Disdain is the common wisdom among foreign institutional investors toward China’s B shares. Those who sold too early and missed the past month’s rally may rue their hastiness, but overall the market is too volatile and the companies too shoddy to stir much interest. It would be pointless to now try to chase the rally, which has more than doubled the market capitalization of the Shanghai and Shenzhen stock exchanges from $18 billion to $42 billion in the past month.
For a handful of China experts, however, the rally – sparked by news that the China Securities Regulatory Commission (CSRC) would allow domestic investors to purchase heretofore off-limit B shares as of 1 June – is a vindication of their belief in the China market, not a chance to finally dump shares.
One such bull is Liu Yang, director of China investments at CMG First State Investments in Hong Kong. She has been managing a China portfolio, including B shares, H shares and red chips, for eight years, including service for red chip CITIC’s Beijing and Australia offices.
Liu believes the B-share market has potential to rise another 50% by June. She recognizes the scepticism many outsiders have toward B shares,but believes it is a misplaced victim of a ‘China phobia’. She argues that half the companies with B shares are worthwhile investments. She currently holds 20, and her top 10 holdings are all B shares, comprising 50% of her asset allocation. In total, her $60 million fund, listed on the Australia Stock Exchange, has 65% in B shares, up from a typical weighting of 40%, with 15% in H shares and 20% in red chips.
She notes that most foreign dedicated China funds, having cashed in on B shares, are moving into red chips and H shares. She believes that restructuring across sectors in China make many B shares appealing. Liu says problems of corporate governance are being addressed – today most company executives understand the concept of corporate governance, versus five years ago when they hadn’t a clue. And she says she has no trouble obtaining data from companies. The problem today, Liu maintains, is that the government and various industry regulators are not transparent, and their decisions unpredictable – this is the risk she faces.
Essentially, her argument is one of overwhelming growth. China is the only real story that appeals to foreign managers in Asia this year. The macro economy, fuelled by record levels of foreign direct investment as well as growing domestic consumption, will continue to grow 7% per annum. Domestic investors have some $900 billion in savings and few channels for investment, and will drive up any market that authorities open. The government is committed to liberalizing the capital markets, and Liu predicts within five years, multinational companies will be able to list on the Shanghai Stock Exchange.
If Liu’s take on investing in China is accurate, this is good news indeed for the many fund managers hoping to form joint ventures once China joins the World Trade Organization. CMG First State hopes to be among them: Ian Jenkins, its Hong Kong CEO, says the firm is looking very closely at potential relationships on the Mainland.
