China Stocks Lure international investors

Dec. 24 -- The biggest investors in emerging markets say China is the best choice for 2009, betting plans to stimulate growth will lead a stock market recovery in the fastest growing major economy.

Investors with $63 billion of developing-nation stocks put 15 percent of their funds into China, more than Brazil, Taiwan or South Korea and the most in 13 years, according to data compiled by EPFR Global last month. Templeton Asset Management Ltd., Schroder Investment Management and BlackRock Inc. say they're adding to holdings in China.

While the MSCI China Index lost a record 53 percent in 2008, Merrill Lynch & Co. says China's plans to spend 4 trillion yuan ($584 billion) on bridges, housing and tax breaks will help make it the best-performing market next year, boosting shares of China Mobile Ltd., the world's largest phone company by value, and coal producer China Shenhua Energy Co. Investors are becoming more optimistic even as China faces its steepest slowdown in two decades, because the government has $1.9 trillion set aside in the world's largest reserves.

“We've got the mother of all stimulus plans,” said Plamen Monovski, an emerging-markets fund manager in London for BlackRock, which oversees about $1.3 trillion. “Savings rates are high, prices of commodities have come down and employment is unlikely to collapse.”

Fund Favorite

The MSCI China Index advanced 12 percent since the end of October and China's CSI 300 Index of shares traded on the mainland, where the government limits foreign investment, gained 15 percent. The MSCI Emerging Markets Index fell 2.6 percent in the same period, extending this year's decline to 55 percent, the worst in its 20-year history, according to data compiled by Bloomberg.

The CSI 300 Index dropped 1.9 percent to 1883.14 at 2:24 p.m. local time, a third straight retreat, while the MSCI China Index lost 0.5 percent to 39.62.

Mutual funds focused on China received a net $1.2 billion from investors in the past two months, compared with $25 million for Brazil, according to EPFR, a research firm in Cambridge, Massachusetts, that specializes in investment flows. India and Russia funds suffered a combined $778 million in withdrawals, the EPFR data shows.

Increased Holdings

Funds investing in emerging-market stocks worldwide raised their holdings of Chinese equities last month to the highest level since EPFR began collecting the data in 1995, increasing the weighting from an average of 10.7 percent in January.

Shares of Chinese companies accounted for 16 of the 30 best performers in the MSCI emerging markets index as it rebounded from a four-year low in October, including 13 stocks that more than doubled.

China Mobile, China Shenhua and Ping An Insurance (Group) Co. are among 20 emerging-market stocks worldwide that are the “best of breed” because of “solid” balance sheets and increasing profitability, according to Michael Hartnett, the New York-based emerging-market strategist at Merrill.

Beijing's State Council announced a spending package last month for low-rent housing, roads, railways and airports, along with tax deductions on industrial purchases. The package is equivalent to about 18 percent of China's gross domestic product, compared with the $1.4 trillion of stimulus plans under consideration in the U.S. that amount to 10 percent of GDP.

Slower Growth

China aims for 8 percent economic growth to create jobs and maintain social stability in the nation of 1.3 billion, according to Banking Regulatory Commission Chairman Liu Mingkang. Goldman Sachs Group Inc. forecasts expansion will slow to 6 percent next year because of weaker exports and investment, half the 11.9 percent pace in 2007.

“Even at 6 percent growth, that's very high when you compare it with the growth, or lack thereof, in Europe, the U.S. and Japan,” Mark Mobius, who oversees about $26 billion in emerging-market shares as executive chairman of Templeton, said in a Bloomberg Television interview from Hong Kong last week. “We are buying Chinese stocks pretty aggressively.”


China has more money to spend on stimulating growth than other developing countries because its debt is equivalent to less than a third of reserves, lower than any of the 20 nations tracked by Morgan Stanley. The economy is cushioned from a global slowdown in retail spending by a savings rate equivalent to 50 percent of GDP, five times more than in the U.S., according to Credit Suisse Group AG data.

Even the 40 percent slide in the Reuters/Jefferies CRB Index of 19 raw materials that drove investors from emerging markets has benefited China as it imports a net 3.3 million barrels of oil a day, based BP Plc data for 2007.

The People's Bank of China has sought to boost spending by reducing its key lending rate by 2.16 percentage points to 5.31 percent since September.

“There's value starting to reappear in China,” said Allan Conway, the London-based head of emerging-market equities at Schroder, which oversees about $170 billion. China is his biggest “overweight” holding. “What we highlight in China is their ability to stimulate domestic demand,” he said.

Not Enough

Lower borrowing costs and government spending may not be enough to keep China from contracting as the first simultaneous recessions in the U.S., Japan and Europe since World War Two reduce exports, said Marc Faber, publisher of the Gloom, Boom & Doom Report.

“The Chinese economy, in my opinion, is also in recession” even though the government won't report “recessionary figures,” Faber said in a Bloomberg Television interview from Zurich this week. Chinese stocks may rally as much as 30 percent in a “trading opportunity” before resuming their decline, he said.

The MSCI China index slid 4.3 percent yesterday after the central bank cut interest rates by 27 basis points, half the reduction forecast by Citigroup Inc. and HSBC Holdings Plc.

Shrinking Reserves

Foreign-exchange reserves are shrinking for the first time in five years, Market News International reported this week, citing Cai Qiusheng, head of the investment management bureau under the State Administration of Foreign Exchange. Reserves dropped in October by at least $16 billion, Reuters reported, citing a person familiar with the situation.

The country has “nothing to fear” from a slow erosion of reserves given the “enormous size,” Stephen Green, head of China research at Standard Chartered Plc, wrote in a research report yesterday.

Stock gains since October boosted the price of Hong Kong-listed companies to 9.9 times annual earnings, almost triple the valuations on Russia's Micex index, and more than India's Bombay Stock Exchange Sensitive Index at 9.6 times and Brazil's Bovespa at 8.6. Chinese stocks remain 69 percent cheaper than the peak last year and 41 percent below the monthly average this decade.

China Mobile is valued at 12.8 times earnings, 69 percent cheaper than at its peak last year and 25 percent below the six-year weekly average, according to data compiled by Bloomberg. Ping An, China's second-largest insurer, trades for 2.7 times book value, near the lowest on record.

“Some stocks are just fundamentally cheap,” said Jeff Chowdhry, the London-based head of emerging-market equities at F&C Asset Management, which oversees about $150 billion. “People who are sitting on large amounts of cash should be nervous.”


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