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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE SAFE WAY TO PLAY CHINA

Hong Kong and Taiwan offer the sanest routes


IT IS UNUSUAL TO think of China as a safe haven. Yet, compared with much of the rest of the region, it has been just that. China investments, whether they involve companies listed in Hong Kong and Taiwan with major China operations or mainland shares themselves, have suffered in the last nine months - but not as much as companies in South Korea, Thailand and Indonesia. Does that mean it's time to invest in China? TINA SO SHUK-MAN manages two funds for Schroder Investment Management in Hong Kong specifically aimed at participating in China's long-term development. She acknowledges that China faces enormous challenges over the next few years, but she remains bullish on China in the long run. She talked with Asiaweek's Tim Healy about investing in the growth without risking too much:

What will the impact of Asia's financial and currency crisis be in China?

China is still a major trading partner with Southeast Asia. If your neighbor is in trouble, you are bound to be affected. On the other hand, we believe the renminbi will be steady this year. As for the overall economy, the key factor that will determine whether China can maintain its target of 8% GDP growth hinges on fixed-asset investment and domestic spending. In real terms, domestic spending has been pretty steady, with growth of up to 10% each year since 1993. I do not expect that real spending will contract significantly.

What about fixed-asset investment?

We're expecting lower foreign direct investment for China this year. In 1997, China received $42 billion in FDI, which was great compared with the rest of Asia. We're looking at a drop of between $7 billion and $9 billion this year. Still, $33 billion is substantial. On the other hand, China has not been very efficient at mobilizing domestic investment. In China, you have about $550 billion in domestic savings, and you have stock markets in Shenzhen and Shanghai worth between $30 billion and $35 billion together. It's very small.

Is Beijing addressing the problem?

In several ways. In March two government-authorized mutual funds - closed-end funds for 15 years - were launched. They were 40 times oversubscribed. The unit price started at 1 yuan (12 cents). It recently hit 2 yuan. But the underlying net asset value is barely above the launch price. In other words, the premium is huge. The demand shows that there is a lot of room for more of these. In the next six months we expect an additional one to three funds of similar size. And in due course we expect the government to allow foreign investment managers like us to set up joint ventures in China and help the markets develop. If you don't have a certain level of professional involvement it becomes just a casino.

What makes China risky?

So many challenges. In the last 15 years, they've tackled price and market reforms. You don't see people from the price bureau attaching price tags anymore. But many banking practices have not changed. Reform of the financial system is closely related to restructuring state-owned enterprises. In the past, the banks have been the major supplier of funds to SOEs. Also, some of the managers of SOEs haven't developed a sense of responsibility to shareholders. You don't have well-defined property rights. Who owns what? Who is responsible to whom?

Banking reform, SOE reform, property reform. These are major challenges. Should people really be investing?

China is a huge country. Obviously, the problems are big. From a fund manager's point of view, we cannot be looking 100 years into the future. But we have to be realistic that these changes aren't going to happen overnight.

What should investors do?

Three years ago, you had maybe 10 China companies worth considering. But we have added another 150 since then. Suddenly China red chips (Hong Kong-based companies with strong mainland corporate connections) account for 15% of the Hong Kong market cap. Things change rapidly. One year ago, we could not find a telecommunications play in China, but now you have China Telecom. Cheung Kong Infrastructure could be excellent because of the Hutchison component. CITIC Pacific - even though the market doesn't like it that much - is another one. In H shares (mainland-based companies listed in Hong Kong), you have Qingling Motors. It has the Isuzu franchise, which makes it desirable.

In the end, what's the best way to make a China play?

I think it is still too early to pick China B shares (mainland-listed shares sold to foreigners) for long-term investment. We have seen B shares in only one profit cycle. That is not enough variety. I'm not going to name any B shares. For the time being, the best way to play China is through blue chip companies in Hong Kong with substantial China operations. Second, red chips in Hong Kong. And third, H shares.


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