(The author is a Reuters columnist and the opinions expressed
are his own. For more from John Wasik see link.reuters.com/syk97s)
By John Wasik
CHICAGO May 12 As the financial world casts its
eyes on the initial public offering of Chinese Internet company
Alibaba IPO-ALIB.N, likely the largest ever tech IPO, the
bigger picture of Chinese economic growth is in question.
Since most of China's big export customers are showing
sluggish or no real growth this year, the world's second-largest
economy may be taking a breather after nearly a generation of
expansion. Manufacturing in the People's Republic showed a
fourth straight month of slowdown in April.
Despite myriad concerns about Chinese stock markets, real
estate and banking systems, the long view on China is still
bullish. For one, Neena Mishra, director of ETF research for
Zacks Investments in Chicago, sees a little slowing in China in
the near term. But, she notes, it's "not likely China will see a
hard landing" akin to a meltdown given its $3.8 trillion foreign
exchange cash pile and growing middle class. She still sees some
relatively good values in Chinese stocks, and "wouldn't be
surprised to see that market moving up."
Lately, Chinese stocks have not reflected the long-range
growth optimism as global investors fear contraction. The
largest exchange-traded fund of major Chinese stocks , the
iShares China Large-Cap ETF, which holds half of its
portfolio in financial services and energy stocks, is down
nearly 10 percent year to date through March 9 and off about 7
percent for the past 12 months.
In the short term, you would be better off investing in a
broader portfolio of emerging markets stocks and reducing direct
exposure to China.
Like many single-country, emerging markets funds, the
iShares fund is highly volatile: It lost nearly half of its
value in 2008, then regained almost all of its loss the
following year, but lost ground in two out of the past four
years. It charges 0.73 percent in annual management expenses and
holds companies such as China Mobile Ltd, PetroChina
Co Ltd and China Life Insurance Co.
A similar fund, the SPDR S&P China ETF, is down 11
percent year to date through May 9 and off about 2 percent for
the past 12 months. The fund charges 0.59 percent in annual
expenses. The fund's top holdings included Tencent Holdings Ltd
, China Construction Bank Corp. and
Industrial and Commercial Bank of China ltd.
TAKING THE LONGER VIEW
Despite the sour short-term news, the Chinese government is
committed to growth in its long-range plans, and has ample cash
to stimulate its economy, should it need to do so.
The Chinese are still building infrastructure at a breakneck
pace, leading to construction of entire cities. Its long-term
goal is to produce an economy driven mostly by domestic demand
and not exports.
At its current 7.5-percent expansion rate - compared to 2.5
percent for the U.S. and 1.2 percent for the euro zone - the
size of the Chinese economy will eclipse America in roughly five
years, possibly sooner, according to a projection by The
In the interim, the Chinese will be ramping up production of
everything from computers to vehicles. China may also benefit
from falling energy prices and Western sanctions on Russian
banks. And a slowly recovering United States and euro zone may
only serve to keep China's export machine humming.
But as a global investor, you would be adding several layers
of risk to your portfolio if you loaded up on Chinese stocks.
Public companies based in China don't have to comply with the
rigorous accounting standards found in Europe and the U.S. and
transparency on company operations is a major concern. Facing
myriad questions over accounting practices and privatizations,
more than 20 Chinese companies have been de-listed from U.S.
exchanges over the past three years.
A broader focus on emerging markets and developing economies
is a much more prudent play - move away from a China-focused ETF
into one that focuses on a wider selection of emerging markets
to mitigate your risk. One popular fund, the Vanguard FTSE
Emerging Markets ETF, is up 0.75 percent year to date
through May 9 and off 4 percent for the past 12 months. It
charges 0.15 percent for annual expenses.
Half the portfolio is invested in Asian-based companies -
including many of the same top holdings in the two other China
funds above - but it also has stakes in Africa, emerging Europe
and Latin America. Lately, the fund has benefited by holding a
quarter of its portfolio in favored financial services
But note: Although the fund is likely to be less volatile
than a single-country fund, it will still exhibit
higher-than-average risk than a U.S. stock-index fund.
(Follow us @ReutersMoney or here
Editing by Beth Pinsker and Andrew Hay)