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OCTOBER 13, 2000 VOL. 26 NO. 40 | SEARCH ASIAWEEK


Wai Leng Tay for Asiaweek.
Riding on Chinese Hopes
Will Beijing really merge its A and B shares?

Nicholas Paris, 40, and Queenie Chung, 27, still cannot believe it. They knew that business in Europe takes a breather during the summer. So they expected a slow build-up when London-based Paris, who heads the country funds corporate finance division of stockbrokerage CLSA, started looking for new institutional money for Chung's China Index Fund, which is listed in Ireland. To their surprise, Paris raised the targeted $40 million in less than two weeks in July. He even had to turn away $8 million more. Paris and Chung, who runs the China Index Fund for Long Investment Management in Hong Kong, spoke with Asiaweek's Alexandra A. Seno.

How do you explain the overwhelming response to your fund-raising?
Paris: Institutional investors have become very interested in China, specifically in [for foreigners only] B shares [on the Shanghai and Shenzhen stock exchanges]. You have liberalization, entry to the World Trade Organization (WTO) and the restructuring of companies that has gone on in the last few years, making them much more efficient and focused on profits. Even if we have seen a 40% or 50% rise in some of these stocks in the last four to six months, we believe there is a long way to go.

The prices of B shares have fallen so much that there is a 75% discount [to A shares, which only local investors can own]. For that discount to disappear, B shares would have to triple in value. We believe that is what is going to happen. As the Chinese government allows locals to buy B shares, ultimately in the next two years, the A and B shares are going to merge. This fund gives investors the opportunity to get involved in the discount play.

But some of these B-share companies have been criticized for not providing quality information about their operations.
Chung: The Chinese government classifies the shares. If a company loses money two years [in a row], it is "ST-class," meaning "special treatment." If a company has a loss for three years, it is "PT-class" for "penalty treatment." You cannot trade them from Monday to Thursday, only on Friday morning. I avoid these stocks. Given the size of our fund, it is very difficult to unwind our position if we keep them. We buy based on the index [which CLSA compiles]. We own 85 to 87 stocks out of the 111 B shares.

Are there sectors you are particularly excited about?

Paris: The fund does not look to be overweight in a particular sector or company. It seeks to give you the performance of the B-share market [as a whole]. Individuals shouldn't really be drawn into owning one or two shares. There is very little research or understanding about some of these companies. The industries covered by the B-share market are quite broad. It is quite a reasonable spread, although I don't think there is much of a technology weighting for now. There have been only three [technology] flotations in recent years.

What are the top companies on the B-share index?
Chung: Based on market capitalization, they are Guangdong Electric Power, [carmakers] Dazhong Transportation and Shanghai Tyre & Rubber, Zhejiang Southeast Electric, Heilongjiang Electric Power and property developer Shanghai Lujiazui.

The current interest in B shares seems to be driven largely by sentiment.
Paris: There is a feeling among investors that they don't want to miss out. But there is also a wariness about being sucked into companies that don't necessarily have good businesses. Investors would not buy China at any price. They would not buy a state-owned enterprise just because the Chinese government has hired an investment bank and paid a lot of money to float it.

Many stock investors have been burned in China.
Paris: There is a certain risk with regards to corporate governance, but there is a risk behind all equities in emerging markets. Chinese managements have worked out that there is no point in saying one thing to investors and not doing it. They will never be able to raise capital. The message has got through that you have to look after shareholders, not just take their money and do what you want. There will be odd instances that will disappoint people, but I don't think there will be too many.

What are the crucial issues investors should look out for?
Chung: WTO. Some have bought B shares because they expect membership in the world trade body will bring more business to China. [Final negotiations in Geneva are reportedly not progressing well.]

Paris: The [A- and B-share merger] is the biggest risk area that we are keeping an eye on. The others are a change of government, change of personnel and change of direction, though we don't think they will happen. If WTO is delayed without any major reason, then we should be concerned.

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