Investing in China

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Why Invest in China… Now’s The Time

By Dr. Steve Sjuggerud, President, Investment U
Friday, August 15, 2003: Issue #165

“Nobody with blue eyes has ever made money investing in China,” the old saying goes.

Try and explain that to the lucky souls that invested in the four Chinese Internet stocks that trade on the Nasdaq this year. A $10,000 investment in two of them at their 52-week lows would now be worth $500,000 today. On average, these four stocks are up over 1,500% from their lows, and are worth an average of over a billion dollars each. (See for yourself – the symbols for these four are NTES, SINA, SOHU and CHINA).

Last night here at the Agora Wealth Conference in San Francisco, investment analyst Porter Stansberry gave a compelling presentation on why the time to invest in China is right now?(although he’s not recommending these particular Internet companies). In today’s Investment U e-Letter, you’ll learn the easiest ways for Americans to invest in China, and which way looks like the safest bet right now.

My, How Things Have Changed In China

You’d have laughed at the stock exchanges in China even as recently as 1996. “No cameras,” they said as I entered. After visiting, I thought the reason wasn’t for security – it was to prevent the outside world from knowing what a dump they were. At the Shenzhen Stock Exchange in the south, I saw about half the traders literally sleeping on the job. From the outside, it looked like it could have been a meatpacking plant. There weren’t any markings that this was a stock exchange.

The Shanghai Exchange wasn’t much better, an old building on The Bund that was probably nice 100 years ago.

Today the new Shanghai Stock Exchange now sits as one of the jewels of the Pudong area, a dramatic and modern building (www.sse.com.cn) in China’s bustling new center for business. Back then it was difficult to make a decent investment in China. The offerings for foreign investors like me were pretty slim. But I did visit some companies trading on the Chinese exchanges, and I was amazed at what I saw

Going to Chinese factories, I expected to see some rough working conditions. I wasn’t prepared for what I actually saw

I saw perfection. Let’s take Konka Electronics, for example. You don’t know the name Konka, but chances are you own something it has built. When you see “Made in China” on the back of your TV or VCR, Konka might have made it. Konka is a major world manufacturer of TVs, VCRs and now mobile phones. It builds them and then major brands put their names on them.

Back in 1996, Konka’s factory in Shenzhen was a picture of perfection. You could eat off the floors. The main factory area was a technological marvel. (Though for all the technology, I got a kick out of the quality-control lady at the end of the assembly line. As a TV rolled off the line, she’d turn it on, and then bang the TV on three sides with her mallet. If the screen didn’t shake, the TV passed. You’ve still got to do some things by hand I guess.) All the Chinese workers were in white lab coats.

Konka was a family place. Konka provided both meals for employees and day care for their kids, if I remember correctly. The cafeteria area was nice. For the corporate side, things were more functional than stylish. But Konka was not far behind the U.S. at all, even back in 1996 (you can see Konka at www.konka.com/english).

Looking for opportunities for his readers, Porter Stansberry has traveled deeper into China than anyone I know. At one point he was 2,000 miles inland and 2,000 feet underground, looking into a Chinese mining opportunity. Porter knows as much about China as anyone in the investment world. For a few years in the late 1990s, Porter wrote an institutional investment letter on China, called China Business & Investment.

Back then, all the decent opportunities involved buying something overseas – investing on the Shanghai, Shenzhen or Hong Kong exchanges. There were a few Chinese stocks that were listed in the U.S., but Porter thought they were all basically garbage. So your options were either to send your money to Asia or to buy garbage in the U.S.

Why Invest in China…Today’s Investing Opportunities

Today, according to Porter, we have a handful of outstanding Chinese blue chip stocks?that are finally easy to buy for Americans. They’re solid companies trading at cheap valuations. It is a short list. The complete list of easy-to-buy China opportunities is as follows:

The big blue chips on the NYSE (from $5 to $50 billion)
The Chinese dot.coms on the Nasdaq
The smaller-cap China stocks (less than $5 billion in size) on the NYSE
The closed-end funds (type “China” into www.etfconnect.com to see them)
A few other smaller opportunities (like OTC stocks)

Out of these, the big blue chips appear to be the cheap, safe and sound opportunity. In short, the smaller caps are still “garbage,” the Chinese dot.coms are a bubble ready to burst, and the smaller opportunities are risky and have high trading costs (high spreads). A fund or two might be okay – the Templeton China Fund (TCH) is a familiar name and probably a safe bet.

Porter laid out his case for why to invest in China last night. It is truly compelling. If you’re not familiar with the current case for investing in China, Porter is the guy to hear it from. There is a free way to read his case for China – it’s in his sales letter for his China Strategy Report, where Porter says: “There’s a simple, and probably inevitable, way to make several times your money – at the expense of the Chinese government.”

It is a few pages long, but I urge you to read it. After you read it, you’ll truly understand what’s going on right now, and you can decide for yourself whether an investment in China is right for you. You can take Porter up on his offer, or you can try to do it on your own through a fund or a blue chip stock.

As for me, I’m torn. After years of watching investors in China come and go, I came to believe the old saying that “nobody with blue eyes makes money in China.”

This time around, on the one hand it feels like “here we go again.” Boom, and then bust. On the other hand the case is so compelling, and so many people are getting interested, that now may be the right time. Could it be worth a speculation, at least? What’s the harm in a little speculation here, especially if you use a trailing stop?

That’s for you to decide The goal of these Investment U E-Letters is to educate you to open your eyes a bit and to help you see the investment world in a different way than you’ll find from your financial planner or CNBC. Giving out stock picks is not our mission.

So spend a few moments today learning more the reasons to invest in China. Whether you invest or not, I think you’ll find the story particularly compelling.

Good Investing,

Steve

Today’s Investment U Cribsheet

To learn more about the four closed-end China funds, go to www.etfconnect.com and type “China” in the search box. When you look at each fund, you can see that the holdings of each are very different. Stay away from the one that has performed the best over the last year – it’s full of dot.coms.