China Play Stocks

China Play Stocks
Contributor since: 2011
What is the evidence that the shadow banking system is like the subprime mortgage lending? Isn't the corporate high-yield debt market a better analogy? Plus, since the government backstops everything in China, isn't this basically a bet on the sovereign balance sheet of the Chinese government, and their large (if not infinite) firepower?
HAO is more mid-cap. ECNS is small-cap and includes some B-shares. Both are good -- most likely to rocket up if China does indeed turn the corner towards growth. ECNS has been hammered over the last 2 years.
Better options include index ETFs like HAO and ECNS -- diversified mid-cap and small-cap stocks. EWH is OK except that it has run up quite a bit recently and is more of a bet on Hong Kong (property).
Rather than buying individual Chinese stocks, you should be looking at broad-based ETFs like HAO, ECNS, GXC, TAO, PEK, CHIQ and so on. Also, talking about index price levels without talking about P/E, P/B or other valuation metrics is not quite right. In 2007, Chinese stocks were in a bubble with nosebleed valuations. Today, they trade at historically low valuations. If a hard landing occurs, and the stocks fall further, that would be the buy of the decade.
Volume declines first, price declines follow. The real fear is that nobody knows for sure how much of this speculation is leveraged, because of the shadow banking system, and the use of property as collateral for business loans. If business owners have to repay loans, they may have to resort to distress sales of real estate. So, a slowing global economy may worsen this real estate problem in China. That said, I would be surprised if there is a systemic meltdown like we saw in the U.S.
Good observations, especially concerning luxury malls.
"including China, which has a total debt-to-GDP ratio that may be greater than 200%. "
How did you arrive at this estimate?
There are many reports, including articles here in SA, from residents as well as visitors to China that have described things similar to what you saw in Mexico, not just empty apartments, but also empty malls and commercial buildings. So, Chanos is not alone.
However, I believe that empty apartments in China are not finished. Rather, they are mostly raw uninhabitable units mostly held for investment and flipping. Sort of like gold, they don't care about the rental yield. One of the key unknowns is whether these will ever get occupied in the near future.
If this Chinese black swan event were to occur, gold's value as an alternative currency will increase. So, gold would go up. Buying gold is another way to hedge against this event. Thanks for the observation.
No. This observation pertains to a trend that has implications for long-term investors. This is not a short-term event call.
The reports I cited (for example, Bloomberg) have the numbers you seek. Also, note that these are low-cost vendor financing / export assistance loans from China Development Bank and China Export-Import Bank. These are for exporters, not for domestic Chinese companies.
Here are some excerpts from the first Bloomberg report which cite some numbers:
A two-year grace period on payments and an interest rate of 2 percentage points over the London interbank offered rate created an unbeatable deal, Tele Norte Chief Financial Officer Alex Zornig, 52, says.
The terms of Tele Norte Leste’s seven-year credit agreement give the company an interest rate of about 4 percent, Zornig said. Brazilian companies are paying an average borrowing cost for dollar debt of about 5.99 percent, according to JPMorgan Chase & Co.
Also, note that comparisons are between rates available through China's banks for Indian / Brazilian buyers versus the much higher rates those other emerging market buyers will have to pay in the international market. The second Bloomberg report has numbers with those comparisons. Here is an excerpt:
“Reliance has to repay the debt and the China loans are an immediate solution because interest rates there are 1 to 3 percent cheaper
India has the highest 10-year government bond yields among Asia’s major economies, and the nation’s companies face rising borrowing costs in rupees and dollars. China Development Bank sold one-year debt last month at a 2.61 percent coupon, letting it support the global expansion of Chinese companies.
Please read the Bloomberg and WSJ reports I have hyper-linked and cited in the article. I have cited three separate reports, and they have the facts and numbers you seek.
The growth is in developing countries where financing and price are more important than technology. Western markets are slow growth. That's not where the real battle is.
www.businessweek.com/n...
Nokia Oyj’s mobile-phone market share tumbled to its lowest ever as unbranded Chinese device makers gained ground on the low-end, while Apple Inc.’s iPhones advanced in smartphones, researcher Gartner Inc. said.
www.cn-c114.net/583/a5...
ZTE started operations in India in 1999, offering products for wireline, wireless and other services. It has a very wide product range in India, including fixed/wireless network, terminals and services. Products with technologies likes Dense wavelength division multiplexing (DWDM) and DSL broadband have 50 and 30 per cent market share in India.
"Roubini called the recession in America and is no lightweight economist." The media creates these celebrities but doesn't bother to verify the consistency of their predictions. Make one right call and you are set for life.
"More than 80 percent of the 18 million auto sales there last year were paid 100 percent up front." Why is this statement in the paragraph about credit cards? If anything, it proves that Chinese don't like using credit, and use the cash they saved.
Does anyone know if the real-estate bubble is widespread, or localized to prime areas in big cities? I am familiar with the real-estate market in India. The prices in prime big-city locations are sky-high. But the bubble is not widespread, and prices have stagnated in non-prime areas. Is it the same in China?
"we doubt that gold ETFs can continue to attract the tremendous amount of inflows over the long run, like they have done so far in their brief history. In fact, we've already seen net inflows into gold ETFs in 2010 (and so far in 2011) decline from their 2009 highs."
www.bloomberg.com/news...
Net inflows into gold ETFs are still positive. Of course, the rate of increase will slow, due to the law of large numbers. If you are out making a contrarian call, you need a better argument backed by stronger facts, not sweeping statements.
www.hsi.com.hk/HSI-Net...
You have to drill down to literature.
www.hsi.com.hk/HSI-Net...
The index is published at this website.
www.everbank.com/perso...
www.everbank.com/perso...
So, I was wrong about calling it a "CD". Everbank does not offer a Yuan CD. They offer a Yuan Access Deposit account which pays no interest. The fees are not disclosed prominently (I didn't look hard enough), but I vaguely recall them charging 0.75% or something like that each time they do a conversion. This was many years ago, I am not sure if that is still true. They may claim the account has no fees, but you pay something every time you switch back and forth between Yuan and dollar. That can get expensive.
My suggestion is to stick with CYB as long as you are buy-and-hold and long term. Yes, it may under-perform the spot, but you will still get some appreciation. The fees are modest. If you are into options, you might want to sell covered calls against your CYB holding to offset the 0.45% fee.
Good observation. My guess is the following. CYB jumped in September and October because the forwards market was anticipating a sharp upward revaluation of the Yuan before some significant meetings in late October and early November (G-20 or some such). But China didn't budge and allowed only the usual slow appreciation. So, the forwards basically started giving back those gains. Just a hunch. I didn't study the forwards in detail.
I have noticed that Yahoo Finance tends to adjust for distributions. I am not sure about some of the other data providers. Even if you include the distributions, the under-performance with respect to its benchmark (the MSCI China A share index) remains. You have to also consider the tax impacts of such distributions.
I am not sure if Google adjusts for distributions or not. I think Yahoo does. But even if you factor it in, CYB still under-performs the spot price by a large amount -- instead of 4%, it might come down to say 3.5% with the distribution. The basic premise of the article does not change.
Stop trying to find fundamental reasons for the commodity bull run. Cheap money and hedge funds speculation is all there is to it. Enjoy the run till the next crisis hits.
I looked it up at www.uobam.com.sg/uobam... . Instead of the CSI300, it is based on the top-50 only. Otherwise, the structure is similar to PEK and others. I guess if you are limited to Singapore listed funds, this may not be a bad choice. I think there may be a CSI300 fund listed in Singapore, but I am not sure. If you can trade in Hong Kong, buy one of the two alternatives I discussed here. The CSI300 is broader and safer than just the top 50 which the SSE 50. The Singapore fund has annual fees of 0.75% which is more expensive than DB X-trackers.
Patrick -- The main point is that these bad loan losses are still manageable given China's overall financial strength. As one other example, consider the massive stakes that the Chinese government owns in the leading SOE shares. Even if you ignore the financial sector, these stakes are very valuable given how some of these stocks are performing. Look at CNOOC (CEO) for example -- new all-time highs every day. China owns at least 50% of many of these giants. Even if it just sells a 10% stake over a period of time, it will raise massive amounts without depressing the shares much. If it liberalizes the QFII quota, foreign money will rush in. I suspect China will do this once the A-shares turn around from their somewhat depressed state.
Ultimately it's all a bet on the sovereign balance sheet of the Chinese government. What is the absolute worst-case scenario? A total loss of US$1 Trillion? $1.5 Trillion? $2 Trillion? China has about $3 Trillion in foreign exchange reserves. The worst-case estimates of current debt-to-GDP for the Chinese government does not exceed 80% (even assuming most local government debt goes bad). China's international credit rating is stronger than that of the US government. China can easily borrow $1 Trillion in US dollars in the global market, and use that money to recapitalize these banks. This is all deja vu all over again. We saw this movie 10 years ago, and China quickly made the banks whole and floated them as public companies. Don't bet against the Chinese government.
MCHI is yet another johnny-come-lately "me-too" fund whose only real strength is the relatively low expense ratio. There is too much overlap with a lot of other funds including GXC, FCHI, YAO, to name three.
There is hidden value in the real-estate. From Yahoo: As of December 31, 2009, it owned approximately 88,925 acres, consisting of 88,475 acres in Hawaii and 450 acres on the U.S. Mainland.
China wants robust domestic competition, but it steps in to mediate when things gets ugly between the domestic competitors (watch the recent dispute resolution between Chinese Internet companies. Basically, the Chinese government is like a parent / elder watching the kids compete. The aim is to displace the foreigners (their technology) and stop paying license fees. Of course, also to own patents so they can counter-sue when accused of plagiarism and IP theft. All this has been well-articulated and openly stated as goals of the Chinese government. They don't care too much if companies waste resources, as long as China, as a country, comes out ahead.
You say: "FXI, the most widely held Chinese ETF, is arguably best-placed to capitalize on a rise of China’s fortunes". No. FXI has only 25 names, mostly giant banks / insurance firms, or giant energy companies. Not the best way to play china.
Chinese investors toggle between stocks, real-estate, and gold (a relatively new option). They chase whichever one looks appealing. Government crackdown on real-estate and under-performance of the stock market are certainly factors in allure of gold and silver for Chinese investors.
It is not either speculation or inflation-hedge. It is a combination of both. With bank deposits providing a negative return after inflation, there aren't too many alternatives for Chinese savings. Since China is the world's biggest gold producer, all this new demand for gold stimulates further mining within China creating more jobs for the Chinese. Another reason for the government to favor higher gold prices.
Chinese officials have gone on record stating that they are not aggressively boosting central bank gold reserves, partly, due to fear of upsetting common folk who want to buy gold as personal investment. The market will front-run any big moves by the Chinese government to start building huge gold reserves. They have been buying over the last year, but it is relatively modest. I would expect that to change over the next few years, as China starts to back the Yuan with its gold reserves, and diversify its foreign exchange reserves.
You cannot read much into one year's stock market performance. China's stock market goes through boom-bust cycles. It under-performed many other markets from 2001 to 2005, and then took off like a rocket for a couple of years (2006 and 2007). Unlike in other markets, the individual retail investors have a big say in the A-shares market; they tend to be of a speculative bent. This will change as the QFII program is relaxed to allow more foreign institutional investors to come into the A-shares market.
Also, using FXI as a proxy for Chinese stocks is not reasonable. It is only 25 stocks, and not very representative. Some sectors, such as the consumer sector stocks, have had a good run over the last year. Banks and real-estate stocks have underperformed due to fears of government tightening and the so-called real-estate bubble.
China is under-represented in global portfolios. It is being clubbed under the "emerging markets" category, which is partly to blame.