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From Wall Street to the Great Wall – How to Invest in China
August 7, 2007, 3:38 pm
Filed under: investments/finance/economics

Personal notes from From Wall Street to the Great Wall – How to Invest in China by Jonathan Worrall and Peter O’Shea

China is multi-faceted; do not think of the country as a single entity but rather think of it as being composed of diverse elements.

China’s two major transitional challenges

  • Transformation from an agrarian economy to a modern and industrialised economy
    • Disparity between countryside and coastal and southern areas
  • Moving from a planned economy to a market economy
    • Elimination or reform of state-owned enterprises (SOEs)
      • Increasing competitive success in the nonstate market sector
      • Growth in nonstate sector jobs
      • Rapid increases in private capital investment
    • Disparity in income levels

Inhibiting factors to economic growth

  • Nonperforming loans – inherent problems with state banking system
  • Unemployment – lack of skills – urban unemployment, rural unemployment and underemployment and unemployed former state workers
  • Unchanged rural poverty in norther regions
  • Corruption – privatisation of SOEs and reforms of state institutions will help alleviate the problem

Economic forces do not solely determine viability of investments – China as a Goliath with many heads

Two trends to consider – Energy and Financials

  • China’s hunger for energy is tremendous, and it is importing energy.
  • China’s financial sector is in need of cleanup

Chinese stock markets

  • Varying accounting practises obscures real information in reported data.
  • A shares – denominated in RMB and available only to Chinese citizens and foreign investors through the QFII channel. Listed and traded in the Shanghai and Shenzhen exchanges
  • B shares – denominated in USD (Shanghai bourse) or HKD (Shenzhen bourse). Chinese citizens with foreign currency accounts including residents of Hong Kong and Macau are also allowed to trade B shares.
  • H shares -certain mainland Chinese shares traded on the Hong Kong Stock Exchange in HKD, available to all investors.
  • S shares – traded in Singapore
  • N shares – China-based companies traded on NASDAQ or the NYSE, most frequently in the form of ADRs
  • P shares – private-sector-owned corporations located in mainland China traded in Hongkong.
  • Red chips -listed in Hong Kong, partly owned by the government

China’s issues

  • Energy problems
  • Demographics – migration from countryside to city
  • Financial markets need to be reformed

The rise of the Chinese consumer

  • Movement from being an exporter to having domestic demand driving the economy
  • Chinese corporations have extensive¬† internal distribution networks that foreign competitors will find hard to replicate.

The future investment environment

  • The international securities market will be further integrated.
  • The traditional securities firms and information providers will find their dominance challenged- many firms are unaware of the changes going on around them.
  • Chinese exchanges will become major players – especially with the move to clean up accounting standards
  • Shares of Chinese companies will become more available
  • The value of international research expertise will rise.
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