New Chinese Antitrust Law

Just after I finished posting about how I don't want to invest too much money in state-owned firms, here's a new law designed to protect state-owned firms:
The new law does not undercut central government control of industries considered crucial to national interests, including electronics, telecommunications, postal services, airlines and railways. Moreover, local governments will maintain their traditional grip on public services such as medicine, education, publications and tourism.

Comparing the Broad China ETFs, Part 2

Here's something I wrote more than a year and a half ago.

The Chinese economy has grown more than 50% in the last 5 years. Good companies grow profits at a rate faster than GDP growth. Companies with rising profits generally have rising shares. So why does the Shanghai composite 5-year chart look like this:

I then referred to this article by John Christy.
One of the main reasons to invest abroad is to find growth opportunities that don't exist at home. Another reason is to invest in companies that are better-run than the ones you'd normally choose from. FXI hardly helps you accomplish any of this.

I pasted that chart on March 14, 2006, when FXI sold for $71.80. It closed at $208.09 on Friday, a gain of 190% in less than 20 months.

There are some good companies in iShares FTSE/Xinhua China 25 (FXI), but I'd prefer to own something other than state monopolies. That said, FXI invests in H-shares, which will should soon eventually be available for purchase by mainland investors. They are currently paying a steep premium for A-shares, the only available shares besides the illiquid B-share market. As a trade it probably has room to grow, but I would not buy this as an investment.

PowerShares Golden Dragon Halter USX China Portfolio (PGJ) has two features that make it stand out as a potential investment. The first is that it invests in ADRs. In theory, this should provide investors with increased protection, but that isn't necessarily the case. The best example of what can happen with a Chinese ADR is China Yuchai. You'll find several articles by Peter A. Delgado, II, an investor in China Yuchai (CYD) at Seeking Alpha. Anyone interested in investing in China should take the time to read all his posts.

The second feature of PGJ is it's heavy technology exposure. Many Chinese tech companies listed in the United States, where capital was easier to acquire, and the result is a large number of companies to choose from. That said, the Alibaba IPO (1688.HK), may change things. If Chinese companies increasingly look to Hong Kong for financing, investors in a strictly ADR fund could miss out on some opportunities. Nonetheless, this is a tech heavy fund, because there are several technology names hiding in the consumer discretionary and industrial sectors. By my estimate, the fund has roughly 23% in tech, 8% more than the 15% listed on the PowerShares website.

Finally, there is the S&P/Citigroup BMI China Index (GXC). The strength of this fund lies in its diversification across markets. It holds ADRs as well as H-shares, offering exposure to technology while also offering many consumer names that are unavailable as ADRs. Like the other two funds, this one also allocates a large portion of assets to mega-cap state owned firms, but if I had to pick one fund of the three to best represent the available universe of Chinese equities, this would be it. Whether it will be the best performing investment is a separate question.


Comparing the broad China ETFs, Part 1

There are three major China ETFs. In this post I want to examine what each fund offers investors looking for a slice of the economy that surpassed the United States as the engine of global growth.

iShares FTSE/Xinhua China 25 Index Fund (FXI)
PowerShares Golden Dragon Halter USX China Index (PGJ)

Here's a brief description of each fund from each sponsor's website:
The iShares FTSE/Xinhua China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index.

The PowerShares Golden Dragon Halter USX China Portfolio (Fund) seeks to replicate, before fees and expenses, the Halter USX China Index, which is comprised of the U.S. listed securities of companies that derive a majority of their revenue from the People's Republic of China.

The S&P®/Citigroup® BMI China Index is a float-adjusted market capitalization weighted index that defines and measures the investable universe of those publicly traded companies domiciled in China that are legally available to foreign investors.

Right off the bat, PGJ distinguishes itself by assembling the fund using only U.S. listed securities versus GXC and FXI, which are invested in Hong Kong listed shares. GXC and FXI are similar, but FXI has a 10% cap on individual stocks and is limited to the top 25 Chinese firms—even though it currently holds 29 securities. PGJ holds 75 securities as of Thursday's close; GXC holds 201.

Sector Weights

39.7% Financials
17.9% Telecommunications
17.5% Oil & Gas
13.1% Basic Materials
9.2% Industrials
2.4% Utilities

28.8% Financials
21.3% Energy
16.4% Telecommunications
12.1% Industrials
7.5% Materials
4.6% Consumer Discretionary
4.0% Information Technology
2.8% Consumer Staples
2.4% Utilities
0.2% Healthcare

21.1% Energy
20.8% Telecommunications
14.0% Information Technology
14.0% Industrials
8.2% Materials
8.1% Consumer Discretionary
5.1% Financials
4.5% Utilities
3.5% Healthcare
0.5% Consumer Staples

FXI is strictly the top companies by market cap, which turn out to be state-owned enterprises with monopoly-like status. The banking sector is dominated by the large state owned banks, and while it may be a surprise, it isn't shocking to learn that nearly 40% of the fund is financials, double the weighting of the S&P 500 Index. GXC owns a broader cross section of companies, but financials still dominate the fund. Due to limited financial ADRs, PGJ holds only 5% in this sector.

Energy and telecommunications are even more narrowly dominated by SOEs and because ADRs are available, these two sectors have the largest weights in PGJ.The third sector in PGJ, however, is information technology. Due to difficulties in listing domestically, plus American experience in bringing technology companies public, many Internet firms have chosen to list in the U.S. Since the Halter USX Index includes all stocks with market capitalization greater than $50 million and is limited to U.S. listed shares, technology is weighted heavily. GXC holds some American listed information technology as well.

Beyond the top three, excepting materials, the three funds diverge in their holdings. FXI sticks to the industrial giants, while GXC achieves a broad representation of the Chinese economy. PGJ is more heavily weighted towards consumer discretionary and healthcare.

Market Cap Weighting

Giant 90.73
Large 9.27

Giant 65.63
Large 22.81
Medium 10.43
Small 1.03
Micro 0.10

Giant 40.28
Large 12.57
Medium 33.74
Small 8.45
Micro 4.95

Source: Morningstar.com

FXI is 100% large cap or greater, GXC is 88%, PGJ is 52%.

Top Ten Holdings

Total: 61.78%

China Mobile Ltd 13.36%
Petrochina Co 7.34%
China Life Insuran 6.96%
Cnooc Ltd 4.52%
China Const Bk 4.34%
China Petroleum 3.83%
Ind & Com Bk China 3.69%
China Shenhua Ener 3.22%
Ping An Insurance 2.60%
China Cosco Hldgs 1.95%
Total: 51.81%

PetroChina Co. Ltd. (ADS) 7.14%
China Mobile Ltd. (ADS) 6.09%
China Petroleum (ADS) 5.28%
China Telecom Corp. Ltd. (ADS) 5.24%
China Life Insurance Co. Ltd. (ADS) 5.10%
China Netcom Group (ADS) 5.08%
Aluminum Corp. of China (ADS) 4.70%
CNOOC Ltd. (ADS) 4.63%
Huaneng Power Inc. (ADS) 4.49%
China Unicom Ltd. (ADS) 4.35%
Total: 52.1%

The top ten holdings in each fund are very similar, with individual weightings as the main difference.


FXI 0.74%
GXC 0.59%
PGJ 0.70%

Source: Morningstar.com


Chinese Economic History

Joining some pioneer studies on Chinese firms, this research compares China's experience with that of the West, and then rejects a unique Chinese pattern. As it shows in the story, Chinese entrepreneurs possessed the same entrepreneurs' instinct as their Western counterparts, and they would respond to similar problems related to new social, political, economic, and technological situations with some similar innovations in managerial arrangements. However, unlike some early studies, my dissertation suggests a linear path of institutional development of this particular enterprise. It is a path from small to big, from personal to contractual, and from traditional to modern.19 Eventually a "jituan" or Chinese business group appeared in 1940s with a multidivisional structure under the control of a central office. As my narrative will show, the creation of a "jituan" was a response to a series of business crises the enterprise faced in 1930s and 1940s. Many of institutional innovations started as an expedient arrangement targeting one temporary problem, and were maintained after the particular crisis was relieved. Ironically, this new business institution was hardly influenced by the newly-enforced Chinese company law or the efforts of early-twentieth-century reformers, two topics that have been well studied to understand China's modern business development.20 In fact, according to the company law, "jituan" was not even a legally recognized form of business organization. Again, entrepreneurship is emphasized as the main driving force for the institutional development of this industrial enterprise.

One point illustrates why history is critical:
After Deng Xiaoping's Southern tour of 1992, China started to promote a socialist market economy, in which the state-owned enterprises were gradually transformed into a revised version of Modern Corporation. To offer the theoretical guide for this new transition, Chinese scholars turned to look at the business practice both in the West and in the past. A considerable amount of studies on company history was produced during this period. One of the major agenda of these researches was to justify the reform policy by discovering the similar "capitalist" practices in indigenous Chinese businesses---so the new reform would appear ideologically more "Chinese" and less "capitalistic." In late 1990s, when the economic reform was deepened and the privatization movement has already started, economic historians in China had little ideological confusion left. Influenced by Chinese economists, who borrowed institutional economics from the West, they continued to study the history of Chinese enterprises but with a new interest in their institutional development.


Commodities Growth

Although the main focus of this blog is to analyze equities, commodities offer an uncorrelated way to play Chinese growth. Here's the September press release from the Dalian Commodities Exchange:

According to the latest statistics from China Futures Association, the performance of the national futures market in general was appeared brisk. For China's futures market as a whole, in September, the total volume and turnover increased 149.6% and 113.29% respectively from a year ago to 85.4 million contracts, worth 3.8 trillion yuan, and was 33.46% and 8.14% upper than August respectively. The total trading volume and the turnover from January to September were 455.7 million contracts and 26.1 trillion yuan, up 46.16% and69.71% respectively from last year.
Dalian Commodity Exchange (DCE) achieved a trading volume of 51.03 million contracts and a turnover worth 1.69 trillion yuan, accounting for 59.74% and 44.12% in all of China's three commodity futures exchanges. The trading volume increased by 486.26% from a year ago and 84.06% than August respectively, while the turnover was 866.75% higher compared to September 2006 and increased by 99.75% from August respectively.

Investment Terms

All subsequent posts will be located under the Dictionary tag.

Invest: 投资 tóuzī
Stock: 股票 gǔpiào
Common Stock: 普通股 pǔtōng gǔ
Stock Market: 股市 gǔshì
Price to Earnings Ratio:市盈率 shì yíng lǜ
Profit: 利润 lìrùn
Profit Margin: 边际利润 biānjì lìrùn
Debt: 债务 zhàiwù
Equity: 所有者权益 suǒyǒuzhē quányì
Security: 证券 zhèngquàn
Derivative: 衍生证券 yǎnshēng zhèngquàn

Chinese Stocks: The American Option

If you want to invest directly in China without purchasing shares in Mainland companies, there are many stocks available on the American exchanges. These companies must comply with American listing standards, although as Jonathan Weil points out, that isn't necessarily saying much.

The are several major differences between the available stocks. First, some are ADRs of Chinese state-owned companies. China Mobile (CHL) falls in this category. Some of these companies have very odd share structures, such as China Yuchai (CYD). Shareholder Peter Delgado, II, is an activist shareholder in CYD, and he's written several articles on the company. Anyone who's serious about investing in state-owned companies should read his articles, which can be found on Seeking Alpha.

Next are Chinese companies that have listed directly on a U.S. exchange. Since it is difficult to list on the mainland exchanges, many companies chose to list overseas—especially Chinese internet companies. Here's a small part of Shanda's investor relations FAQ:
20. Where and when was Shanda incorporated?
Shanda was incorporated in the Cayman Islands in November 2003, however, our business was founded in December 1999 under the Shanghai Shanda Networking Co., Ltd.

21. Where is Shanda's stock listed?
Shanda's stock is listed on the NASDAQ National Market under the ticker symbol SNDA.

22. When did Shanda go public, and at what price?
Shanda issued 13,854,487 ADSs (American Depository Shares) on May 13, 2004 at U.S. $11 per ADS in its initial public offering (IPO). On June 2, 2004, Shanda held the closing for the over-allotment option in connection with its IPO. At this closing an additional 1,505,634 ADSs were purchased from Shanda and the selling shareholders, which increased the total outstanding Shanda ADSs to 15,360,121 and the total outstanding Shanda ordinary shares to 141,818,280.

Finally, there are American companies who do the vast majority of their business in China. A good example of this is Chindex (CHDX).

You can find American listed Chinese companies with market caps over $50 million at the website for the Halter USX China Index.

Wu Xiaoling: RMB Will Not Appreciate Quickly

Wu Xiaoling, the deputy governor of the People's Bank of China said, "If we rush things too much, this will hurt the Chinese economy and the global economy," she said. "We are moving in a smooth manner, and this will help us all."

Here's the anti-China slant from the Washington Times.

The currency issue remains an important factor in investing in China and can greatly affect returns. However it is not a reason to invest in equities, only a factor used when deciding which equities will outperform given the current situation.



Note: This site is intended for informational purposes. It is not intended to serve as financial advice, nor should it be construed as advice. Discussion of securities or trading strategies are informational and are not recommendations to buy or sell securities. Any mention of trades, real or fictional, are informational. Investors should contact their financial adviser before making any financial decisions.



Introduction. This agreement (”Agreement“) between You and INVESTINGINCHINESESTOCKS.BLOGSPOT.COM (”the Author“) consists of these INVESTINGINCHINESESTOCKS.BLOGSPOT.COM (the “the Blog“) Terms of Use (”Terms“). “You“, “Reader” or “Commenter” means any entity identified by its comments, e-mail, registration information or IP address. If You use this Blog on behalf of your employer, organization or company, they shall also be bound by the terms of this Agreement.

Privacy. When You leave a comment, the Author is automatically notified and receives IP, WHOIS, and e-mail information pertaining to the Commenter. This information is not stored by the Author for other purposes than to moderate comments. This information is not being sold or used for other purposes. If you have concerns with the way this information is used, please contact the Author directly to arrange for complete removal of this information. Removal of all personal information will result in the removal of any content the Commenter might have contributed to this Blog, including comments. This Blog is hosted in USA. Be aware that laws regarding personal information and privacy may differ from Your location.

Blog content. All the contents of the Blog, EXCEPT FOR COMMENTS, constitute the opinion of the Author, and the Author alone; they do not represent the views and opinions of the Author’s employers, supervisors, nor do they represent the view of organizations, businesses or institutions the Author is a part of. The Author is not a financial professional, and you should never substitute information from this Blog for information obtained from a licensed financial professional; always consult your financial adviser before making any investments. This Blog is written in English and Chinese; however, the latter is the Author’s second language. The content of this Blog is not intended to cause harm, but if You have any concerns about the contents of this Blog, please contact the Author. Disagreeing with the content of the Blog does not constitute sufficient ground for You to ask the Author to remove or modify any parts of this Blog. The Author is not being paid to write content on this Blog or to manage and in any way operate this Blog.

Copyright policy. All the text, images and other content being part of this Blog is property of the Author, unless noted otherwise. All logos and trademarks are property of their respective owners. You are not allowed to reproduce, sell, and modify any part of this Blog. You are welcome to link to this blog, and to discuss its contents in a respectful manner. When You quote or link to this Blog, please include the INVESTINGINCHINESESTOCKS.BLOGSPOT.COM in your link. You are not authorized to use this content for personal profit. UNAUTHORIZED COPYING, REPRODUCTION, MODIFICATION, REPUBLISHING, UPLOADING, POSTING, TRANSMITTING OR DUPLICATING OF ANY OF THE MATERIAL IS PROHIBITED. Whenever copyrighted material is mentioned or use, the Author is doing so according to fair dealing practices. Use of material from this Blog according to fair dealing practices requires proper acknowledgment. Simply linking back to the Blog is not considered proper acknowledgment; please provide a link including the Author’s name, the name of the page you are linking, and a permanent link (”Permalink“) to that page.

Comment policy. The Author is not responsible for the content of any comments made by the Commenter(s). The Author is also not responsible for knowing whether the content of Your comment is breaking the law in other countries or jurisdictions. This Blog is a venue for discussion; therefore, the Author will not delete critical comments, or comments portraying a different opinion from the Author’s own. However, the Author reserves the right to edit, delete, or not publish a comment if this is deemed to be potentially illegal (this includes, but it is not limited to comments containing hateful, libelous, and defamatory content). All comments on this Blog have to be written in English. Please do not endanger Yourself or break the law when you comment. Comments intending to advertise and/or off-topic (”SPAM“) will be deleted. The Author also reserves the right to block Commenter(s) who have previously published offensive comments, illegal content, or SPAM.

Forbidden actions. You are not authorized to (i) use this Blog to advertise for products of any kind and for other Blogs, (ii) to infringe the Copyright policy and Comment policy of this Blog, (iii) to attack this Blog using malicious software and/or use this Blog for data mining (iv) to commit any illegal actions while using the Blog, or against this Blog, (v) to restrict access to this Blog, (vi) to impede the normal functioning of this Blog and (vii) to menace the Author with, or cause physical or financial harm to, the Author of this Blog.

Changes to the Terms. The Author reserves the right to change these Terms at any time. You will only be notified by the Blog through posts or syndicated content (RSS), NOT IN PERSON. It is Your responsibility to make sure that you agree with the new Terms, whenever changes have been announced. Changes to the Terms will be effective 48 hours after the notice has been posted on the Blog. If You do not agree with the Terms, DO NOT USE THIS BLOG.

No Guarantee. The Author makes no guarantee regarding the validity of the content of the Blog. In addition, the Author does not guarantee that the Blog will be accessible at all times or during any down time (i) caused by outages to any public Internet backbones, networks or servers, (ii) caused by any failures of Your equipment, systems or local access services, (iii) for previously scheduled maintenance or (iv) relating to events beyond the Author’s control such as strikes, riots, fires, floods, explosions, war, terrorism, governmental action, labor conditions, natural and/or man-made disasters, or interruptions in Internet services to an area where the Author or Your servers are located. Although the Author will try to moderate comments quickly, the Author makes no guarantee to the Commenter that its comments or trackbacks will be displayed promptly, without modifications, or that they will be displayed at all, as all comments will be published to the discretion of the Author.

No Warranty or Condition; Links. The Author makes NO WARRANTY OF ANY KIND. If you choose to access the Blog, you do so AT YOUR OWN RISK. To the extent links and external content are based on or displayed in connection with the Blog, THE AUTHOR SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE DISPLAY OF SUCH LINKS AND SEARCH RESULTS, whether this external content is breaking the law in this or other jurisdictions. YOU AGREE TO USE THE BLOG AT YOUR OWN RISK, and that You will not consider the Blog’s content to be a suitable substitute for professional advice.

Limitations of Liability. IN NO EVENT SHALL THE AUTHOR BE LIABLE UNDER THIS AGREEMENT FOR ANY DAMAGES OR LOSSES.. Each party acknowledges that the other party has entered into this Agreement relying on the limitations of liability stated herein and that those limitations are an essential part of the Agreement. Without limiting the foregoing, the Author shall not have any liability for any failure or delay resulting from any condition beyond the reasonable control of the Author, including but not limited to governmental action, labor conditions, power failures, natural and/or man-made disasters. The Author is not liable for the content of any comments the Commenter might leave on this Blog (see Comment policy).

Obligation to Indemnify. You agree to indemnify, defend and hold the Author, its agents, and applicable third parties (collectively “Indemnified Person(s)“) harmless from and against any and all third party claims, liability, loss, and expense (including damage awards, settlement amounts, and reasonable legal fees, brought against any Indemnified Person(s), arising out of, related to or which may arise from Your use of the Blog and/or Your breach of any term of this Agreement.

Applicable Laws; Venue. The Author operates the Blog from USA, and makes no representations that materials in the Blog are appropriate or available for use in other locations. Access to the Blog from any location where the content is illegal is prohibited. Any claim related to the use of the Blog or to the Blog materials shall be governed by the laws of the USA. Any action related to the access, use, content, or existence of this Blog shall be filed only in the appropriate court located within USA. The use of this Blog constitutes Your express permission and consent to the jurisdiction of the provincial and/or federal courts of the USA for purposes of such actions.

Legal notices and Contact information. If You are intending to carry out legal action of any kind against the Blog or the Author, you are required to contact the Author TEN BUSINESS DAYS before any legal claim is made. Please remember that the Author means to DO NO HARM to You or anyone else by writing this Blog. If You feel that your rights have been infringed, please contact the Author, and allow seven business days for the reply to be received. The Author will do whatever possible to address Your concerns.

How to write a blog disclaimer.