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| Feature: Eastern Promise |
Perilous Paths to China
Rebecca Fannin
09/01/2005
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Still, there are success
stories. JP Morgan Chase provides access to
the Jayhawk China
fund, run
by Kent McCarthy, who has $32 million of his own
money in the $240
million vehicle. He buys B shares directly
in China and hedges
them on
the Hong Kong Stock Exchange.
McCarthy says that a few bad experiences
with too much
exposure to state-owned enterprises taught him to hold
his B
shares down to 15 percent or less and trade more in American
Depository
Receipts. Partly by betting that certain
U.S.-listed stocks
will fall in value
after their initial
offerings, he generated returns
of 15 percent early this
year,
until fears of a recession and currency
revaluation rolled back those
gains, McCarthy says. On average,
however, the fund has risen
28 percent
annually since
1999.
Others see too much
risk in the domestic
exchanges.
Kai Shing Tao is a Taiwanese
citizen who started a Greater China
hedge
fund called Pacific
Star Partners last year, sponsored by U.S.-based KST
Capital. Tao is
eschewing the mainland stock markets altogether in his
fund,
buying instead into Hong Kong–listed red chips and other Asian
companies that
trade on the HKSE, where price-to-earnings
ratios are
about 30 to 40 percent
less than for
American-listed companies in
general. The fund enjoyed a solid
first 12 months, before dipping 5
percent this
year.
For those seeking more
liquidity than private
equity or hedge funds offer, exchange traded funds (ETFs)
boast the
greatest ease of execution. They provide a taste of
the China market
for those who want to invest small amounts of
money—and all too often,
lose it.
A handful of the existing
pan-Asia, ex-Japan ETFs posted gains
of 20 to 30
percent over
the past year, spurring excitement over the
prospect of the first
all-mainland China ETF, the China 50, launched in
February
with State Street and
China Asset Management as its
sponsors. Unfortunately, the fund, which tracks
the Shanghai-50
A-share index, slid by more than 9 percent in its first five
months. An
ETF with the unwieldy moniker PowerShares Golden
Dragon Halter USX
China Portfolio tracks an index of
U.S.-listed Chinese stocks, and it,
too, has
stumbled.
Initially listing at $15 a share late last year, it
ended June down
about 8 percent. Apart from the obvious risks of
investing in
Chinese stocks,
passive vehicles like ETFs, especially
those
that track such small numbers of
equities, are at the mercy of
the markets—no experts stand ready to bail
investors out of a
plummeting stock. For this reason, they are much riskier than
the type
of broad-index ETFs normally used by investors.
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