The are concerns about what the various growing pains and mistakes that have been made in managing the Chinese economy and whatever mistakes will be made in the future. Hopefully it is obvious that mistakes will be made in managing the Chinese economy just as in other economies.
I believe the tone of my past posts has been the same for a long time; broad based access is a bad idea. Broad based could be thought of in funds like iShares FTSE Xinhua 25 (FXI), SPDR S&P China ETF (GXC) or the Claymore China All Cap (YAO). Whatever becomes of China as an investment destination in whatever timeframe you care about I think there will be a couple of sectors, especially the banks, that should be avoided and you can't do that with the funds above.
If you buy into this then that leaves narrow based funds, and I would say that GlobalX has the most choices there, or individual stocks. The two stocks that I think I've talked about the most are personal holding Jiangsu Expressway (JEXYY) and Hong Kong Exchanges (HKXCY).An expressway stock, there are quite a few of them, is a utility of sorts, regardless of the cyclicality of the Chinese economy there are still a couple hundred million people who will move into a city and some portion of those folks will buy cars. There are plenty of people already in the cities who do not yet have a car. There will be more cars per capita and so more people paying tolls. A really bad economy would likely mean this happens at a slower rate.
There are more and more stock listings in Hong Kong to the point of being problematic actually but Hong Kong is becoming more globally relevant for both its role in the development China and for what is happening on the ground there. At some point the massive amount of new listings will decrease, many of those companies will disappear, like during the tech wreck, and HKXCY will lose revenue. It might be able to replace that revenue or not, that is probably down the road some.
If you like a sector fund; the GlobalX China Energy Fund (CHIE) owns a lot of oil stocks, quite a few coal stocks and several solar stocks. By now you've probably heard somewhere that the Chinese use about 2 barrels of oil per capita and that the US uses about 24 barrels. China is going to get closer to 24, and for all I know closer might only mean four barrels but whatever increase on whatever timeline should mean good things for oil in the future and also Chinese energy stocks. Obviously if the economy sputters, or worse then the path to increased consumption and whatever good will come from that will be slower.
In looking at each of the three above there are shorter term risks and longer terms rewards. If you think you could not ride through the consequences of those risks, or the risks to whatever way in is right for you, then you need to be more tactical and take greater heed from arguments making the case for real problems happening now or in the next couple of years. Some folks are long term in such away that they can absorb those consequences.
For anyone thinking the long term for China looks promising, I do albeit selectively, there is need to sort this out, decide how tactical they can be (which might be not tactical at all) and then move forward. If you've been reading this site for a while you know I have come out of China a couple of times on an across the board basis and am out right now with the expectation of getting back in later.
China is similar to a few other countries in that the promise for outstanding long term results seems obvious, more than the US IMO, but the risks are also tangible and the consequences for the full brunt of those risks could be big. One idea for people not confident in their ability to sort this out is to just have some fraction of a full position like maybe 1/3 or 1/2.
7 comments:
Looks like Europe's central bankers came to their senses. If the market buys it the rally should be significant.
That didn't take long: Hmmmm, feel that vol, toasty.
I think China gets another bite at the apple because the ECB is so anti-inflation I doubt the Euro will be allowed to fall much which means Europe's exports remain relatively higher in price.
Longer term I see a new Bretton Woods on the horizon.
In the meantime, fun and games (and really good hedges).
RW: Have you read Supercycles, by Arun Motiany?
Sam
Sam, no I haven't, but I'll look into it. Was there anything in particular you found useful or illuminating in the work?
Roger or commenters, what are your thoughts on the trillion dollar European rescue package? Most of what I have read today is short-term positive and long-term negative; very similar to the US stimulus package of last year. I tend to agree with that assessment.
JCarr
The ECB/IMF initiative is similar to TARP but not the US stimulus package (yet): Europe has no unified fiscal mechanism (part of their problem actually). Initially they made the same mistake as the US, treating a solvency crisis as if it were a liquidity crisis, so the first proposal was a backstop for bondholders, injecting liquidity into banks and other financial entities.
They seem to have realized that was insufficient and, in the second pass, appear to be trying for a real expansionary monetary policy that could have some stimulative effects if they're serious about it. We'll see but given the ECB's sole mandate to maintain stability of the Euro (AKA no more than 200 bips inflation allowed) I don't see them willing to accept the slightly higher rate of inflation that would probably be involved.
Frankly I think there is a good chance Germany digs its heals in and the ECB turns turtle, trying to maintain a strong Euro (adding to trade imbalances of course) while sterilizing as if it's just a bigger liquidity operation. In the meantime the powers-that-be will doubtless insist that individual countries must cut their budgets to do the heavy lifting. That is a formula for pernicious deflation with depression possibly accompanied by fragmentation of the union following. JMO of course.
NB: Even though the Euro jumped after the news while gold, $USD and Yen retreated that pattern did not hold and began to retrace later in the day. Information overload breeds uncertainty.
RW: I'm only about 50 pages into the book, but it reads like you wrote it. Three possible outcomes: Inflation, deflation, and stagflation. How to plan for each possible outcome. The beginning of the book (what I've read so far) is a history of modern economic theory. He does an interesting treatment of modern capitalism and the investment of capital to maintain a level of profit, not a % return on investment. I witness this daily where I work, and this is the first attempt at explaining this practice. By the way, I use the library; It's a good way to learn in a cost effective manner. Look it over and let me know if there is anything you see that strikes you as novel or unique, if you get a chance.
Thanks,
Sam
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