4/29/2011 11:14 AM ET|
5 Chinese companies to own
Even with its many risks and lack of transparency, the world's No. 2 economy is too big and growing too quickly to ignore. Here's how investors can ease their way into the Chinese market.
It used to be when E.F. Hutton spoke, we would listen. Now it's Pimco.
Case in point: Maria Gordon, who manages Pimco EqS Emerging Markets (PEQAX), a newly launched fund, recently said she has a "favorable view of the yuan" and is now "large overweight" on China. That pronouncement has more than a few investors thinking about ways to play China. What's good enough for Pimco should be good enough for the rest of us, yes?
Philip Abbenhaus, the director of the Asian Equity Research Institute, is bullish on China, too. He cites three reasons for optimism:
- China's economy has grown 9.7% per year since 1978 and is now the world's second-largest.
- China's 1.3 billion residents are consuming more goods and services.
- China's political environment is more stable following the recently concluded Central Government Economic Work Conference, during which China's leaders pledged to ensure stable and relatively fast economic growth in 2011.
To be sure, Abbenhaus, whose institute issues the China Business Conditions Index and is housed at the Trulaske College of Business at the University of Missouri, also sees risks associated with investing in individual Chinese companies.
It's difficult to get information about Chinese A-share market trends, overall economic activity and significant government policy changes, he said. Therefore, it's hard for average investors to get a bead on what's really happening in China, especially at smaller companies. (The Chinese A-share market in 2010 was composed of more than 531 companies that could be owned and traded only by Chinese citizens. There are about 250 Chinese companies listed on U.S. stock exchanges.)
But Abbenhaus said none of the risks should deter average investors from considering, if nothing else, owning the American depositary receipts of the largest Chinese companies. "For most average investors, bigger is better," he said in an interview.
The policy play
Despite its market share, investing in China Life is not without risks. For one, the Beijing company is not able to fully mitigate its interest-rate risk. Plus, debt securities comprise nearly half of the company's assets.
"Economic conditions, bankruptcies, lack of liquidity and other failures of the underlying debt investments could impair China Life's financial condition," Abbenhaus wrote in a recent report.
Last month, the company said it had no plans to replenish its capital even though its solvency ratio (a measure of its ability to meet long-term obligations) had dropped to 219% at the end of 2010 from 300% a year earlier.
Insurance laws and regulations in China limit the universe of securities available to the company for investment. This limits the company's investment return and its ability to diversify to manage risk.
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