Mid-year SSE Update

Its been a while since Sinocracy has had an update, but now is a good a time as any to get things back on track.

Things have not been going well for China as a whole during the first half of 2008 - noteworthy events include devastating snow storms during February, and more recently the Sichuan earthquake in May.

The stock market has been a rollercoaster of a ride so far this year, and today, it dropped to a 15 month low.

Shanghai market sinks to 15-month low by -- A BROAD sell-off in the market dragged Shanghai's key stock index down for an eighth-straight day today and sent the index to its lowest level since March last year.

The Shanghai Composite Index, which tracks...

Naturally, the events have shaken investor confidence and affected the market considerably, and now we see the market at 2,868.80 points.

It is hard to tell which direction the market will be headed, but with inflation on the up, and China still recovering from the damage caused in Sichuan - now will definitely not be a good time to invest, even with bargain basement prices on A-Shares.

-GP

Sinocracy Portfolio Review

Both George and I have been fairly busy over the past week, and this blog took a good deal of neglect. Lets try to change that by reviewing the Sinocracy Index that we created on the last post (about 3 weeks ago, sorry!).

Name	Symbol	Price	Shares	Value
China Telecom	CHA	65	385	27,512.10
Lenovo Group	LNVGY.PK	14.45	1,730	27,264.80
China Life	LFC	55.91	447	28,178.88
Citic Pacific Holdings	0267.HK	32.55	5,985	26,485.70
				109,441.48

From the table, we can see that our index gained 9.44% from its 100,000.00 value on its creation.

This can be compared to the Ishare FTSE/Xinhua China 25 Index (FXI) which is priced at 152.01 today, a gain of 4.4% from 145.58 at the opening of the day we created our fund. The S&P dropped from 1,388.82 to 1,388.28 during this interval.

Hurray for us! I'll review the investment choices and update this portfolio this weekend.

- H

Sinocracy's Large Cap Index - A Work in Progress

By Colin Chen,

When we started this blog, I told myself I wouldn't turn it into a boiler room rumor machine by discussing individual stock or commodities, but there was little left to say about investing in China without actually doing it. So I got my hands dirty last night and compiled a list of large cap China stocks that I feel are undervalued. The portfolio is a work in progress and I have not used any optimizers.

Here are the companies that form the Sinocracy Large Cap Index:

China Telecom (CHA) - This is my equity of choice for the Chinese telecommunications sector. With the largest and one of the fastest growing computer user population in the world, China will feed the rise of this sleeping giant. The 18.58 P/E ratio still undervalues China Telecom's growth potential.

Lenovo (LNVGY) - Sure, HP and Dell are eyeing the Chinese domestic market as the sustenance for future growth, but nothing beats the home grown strategy to push back the foreign devils. Asian populations have shown constant favoritism toward domestic companies and China's treatment of Lenovo is no different. In fact, Lenovo's management is already exploiting its status and connections to the Chinese population by sponsoring the Beijing Olympics. Riots aside, the 2008 event is expected to give fantastic PR to this Chinese company in the nationalist domestic market. To the international business, the sponsorship instead establishes this firm's legitimacy.

China Life (LFC) - China's conservative risk averse population needs insurance. This company can offer exposure to several domestic sectors including healthcare and property growth.

Citic Pacific (0267.HK) - A resource holding company. CITIC pacific is a great way to obtain exposure to the commodity hungry Chinese economy.

The index itself is formed an equal part of each mentioned firms and will be compared to the FXI iShares FTSE/Xinhua China 25 Index. I used this morning's opening as starting prices.

Starting this morning at around 100,014 USD:

Company	Ticker	Share	Price (USD)	Total (USD)
China Telecom	CHA	385	65.00	25025.00
Lenovo	LVNGY.PK	1730	14.45	24998.50
China Life	LFC	447	55.91	24991.77
Citic Pacific	02567.HK	5985	4.18	24999.35
				100014.62

iShares FTSE/Xinhua China 25 Index (FXI) opened at 145.58 today.


I will review and reevaluate the portfolio bimonthly.

- H

Shanghai Property Prices

By George P

Following up on a post from a while back, I have been going through some examples of property prices on the Shanghai market.

As is the case all around the world, there are new developments, and second hand. Second hand places are usually not quite as attractive to potential buyers, as there are extra fees associated with them. New developments cost less in Shanghai as well, compared to the second hand equivalents.

A good database exists here (of course in Chinese):

http://newhouse.sh.soufun.com/ (for new properties)

While on first inspection, the page looks like jibberish; it isn’t as difficult to get the information you want as you think. Second hand property prices are also accessible, but I won’t go in any deeper in regards to that at this moment.

From the first drop down list 城市 you select the city – in this case, 上海 (Shanghai) will be pre-selected).

The next 区县 is the district – so for this example, select 静安 (Jing An), which is right in the heart of Shanghai (and one of Shanghai’s priciest areas).

片区 – Area, e.g. 南京西路 (West Nanjing Road), 江宁路 (Jiang Ning Road), 静安寺 (Jing An Temple). This will determine the rough area you are looking for apartments in.

Search.

A list of results will be generated as shown below.

The first column details the name of the development, second gives the address, third indicates the type of apartment block, and fourth is the all-important price. The remaining columns are the developers, contact phone numbers, and finally a compare function.

Prices are set in 元/平方米 (Yuan/Square Metre). As can be seen from the list of results, you can be expecting to pay upwards of 20,000 RMB per square metre for a place in the Jing An area, near West Nanjing Road.

So, the results generated previously show rough prices in the downtown Puxi area.

As I mentioned previously, a cheaper choice would be the Pudong area, which is cleaner, and almost just as convenient (if situated along Line 2 metro).

This time select 上海 (Shanghai), then 浦东 (Pudong), and 世纪公园 (Century Park). This location is a very pleasant area of Pudong, a lot of greenery (being right next to Century Park), fresh air, and convenient access to the metro.

Scanning over the list quickly, of course with exceptions, new properties in the Century Park area are visibly lower-priced when compared with the Jing An equivalents, in some cases 10,000 RMB+ less.

Conclusion is, buying property in Shanghai depends on your personal requirements. On one hand, Puxi has great restaurants, nightlife, many conveniences within walking distance; but it comes at a high price. Pudong, however is becoming more and more attractive as it is clean and fresh, with many conveniences within a short metro ride, and also has a reasonable choice of good restaurants and supermarkets.

-GP

Recession and the Business Cycle

By Colin (Huaizhi) Chen

There is one word that haunts the dreams of economists and feeds on the tears of broken politicians. Some believe that it is only a legend, invented by Allan Greenspan as an old wife’s tale to keep investment bankers in check of their unruly excesses. Yet those who have been in its remorseless grip cannot deny the certainty of its affects and the truth of its existence. Over the eons, many charismatic young defenders of wealth and economy have joined in crusades against its might. They celebrate their temporal victory only to cower in fear in old age as it returns again and again. There is one word to rule over all other words (about the economy). Guessed it yet? It starts with an “R” and ends with an “ecession.”

Ok… this is probably not the first time you came across the concept of a recession. In fact, if you’re a working age adult, you most likely have heard at least one of its two common definitions. One definition is simply two or more consecutive quarters of zero or negative economic growth. However, if you tell this to a NBER economist, he’ll likely tell you to grab a seat so he could lecture about the growth of the American economy and his love of Milton Friedman. He would then go on to dictate that recession, as defined by the National Bureau of Economic Research, is a significant decline in economic activity, and serves as the period between economic growths. He would then proceed to linearly-regress the number of times someone gives up a seat on a public bus to the incarceration rate for public indecency, but more on the oddities of economists later. So what makes the hairsplitting so important, and what makes recession so fearsome in the economy?

To answer that, we will have to look at the broader picture. Most free market economies in history have followed periods of expansions and slow downs. We call the sequence of economic growth and declines, the business cycle. More specifically, the Juglar cycle, based on its name sake, Clement Juglar, who as far as in 1860, foresaw the periods of expansionary prosperity, crisis, and liquidation in various economies. Assuming that an economy is growing steadily, investors would become gradually overconfident about their choices of investments. As this confidence becomes irrational and capital grows in an unsustainable manner for less productive industries, a slowdown in growth would occur, bursting the investor confidence. This in turn spirals a dramatic decrease in economic output as capital owners transfer resources from the unsuccessful enterprises to more productive ones. We call this a recession. Correcting inefficiencies in the market, ideally leads to an economic recovery. However, many Keynesians believe that the dramatic decline in production can lead to a spiraling decline of consumer spending, which in turn creates more decline of production leading to a depression. To prevent this, we tend to see loose money monetary policies and fiscal stimulus to stimulate the economic recovery.

“So what?” Evaluating which stage of the business cycle an economy is in helps guide our investment decisions. If we are currently in the recovery stage of the business cycle, investments like commodities and growth stocks are attractive because they would fuel the coming economic expansion. As the economy recovers, it enters an early expansionary stage. We would then look at common equities and real estate as they have historically benefited the most from steady growth. As expansion continues, the fed sets high interest rates to fight inflationary pressures and a possible equity balloon, we would start moving our stocks to bonds and interest rate related securities in expectation of a recession. In a recession, the feds would start cutting the interest rate, generating a nice profit for our fixed income investments. In turn, we’ll prepare to transfer our investments into commodities and growth company stocks in expectation of the coming recovery.

So perhaps recession isn’t the four legged monster many have made it out to be. To a keen investor, it may even present some opportunities.

- H

Thursday 3rd April Market Activity

By George P

Following up on my previous post on Wen Will You Take Action (Soon!) the SSE has made a few (interesting) twists and turns. Here is a little more detail:

Date	Close	Loss/Gain
02/04/08	3347.88	+18.72
01/04/08	3329.16	-143.55
31/03/08	3472.71	-107.44
28/03/08	3580.15	+168.66

Wen made his statement on the 30th March - what is interesting is the jump in the index at close on the 28th of March, just before Wen was going to make his statement - did investors predict it? Insider information?

It appears that my conclusions were a little off, and the week has started on quite a sour note. What does this actually mean? The central Government has actually cautioned that domestic fixed-asset investments are still growing too fast and that banks are still lending too much - this was one of the reason for the sharp decline on Tuesday. In my opinion, this was a very responsible statement to make, and could cool serve as a catalyst to get stocks to acceptable values.

Also, as the previous measures that were taken to boost the stock market proved (e.g. unfreezing of stock funds), investors are seemingly not so reliant on Government intervention to influence their behaviour. In the past, statements such as the one made by Wen would have induced a buying frenzy. Now they require solid information and action, not just 'promises'.

Yesterday, stocks rebounded quite strongly at lunch time, but the gain was much less apparent at close. Stocks opened higher this morning.

-GP

Wen Will You Take Action (Soon!)

Here they come to save the day, in another announcement from Premier Wen.

Wen pledges efforts to stabilize stock market by -- THE Chinese government will make efforts to promote the stable and sound development of its stock market, Chinese Premier Wen Jiabao said yesterday.

A healthy and sustainable capital market will ultimately be conducive...

It was only time before the Chinese Government stepped in an attempt to save the crippled stock market (again). This is the prayer that many investors have been hoping for. Of course, intentions are good, but hopefully they will make good on their pledge (a promise that they have made a countless number of times).

This news is definitely likely to boost investor confidence once more.

I hope people will still make rational decisions regarding investment though, because at the end of the day, the ball is in their court. The sharp fluctuations that the SSE has been experiencing since the start of the New Year are not healthy.

-GP


Wen did not pledge anything that Beijing hadn't already promised before, which is (ignoring the general positivist notions of a stable market) more transparency to the Shanghai and Shenzhen stock exchanges. I wonder how this would makes sense in a largely overpriced market as transparency is a double edged sword that would reveal how deceiving many A-share companies' accounting books are. Personally, I wouldn't hold my breath until those reforms are actually implemented. The mainland Chinese companies that are listed on the NYSE and the HKSE took several years of restructuring to fulfill General Accepted Accounting Principals and International Financial Reporting Standard's respective accounting standards. To actually make noticeable transparency reforms, it would take years of preparation that Beijing had previous ignored.

For the investors waiting for some kind of monetary bailout, keep holding your breath because Beijing will likely not put up the funds to bail out foolish gambles. It would be extremely irrational for it to do so as there aren't any real infrastructures at steak.

Stock market manipulation is very wide spread in China. If Beijing steps up regulation and prosecution to create a "sustainable market," it would be a positive development.

My feeling is that Wen's statements could could stop the bleeding temporarily, and perhaps cause a bounce of confidence for a couple days; however, they will not tighten the tremendous gap between the actual value and the price of A-share stocks.

-H

4 China based ETFs

By Colin (Huaizhi) Chen

So you've been hanging around the investment circles for a long time. You look at your list of mutual funds knowing that she has carried you through a long financial relationship. Lately though, the seductive allure of those tickers have lost their luster. You have this craving in your bones for something exciting and different. You want to impress your buddies with a new investment vehicle, but you know better than to fool around with those European hedge funds (who knows what they have been involved with). You want the safety of your old managed mutual fund but loath her loading and high maintenance (costs). Well, my friend, let me introduce you to a little lady we call the Exchange Traded Fund.

Exchange Traded Funds (ETF) are funds designed to track the performance of a specific industry index. They can be traded over a regular market exchange like the traditional close ended mutual funds; but unlike those funds, ETFs have a few regulatory advantages from their creation and redemption structure. New shares of ETFs are created whenever an authorized participant deposits an index tracking portfolio of stocks into a separate trustee. These ETF shares can be bought, sold, or even shorted like any regular stock. Because they are based on trusteeships and are simply trackers of a specific stock index, ETFs avoid much of the management and tax costs associated with traditionally managed funds. In fact, because ETFs can be created and capitalized fairly easily, prices of ETFs float closely to their net asset value.

"So what? How does this help me with long term investment?" you ask. Exchange Traded Funds allow an effective method of diversification by tracking an industry index. As we have mentioned before, fund managers generally do not out perform the market. Considering that and the hefty one to two percent annual fee they charge off your entire investment, you might be better off firing that greedy know-it-all and putting your money into an ETF.

If you are indeed serious about a new vehicle that taps into the growth of China, consider these four ETF's traded on the New York Stock Exchange.

ISHARE MSCI Hong Kong (ticker- EWH): This is the oldest ETF focused on China. EWH tracks companies in the Hong Kong Stock Exchange. 32% of its holdings are in Real Estate Management, 13.5% in Commercial Banks, and 10.3% in Industrial Conglomerates. While they are companies based in Hong Kong, many of the companies focus on the Chinese domestic market.

ISHARES FTSE/Xinhua China 25 Index (ticker - FXI): As its name suggests, this ETF tracks the Xinhua China 25 Index, which is, itself, formed of the 25 largest Chinese stocks trading on the Hong Kong Stock Exchange. China Mobile, PetroChina, and China Life are some of the companies you will be buying with this ETF.

PowerShares Golden Dragon Halter USX China (Ticker - PGJ): This ETF contains only U.S. exchange listed companies that derive most of their revenue from China. Proponents of this ETF believe that because these companies are US listed, they are much more transparent and in turn, safer for investors.

SDPR S&P China (Ticker - GXC): This is another ETF based on the H and N shares. According to Malkiel's From Wall Street to Great Wall, it has close to 200 companies in its market-weighted index.



Now you have a collection of China focused ETFs. Due to their low cost and diversification, ETFs make attractive investment vehicles for your venture into the East. A note of caution however; while ETFs are diversified to avoid the volatilities of an individual stock, they are still no better in performance and risk than the indices they track. Considering the wild east attitude of the Chinese financial analysts, that might be reason enough to keep your options open.

- H

China IPOs

By George P

China went IPO-crazy last year. A few notable IPOs included PetroChina, Ping An Insurance, as well as a few large banks.

It is not a strange phenomenon to see share issues jump up on the first day of issue, but as has been observed in the Shanghai market, new IPOs aren’t quite as attractive as they were previously. Another characteristic of the Shanghai IPO is a very apparent correction in price shortly (or a while) after, as short-term vultures lose interest and hunt for other scraps.

The subscription process is very much unbalanced, working in favour of private investors and is the main reason for the correction – individual investors don’t have the same level of resources as institutional investors. With the situation described above, the institutions get the attractive gains after the first day’s trading, whist individuals pick up shares at inflated prices, and watch the price plummet after the ‘big boys’ have moved on.

PetroChina, whose share price rocketed to 48.6 yuan (leading it to become one of the world's largest company by market capitalisation), ended at sub-issue price yesterday at market close, after (steady) declines. China Pacific Insurance shares floated in December 2007, and were down 6.9% from their subscription price. Ping An has also been falling since issue.

China Railway Construction Corporation's recent debut on the SSE was unimpressive when compared to the standards set by last year's issues. The A-shares (only) gained 28.19%, which was lower than the price forecast by analysts (China Railway Group Ltd, a rival railway construction company, gained 69% after listing in December).

On the Hong Kong stock exchange, companies are delaying or retracting IPO offers as a consequence of the jittery market conditions. There is no longer the guarantee that investors will dive in, so it proves to be better to be safe than sorry.

All the strange happenings do not deter some Chinese companies though, but one has to question what the money is being raised for. For example, China is trying to cool down the property markets, handle inflation worries, but property developers still have IPOs in the pipeline.

The Shanghai market is still relatively young, and hopefully people will continue to become more mature in regards to their own investment behaviour. It is nice to see investors being more clued-up regarding new IPOs. There may be hope for China's markets after all.

Saying this though, the SSE bounced back to end at 3580.15 (+168.65 points, 4.94%) after a shocking day yesterday (closing 5.4% down) – knee-jerk reaction? Probably.

-GP

China and the Sword of Damocles

By Colin (Huaizhi) Chen

To the imagination of many western observers, the mentioning of China does not conjure images of large modern metropolises with skylines of pearling beauty. Nor does it spark imagery of China’s vast unique natural reserves. As ever, it does not propel China’s cultural basis deeply rooted on justice and tradition. Instead, those westerners are reminded of China’s peasant workers, polluting factories, and an obfuscated ruling class. Despite its status as an economic power house and an undeniable key player in the world’s political stage with an ever growing middle class, China has been unable to shake off its image as a heavy handed communist regime and the fears that accompany such descriptions. Several commentators have remarked the anachronism of a twenty-first century modern economy thriving in a nineteenth century political system. Yet, if no political system is perfect, (one can readily name the costs and benefits of an American style democracy), is not China’s ruling technocracy a brave new experiment, worthy of the coming age? In order to continue its remarkable growth and calm the fear of many outsiders, China will have to face challenges in its regulation of its media, and its dealings of its people.

The power China wields in its party controlled media has lost its purpose – to quell unrest and fuel stability. Instead, as one can observe in the recent days, it is an unruly monster, condensing public opinion into a sword of Damocles. Mob rule hangs in the air as the public, fueled by a one-sided coverage of Hans hurt by the recent riots, threatens to clash against China’s ethnic minorities. To a keen spectator, this is nothing new. The same zealousness was seen in the anniversary of the Nanjing Massacres, as student protests against the Japanese government became eruptions. To this day, the Cultural Revolution remains a symbol of how far the lack of any public dissent and legitimate discourse could lead.

In terms of its people and its minorities, China will have to learn when to confront. As Jim Rogers remarked in his book, A Bull in China, nothing pushes an otherwise rational Chinese to madness than the bare mentioning of Taiwan (Not his exact words, but something like that). China has claimed a history of statesmanship and non-aggression. It is time to prove it to the world.

The coming 2008 Olympics presents a unique opportunity for Beijing. It can put on a show of wealth and power fitting its rise in the twenty first century; or it could go deeper, and display the flexibility and the courage of a modern regime ready to evolve and confront the difficulties of the times. Investors are hanging on its every word.

- H

Introduction to Shanghai Property

By George P

China is growing day by day, property is getting more and more expensive.

As is the case in the rest of the world, property is a (sometimes) good alternative to other investment areas.

So, once again focusing on Shanghai, one of China’s most modern cities; prices have been going up and up, at a pretty rapid pace. (Example, an acquaintance bought his family home around 3-4 years ago, for around 3000 yuan (RMB) per square metre. The same place would maybe cost around 4-5 times that price now).

First off, there is a prerequisite in buying an apartment/house in Shanghai (under your own name, if you are from outside of China), and that is a Residence Permit. To get a residence permit, you need to have a work permit – naturally after getting a full time job (or at least a part time job who you have signed a contract with), the Residence Permit also comes with a Student Visa.

This rule was only introduced a couple of years back in Shanghai, and is actively enforced, to curb overseas investment. Having contemplated buying a place here, I can understand that – because my wife and I wanted to buy a place to live, rather than as an investment; too many ‘rich’ overseas people coming in to snap up the nice properties purely for investment could have dampened our chances. Though this rule hasn't really stopped the rest of China's population driving up prices (including non-Chinese).

Of course, there is also the option of buying the property underneath a spouse’s name, or partner from Shanghai (sorry, the advisor-dog can’t help you this time).

In February 2007, my wife and I considered buying an apartment (in the process of being built at the time) down town. The price was 20k yuan per square metre. For an apartment of around 60 sqm (which was the smallest available), this would end up coming to a reasonable price. In the end, we didn't buy, and somewhat regret it now, as the price has gone up to around 30k.

Is the Shanghai property worth it at the moment? Your guess is as good as mine. Recently, demand has declined a little as more and more people exercise their 'wait and see' strategy. I would say, if you have the money, meet the purchasing criteria, and want a place to live rather than an investment property, just go for it.

Anyway, which areas in Shanghai should be considered? Location, location, location – as is the case in many big cities around the world, some areas cost more than others. Here is an introduction to a few locations:

Puxi (don’t laugh, I know it sounds rude – just make sure you pronounce it correctly)

This is by far the priciest area, located in the heart of the city of Shanghai (West of the river), close to glitzy bars, restaurants, shopping, and other entertainment. For sheer convenience, some may argue that the sky-high prices are worth it.

Hongqiao

Perfect for a family – lots of international schools dotted around. Prices are quite high due to the international/expat communities that live here. Quite a nice area though (it is part of Puxi).

Pudong

Think of this as the ‘cleaner’ area of Shanghai (East of the river); a lot of greenery, but not so much entertainment. Prices are a bit lower over this side. Century Park is located in Pudong, and the area around it is great to live in (speaking from experience).

Jinqiao

The Pudong equivalent of Hongqiao – northern part of Pudong. It is a little bit far away, but some the prices are ok, a car is pretty much essential if choosing Jinqiao, but with the new metro lines – public transport is also an option (although very, very crowded).

There are more places (Shanghai is quite a large city) but hopefully this gives a quick introduction to property areas. I will provide some examples of per square metre prices later.

-GP

Chinese Mutual Funds (Part 1)

By Colin (Huaizhi) Chen

In the United States, actively managed mutual funds have long lost their glister. Contributing to their demise have been their hefty annual and initial management fees, their inflexible regulatory obligations, and the various financial studies concluding that mutual funds generally do not achieve better performance than straight forward indices. It is difficult to justify a 1 to 2% annual fee schedule for yields that are comparable to the wider market. Therefore, it is not surprising to discover that the US trend in financial asset management has been away from the traditional redeemable open ended mutual funds and into various other instruments including the soothingly named Hedge Funds and the novel index tracking Exchange Trade Funds. Upon considering their unpopularity, you might be scratching your heads in wonderment- why do mutual funds perform better with equity in China?

There are two main reasons for choosing any sort of financial vehicle. One is risk management, and the other is performance. In terms of risk, China’s equity exchanges have long been denigrated as corrupt, volatile, and in the worst case scenario, rigged. Stories of government crack down on market manipulation do not reassure an investor as much as it reveals the pervasiveness of corruption. It takes far more experience and expertise to be fully aware of the financial dealings of this market. Because most investors cannot be bothered to develop relations deep into Chinese companies, uncover hidden earnings, and distinguish hearsay and truth, it is advantageous have someone actively managing one’s assets. A good fund manager would have networks (guanxi) into all hidden corners of the Chinese market; therefore, he thrives on volatility, instead of against it.

In terms of performance, Chinese mutual funds have historically outperformed the market composites in the equity portion of their funds, perhaps for the same reason they’re better at volatile risk management. Here is a summary of annual growth rates of the past 5 years I discovered in the book From Wall Street to Great Wall.

Year	Mutual Fund Equity Portion	Shanghai Composite	Shenzhen Composite
2002	-19.47	-17.52	-17.03
2003	31.68	10.27	26.11
2004	-0.63	-15.4	-11.85
2005	-1.28	-8.33	-6.65
2006	102.69	130.43	132.12
Avg	16.01	10.20	14.85

So what does all this mean to the average western investor? Unfortunately for now, unless you could tap into the powers of Mutual Funds simply in terms of Equity, it means fairly little. China’s regulations demand that its mutual funds keep a maximum of 26 percent of its capital in Equity; therefore, their outstanding equity performances are counter-balanced by abysmal performances in Chinese bonds and money market instruments. However, as the Chinese market liberalize and deregulate to allow both investors and managers greater access, there will be plenty of opportunities for the prepared mind.

I will try to give some impressions of the state approved mutual funds sometime later.

-H

Nasty Monday

By George P

Well, a bit of a nasty start to the week. SSE Composite down 4.5% at close (3625.89 points).

Haven't really gone in any deeper on the main ups and downs, but there are possibly quite a few very unhappy people around at the moment. I think I'll take a walk, rather than get the bus or take a taxi tonight.


-GP

H-Share and N-Share Companies

By Colin (Huaizhi) Chen,

So, you have a wad of cash and a positive outlook of China's future. You want to stake a claim to the Chinese domestic growth by investing in mainland China, but is put off by the inherent risks of the Shanghai and Shenzhen markets (corruption blah blah, inscrutable accounting standards blah blah, dogs blah blah). You cry over our disparaging critiques of the A and B-shares, and is sitting on your pile of cash wondering, "WHY GOD! WHY?!?!"

Well, have we got the solution for you!

Chinese companies in the PRC are not limited to listing on the Shanghai and Shenzhen Stock Exchanges. If a company fulfills the International Financial Reporting Standards (or GAAP in the case of the US) and a list of exchange requirements, it may be dual listed internationally! In fact, that is exactly what H and N shares are.

H-Shares are shares of mainland Chinese companies approved by the PRC to be dual listed on the Hong Kong Stock Exchange (tickers are in the form of a numerical value followed by .HK, 0168.HK for example). These company shares are readily available to the international investor, and have solid transparent structures that satisfy HKSE's issuance requirements. To make things even rosier, because the Chinese yuan could not be readily exchanged for foreign money, these shares tend to trade at a significant discount from their listed prices in the Shanghai Stock Exchange. Thats right! In the absence of international arbitrage and in the presence of huge reserves of RMB, Chinese equity is cheaper abroad!



N-Shares are shares of mainland Chinese companies that are also listed in the United States. These companies tend to be large profitable companies that show case the investment potentials of China. Not only are they structured to fulfill the strenuous requirements of Sarbane Oxley, they are also cherry picked by Beijing as the poster children of investing in China. As noted by Burton G. Malkiel and his coauthors in the book, From Wall Street to the Great Wall, these companies are "the best of the best." One caveat not to be skipped is that these shares are generally traded as bundled shares. For example, according to Malkiel, one share of Sinopec traded in New York represents 100 shares traded in Hong Kong.

L-Shares, S-Shares, and T-Shares are shares of Chinese companies traded in the London, Singapore, and Tokyo respectively.

All of these share types can be found at your neighborhood discount brokerage (E-trade, Scottrade, etc.).

So how did you get so lucky as to have these share types at your disposal?

Like all growth oriented companies, the ones in China require international currencies to do business. In order to raise the necessary foreign capital, Beijing created B-Shares in the Shanghai Stock Exchange. However, to the chagrin of the chairman, B-Shares simply did not attract foreign investors (perhaps if they named it HighYield-Shares). Therefore, in 1993, to fuel its ever growing demand of international capital, Beijing approved several major companies to restructure for international issuance. All of this translate to a greater degree of access by you, the international investor, to the Chinese equity market. Lucky you!

You can find a list of H-shares from jongo.com, and a list of N-shares from the NYSE here.

Happy Investing!

-H

Investing in Shanghai (Brief Intro to A and B Shares)

By George P

So far, for a guide to investing in China, there hasn't been much optimism which would lead any readers to actually try investing in China, so here is a scenario.

You have just received a heap of cash, people around you keep saying "Ayaaaa, Shanghai Goo Shi, Hen Hao... Ayyyooooo!". This intrigues you. If only you knew what it all meant. They could be talking about Shanghai's weather, they could be talking about Shanghai's lovely people.

Well, if you heard this, it'd be something along the lines of "Oh my, the Shanghai Stock Market is really good... Oh my!". Enough to make you curious? Of course it is.

Anyway. To invest in Shanghai's market without glitches (well, in an ideal world anyway - since when has anything ever been problem free?), chances are you'll need to get to grips with some of the information that is around - conveniently available, mainly in Chinese.

First off there are two options (in terms of Stocks/Shares):

A Shares - Denominated in RMB (Ren Min Bi - or Chinese Yuan)
B Shares - Denominated in USD

The former can only be traded by native Chinese people, well, obviously to stop those 'foreign devils' from getting too rich! But, if you are like me, there is always a workaround, i.e. find a Chinese friend to open a trading account, or girlfriend, mistress, ayi (maid/cleaner), next door neighbour (that can be trusted)... and so on (I am not saying I have all of the mentioned by the way).

B Shares are denominated in US Dollars, so non-Chinese are free to play around with them to their heart's content. Word of advice though - there does not seem any point in investing in these, as there aren't many to choose from.

Track them here (in English) - be sure to install the Java plugin for your browser:

http://www.sse.com.cn/sseportal/en_us/ps/md/sh_b_qci.jsp (A)
http://www.sse.com.cn/sseportal/en_us/ps/md/sh_b_qci.jsp (B)

Note that the data is 15-mins delayed, but the links above are from the official Shanghai Stock Exchange website. Of course, people like me usually track the SSE Composite Index, which is found here (it is a very good way to pass the time, such a pretty picture):

http://www.sse.com.cn/sseportal/en_us/ps/md/sh_b_qci.jsp

Just some historical data (also found on the SSE website; ignore the 'Delayed B-Share Quotes', this is actually the A-Share):

B-Shares:

There is a real-time tracker, based on Sina.com - all in Chinese naturally, but the details are very obvious, and not hard to work out what means what.

http://finance.sina.com.cn/realstock/company/sh000001/nc.shtml

Naturally, trading stocks/shares personally is not the only way to invest; from personal experience, it gives a nice sense of security investing money via a fund management company (with a good fund-manager), though it doesn't make a difference regarding who manages your investments when the chips are down - the best thing to do is to be clued up on the environment, read lots of news articles, and exercise a lot of common sense (why does that somehow not seem 100% obvious?).

I'll go through some of the Chinese terminology later on, and maybe something on investment funds.

-GP

Beijing Picks Inaction

By Colin (Huaizhi) Chen

Yesterday, in the Wall Street Journal Asia, there was a front page article titled “China Markets Unsettled as Beijing Picks Inaction” on the belief that the Chinese Government has no intention of government intervention in the declining Shanghai and Shenzhen Stock Exchanges. I found this quote to be most interest:

“Privately, Chinese officials say that they are trying to shake off their interventionist image and that investors need to appreciate that official's role is to set market parameters, not dictate stock prices. And senior leaders kept mum about soaring stock values last year, when others openly referred to the market as a bubble.”

Alas to the poor Chinese investors, this is necessary medicine as China moves toward a legitimate equity market.

- H

Contrasting Fed and Beijing Interventions

By Colin (Huaizhi) Chen

Is it me or does anyone else find the contrast between the Chinese and the American policies in government intervention of the financial market striking? Over the past year, the Fed rescued the ailing Mortgage-backed Securities, wooed investors, slashed short term rates, and bailed a huge failing financial institution. In contrast, the Chinese has taken a devil may care approach, raised lending rates to curb inflation, and laughed as its investors took dives on foolish investments.

Personally, I wouldn’t touch the emerging Chinese market funds with a 10 yard stick, but I do wonder who is more committed to the long term health of their economies.

-H

I can't help but think that this is one of Beijing's 'Crazy Plans'... P/E ratios are too high, what could be better than just sitting back and watching while people panic - then intervene at a later date to allow stable growth? Admittedly this is a risk, but then again the people always believe in their Government here, right?

SSE is down 3.55% as I type...

-GP

As Expected

By George P

So... The 5-day losing streak has stopped, and the SSE Composite ended up 2.53% or 92.71 points to close at 3761.61 points.

I read this article this morning on Shanghai Daily:

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Central bank moves to raise lenders' reserves by -- CHINA'S central bank yesterday lifted lenders' reserve requirements for the second time this year after inflation hit a 12-year high last month, shoring up the need for more tightening in monetary policies. Starting...

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The Central Bank finally took action, ending speculation on what form of tightening measures would be taken. The announcement obviously settled some nerves, then Bargain Hunters raided the market for half-attractively priced stocks.

They (the Bargain Hunters) have jumped in once again, but is it such a wise move? This is just the beginning of probably a string of new tightening measures, so it wouldn't be unreasonable to expect further declines in the market as investors start to get scared again (or that pesky dog starts giving out investment advice).

One thing that stays on my mind, is the way that investors (in China) rely on the Government holding their hands: "Cry, cry, cry, the Government isn't doing anything to help the stock market. I will sell all my stocks because... because..."

Really, the typical Chinese investor needs to start thinking properly about his/her investments in depth. Time to think about consequences of one's actions.

- GP

China Market Roundup

By George P

At close today (3pm China time), the Shanghai Stock Exchange closed at 3668.90 points (down 3.96%), but not quite as bad as the Shenzhen Exchange, which closed at 12489.021 (down 5.44%).

Just an indication of how badly the Shanghai Index has been performing since the start of the month:

Date	Gain/Decline
18/03/08	-3.96%
17/03/08	-3.60%
14/03/08	-0.22%
13/03/08	-2.43%
12/03/08	-2.30%
11/03/08	+0.47%
10/03/08	-3.59%
07/03/08	-1.39%
06/03/08	+1.59%
05/03/08	-0.99%
04/03/08	-2.32%
03/03/08	+2.06%
Total	-16.68%

Down 16.68 percent since the start of March.

A Shares	Up: 17	Unchanged: 56	Down: 777
B Shares	Up: 0	Unchanged: 1	Down: 53

A couple of big losers today on the Shanghai Market:

国电电力

6.98

-9.94%

GD POWER DEVELOPMENT CO., LTD

西宁特钢

14.35

-9.92%

Xi Ning Special Steel Co., Ltd

While I'd like to make some positive remarks, it is pretty difficult.

- GP

I raise my nose at you, the chinese stock market!!

-H

A Brief Overview of the US Financial Crisis

By Colin (Huaizhi) Chen

The link between the subprime mortgages and the current crisis in the US financial market lies in the mortgage backed securities that had flooded Wall Street. These securities are simply claims to pools of mortgage loans. An investor would purchase these Mortgage-Backed Securities (MBS), and receive the interest and principal payments of the original loans. Any risk of potential default by the mortgage borrowers will be accounted by the premium placed on the required interest yield of these securities.

Still follow? Good. It’s a great setup; I mean why wouldn’t it be? Mortgage lenders loved it because the packaged mortgage loans became a liquid asset that could be sold off on demand in the global securities market. Investors liked it because MBSs offered a new source of diversification and investment. Mortgage borrowers liked it because MBSs allowed another layer of credit lenders to finance their new house. Finally, the US government liked it because happy house owners equal a satisfied electorate. In fact, everyone was so glad of the liquidity of MBS's that various other financial products were created based on the values of MBS.

While this all nice and good, the mushroom cloud over the skies of Financial New York clearly indicate that something had gone wrong. What happened!?! To answer this, we have to look into the exact origin of most MBS’s.

In the old 1930s, grandpa FDR in his New Deal created an organization known as the Federal National Mortgage Association (Fannie Mae) to oversee the mortgage market. Over the years, she was joined by two siblings - The Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These entities together issued, you guessed it, mortgage-backed securities as a way of making mortgage assets trade-able. Furthermore, because they were government sponsored entities, these issues are implicitly (and in the case of Ginnie Mae explicitly) backed by the full faith and credit of the US government.

Good? That’s what most bond rating agencies believed. As such, agencies like the Standard & Poor and Moody’s assigned outrageous triple A ratings to a subdivision of MBSs that are backed by subprime mortgages (mortgages with the highest default risk). In addition, because of the shiny untarnished reputation of these MBSs, other MBSs issued by your friendly neighborhood investment bank, were assigned that respectable looking AAA rating as well.

So that brings us into to the present. When subprime borrowers found out that the housing market isn't going up any further, and they can’t afford that 30% annual interest rate on their loans, they invariably defaulted, vaporizing the value of mortgage backed securities that their loans were pooled in. Investors of these subprime MBSs and their derived products, the ones who were initially lured by those near risk-fr