Purpose: Expose Opportunities for Smart Investors
Allow the relocation of the central bank of China to allow the yuan to the dollar falling rigid coupling on the day of my return after a three week trip to Asia left many questions unanswered. The basket of currencies that allegedly the value of the yuan will determine the future was not disclosed. What kind of band will be allowed to fluctuate within the currency is not entirely clear. The 2% revaluation of the currency on Thursday followed by a slight strengthening on Friday week may actually encourage further short-term speculation, as most economists believe the yuan is undervalued by about 10% to 20%. With $ 1000000000000 of trades each year and hot money inflows equal to 5% of GDP, the uncertainty about the Chinese currency is high.
Not in the mainland
In the short term, this uncertainty gives investors the opportunity to benefit not only the expected strengthening of the Chinese currency, but the overall growth of the Asian currencies against the dollar. In early 2005, I advised customers that the Euro rise against the dollar and Asian currencies to appreciate against the dollar would be the next area. It may turn out that many of your best China investment opportunities are not involved when investing in mainland Chinese companies at all.
Currency Direct Approach
The cleanest direct currency play on the expected rise in the yuan (also known as the renminbi) is a renminbi currency account opened at EverBank. A leading online bank ranked "Best of the Web" by Forbes, EverBank offers a variety of world currency accounts and FDIC backed three and six-month CDs offering attractive rates.
IShare Direct Approach
Another direct equity China play is through the China iShare (FXI) that the FTSE / Xianhua China 25 index composed of 25 of the largest and most liquid Chinese names tracks. FTSE index is a British company and Xianhua is a media company based in China.
All of the 25 shares in the China iShare are listed on the Hong Kong Stock Exchange. Some of them are listed in mainland China (H shares) and some of them are listed in Hong Kong (red chips). The total market capitalization of the index is $ 170 billion. The widest Xinhua China Index includes 1,355 listed companies with a total market capitalization of $ 550 billion.
To put this in perspective, the average market capitalization of a company in the S & P Global 100 Index is $ 70 billion. Again, that is for a company. The China iShare provides good exposure to three key sectors of China: energy (20%), telcom (19%) and industry (18%). This concentration can be viewed as a plus or minus one, depending on your perspective. For example, some smart investors are placing a greater commitment on China's consumer markets. The top five companies represent 40% of the index. The annual operating costs of China iShare are only 0.74% compared to 2% plus for other alternatives out there, including actively managed Asia and greater China region funds. Keep in mind that most of these companies are still largely controlled and owned by the Chinese government.
Indirect Approach
The best way to invest in China can be through more indirect vehicles that benefit from China's growth and moves its currency. An example of an indirect investment in China by the iShares Hong Kong (EWH). It has large allocations to Hong Kong real estate (33%), utilities (17%) and banking (16%). Having just returned from a trip to Hong Kong, it seems clear to me that real estate markets have a way to go before he too pricey. Supply is inflexible and even if prices rise as expected 30% in the next 18 months, the price level is still about 50% below where they were in 1997. Being the last Asian currency pegged to the dollar should encourage. Capital inflows to In addition, the Hong Kong market has been much more successful than the Shanghai and Shenzhen exchanges signaling that the financial capital of China in the near future will be.
Indirect Currency Play
China's move last week will also press for a number of other undervalued Asian currencies to appreciate. To compete with the Chinese export machine, many Asian countries resist letting their currencies rise, but now they have a little room to maneuver. The Malaysian ringgit was last week released from the peg to the dollar and rose 0.7% on the first day. While currency appreciation will slightly dampen export growth will also increase the cost of rising energy imports and analysts expect the economy to grow 5.5% this year. The easiest way to invest in Malaysia by the iShares Malaysia (EWM) holding a basket of leading companies listed on the exchange tracks. Another attraction - the annual fee for the iShares Malaysia is only 70 basis points.
The Play for the informed
Malaysia is often ignored by investors, although it is quiet but remarkably progressed from a relatively poor producer of raw materials into a vibrant and broadly diversified middle income country.
Malaysia, positioned along the strategically important Strait of Malacca, should be on every investors radar screen for the following reasons:
It has little foreign debt and healthy foreign exchange reserves. In the area, is slightly larger than New Mexico.
Malaysia has a balanced economy with a strong industrial and services sectors, important natural resources and openness to foreign investment.
It has a parliamentary system and divided powers between the central government and 16 states and the federal territories.
Malaysia is well positioned to benefit from growth in the region's main export and investment partners are Japan, China and the United States.
Natural resources include tin, petroleum, natural gas, wood, copper, iron ore, bauxite. Small but consistent exporter of oil and natural gas.
It has a young and increasingly educated population with a median age of 24 and a literacy rate of 90%.
Malaysia income per capita is almost $ 5,000. Solid middle-income country with growing middle class.
The Kuala Lumpur Stock Exchange, also known as Bursa Malaysia has over 800 listed companies.
Canada?
Another smart indirect China play would be to invest in the iShares Canada (EWC). The Chinese are going to buy one to invest in Canadian energy companies spree and recently plunked down $ 2 billion a thousand mile pipeline from tar sands in Alberta to the port on the west coast and on to Beijing and Shanghai to build. The Canada iShares MSCI Canada Index which follows the 40% exposure to Canada's energy and materials sectors.
Starbucks?
And what about Starbucks (SBUX) and China play? Starbucks has about 9,000 stores worldwide and in the first quarter of 2005 its turnover by 27% and sales more than $ 100 million. It entered the Chinese market in 1999 and has about 300 stores performed above expectations. The company hopes to expand to 30,000 stores and China is an important part of its expansion strategy. With 250 million Chinese approaching middle class and millions of new affluent status conscious youth, Starbucks expects that before long will China's second most important market. During my recent trip to China trip, I visited ten Starbucks stores and all of them had strong activity with many young Chinese enjoy not only coffee products, but the higher margin specialty drinks. Think the Chinese will always prefer tea? Japan shows that when reach certain tipping points, changing from tea to coffee. Consumer preferences the income level Starbucks always looks expensive, but many large companies always. Starbucks investors 43 times their investment in the 1992 IPO and sales increased by 27% in July.
China represents a huge opportunity for long-term investors, but an indirect approach, the smartest strategy.
Next week: find out what is the next big Asian Bull Market in the 21st Century - hint "It is not China!
Carl Delfeld is head of global consulting firm Chartwell Partners and editor of Chartwell Advisor and the Asia Investor Intelligence newsletters. He served on the Board of Directors of the Asian Development Bank and is the author of The New Global Investor (iUniverse: 2005). For more information go to or call 877-221-1496
Carl Delfeld is head of global consulting firm Chartwell Partners and is editor of the "Chartwell Advisor" and "Asia Investor Intelligence" newsletters. He served on the Board of Directors of the Asian Development Bank in Manila and is the author of The New Global Investor (iUniverse: 2005). For more information go to or call 877-221-1496.
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