All markets, in fact, are at all time highs, so the eternal search for "new money" plays is especially difficult currently. Rather than provide an outright endorsement, this article is more of a reflection on mightiness. Contemplating whether these China plays are overheated is perhaps much like philosophizing on how to attack Bruce Lee only to get a nunchuck in ones face.
- FXI - this index of 25 domestic plays is the "Dow Jones Industrial" of China. Includes the following prominent components:
- PTR - PetroChina - consider this the ExxonMobile of China
- CHL - ChinaMobile - the AT&T, Sprint, T-mobile, Vodophone, and Verizon of China
- ACH - Aluminum Corp - China's demand for raw materials is simply insatiable.
- BIDU - the Google of China. In my 6 trips to Beijing over the past 2 years, I got ample confirmation that all the natives use this engine (official number is over 70%). They say that is simply understands the Chinese language better. They also say it has a killer feature that finds free mp3 music.
- SINA - the Yahoo of China. A popular portal and e-mail service.
+10% growth. Each % of GDP growth has a profound effect on the standard of living residents and business environment of a country. China has sustained GDP growth of over 10% for over 4 years straight. The last time it was at all comprable to US growth of 3-4% was 1989. The US is still vastly larger, but the gap is shrinking fast, and the market has always rewarded growth.
Undervalued currency. Because it maintains a peg to the dollar, the RMB would be much stronger if it were ever to be let loose. The current exchange rate is ~7.5 to 1 dollar. Only last year the predicted true-value was 6 to 1. Now after the dollar slide, the predicted value is 5 to 1. Yes, the peg allows cheap exports, but most FXI components are dominated by domestic sales. So a complete float of the RMB has a 50% upside for US investors of the FXI, and provides a hedge against total dollar erosion in other investments if such an event were to ever happen.
Massive Reserves. The Chinese government has over a trillion dollars of hard currency reserves. This provides an implicit insurance policy for FXI components, as the Chinese government would likely not let any of the component companies fail.
Risks: plenty. Mostly to do with highly overvalued multiples, arbitrage situations where shares have completely different rules and prices for foreigners vs. domestic investors, and banking issues within China that still need to be sorted out.
