wealth is invested in the stock market. It is the lowest level in Asia and compares to 35-40% in the U.S. and the EU. Money flow moves markets and the long-term trend of money flow from this point in the market is higher...higher for years to come.

Regards

2008 Aug 12 09:14 PM

[Think-About-It:]

China is assendant in every way possible. They can't be stopped externally. Only a shift back to a closed society would reverse their current course and that does not look like it is in the cards.

Their economic growth will be messy, lumpy and cause many social upheavals within their borders but if the government maintains its current economic/fiscal policies China will blossom into an ecomomic giant.

FXI or other broad Chinese stocks market indicies can only be called overvalued by someone with a very short-term time horizon. Don't invest in China for short-term gains. The big money will be made by those who can hold shares for a decade or more.

Disclosure: Long MCHFX, FEED, HOGS, MPEL

2008 Aug 13 02:05 AM

[investor88:]

There is good logic for being bullish on China longer term as stated in Roger's article. However, the China market may not be ready for short term momentum traders and sceptics; for these people they will go in only after a definite uptrend has manifest itself.

2008 Aug 13 03:36 AM

[Roger Nusbaum:]

bad luck on tuesday, some retracement today but one thing is clear a couple months is not enough time to be right or wrong let alone a couple of days. i agree there seems to be no immediate launch pad for trend/momentum folks.

2008 Aug 14 03:04 PM