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.