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| Feature: Eastern Promise |
Perilous Paths to China
Rebecca Fannin
09/01/2005
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Indeed, over the past
year,
Chinese stocks have been among the
world’s poorest performers. H
shares are trading 45 percent lower than their
peak 10 years
ago, and
red chips are 70 percent off their highs of seven years
ago.
Performance of the Shenzhen and Shanghai stock exchanges
has been even more
moribund. Since 1993, A shares have risen only 3
percent in Shanghai
and 2
percent in Shenzhen. Lee
Branstetter, an associate professor at
Columbia
University
Business School who has performed a detailed
analysis of China’s
equities markets, blames the lackluster performance
on
regulations restricting
listings to underperforming state-owned
enterprises.
| Venturing into China through the stock markets is
on a par with a weekend at
the casinos in Monte-Carlo, but not nearly
as scenic. | Those fearless investors
who wish
to wager on
Chinese stock-picking should first secure a competent
advisor. One good
source of discerning appraisals of Chinese
stocks, as well as
of
private equity and real estate
investment opportunities, is the monthly China
Investment Newsletter,
published by the independent research firm
Abacus
Consulting
Services, which has offices in Beijing and Alhambra,
Calif. Abacus’s
newsletter is no starry-eyed tip sheet. The firm
cautions: “As
state-owned and
private companies use listing in the
stock
market as a tool to take money out of
investors’ pockets, many
fraudulent companies report false earnings and boast
the
popularity of
their products to innocent investors.”
All Roads Lead to Equity
part from private equity and
straight
stock-picking, investors seeking exposure to China
can look to
exchange traded
funds, hedge funds and mutual
funds. However, they are
all dependent on the
whims of the
country’s equity markets, because
China lacks both bond and
derivatives markets. This means that all
investments in
Chinese securities are,
at bottom, equity based, and the
market risk, absent any way to diversify it
away, is nearly
impossible
to hedge.
The lack of derivatives markets makes
what would
otherwise be a playground for hedge funds a risky
proposition. The
fact
that the same companies’ stocks may
trade at different prices on different
markets is a boon for
arbitrageurs. However, the limited futures and
options at
their disposal makes it difficult to hedge against a broad
market downtick, and
so such funds are far, far more volatile
than most
of their counterparts in the
West.
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