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intelledgement (98.85) Submitted: 12/18/07 12:49 PM : Start Price: $55.22 FXI Score: -10.81
[2 Jan 07]We select all of our long picks with the expectation of holding for at least five years, barring some fundamental shift that changes the basic underlying conditions and we are really confident about them all…so it is really difficult to have a “favorite”, as we expect all of them will beat the market. However, if you pressed us against the wall, we would probably have to say that the pick that is likeliest to exhibit extreme performance is FXI.The massive buildout currently underway in China - with entire cities being built from scratch—is by far the largest construction effort ever undertaken by humankind. How fitting that it is brought to you by the same folks who dreamed up and implemented the Great Wall. Unlike that project, however—which from the point of view of stimulating productive economic activity, pretty much hit a brick wall (unless you owned a quarry or made construction equipment)—the potential for wealth generation inherent in this buildout is sheerly incredible.The achievements to date are incredible enough. China’s GDP is more than ten times what it was 30 years ago: a sustained compounded annual growth rate (CAGR) of 8.7%…10.5% in 2006. The growth in wealth has lowered the percentage of the population in poverty to 10%, and moved a majority of people off the farms—the percentage of Chinese who make their living from agriculture is down to an all-time historical low of 45%. China, which has long lead all nations in population but trailed badly in most other statistical categories for centuries, is now first in the world in current accounts surplus ($179B in 2006) and currency reserves (over $1 trillion)…and they became the second biggest economy in the world last year on a purchasing power parity basis.Of course massive growth is massive change, and massive change is, ipso facto, disruptive. So there are, inherently, some massive-scale risks here. Will the growing disparity in wealth between city folk and peasants outstrip the growth of the overall pie to the point of societal upheaval? Will the corrupt Chinese political system’s limits to flexibility fail to react fast enough to a swiftly developing problem? Will the bad loans that the amateurs running the banking system made to state-owned businesses drag down too many banks? Will the rampant pollution issues and effects of global warming cripple the buildout? Will demographic issues (too many older Chineses supported by too few youngsters) hobble productivity? Will the imbalance of men (too many) and women (too few) lead the politicians towards militaristic adventures to distract folks from the other problems and bleed off the excess? Will a health wildcard (avian flu, AIDS which is not being managed well) cause problems?No tree grows straight to the sky. Development in the USA, which was faster than that in Europe, also suffered from violent swings in business cycles…J.P. Morgan saved us from likely financial and potential socio-political ruin twice and then the Roosevelts did it again and again. So, while we expect that the waking of the Chinese dragon is the most signficant—and most lucrative—development of the early 21st Century, we anticipate some major down days along the road to Emerald City.Furthermore, the Shanghai stock market, after years in the doldrums, was up over 100% in 2006 and the conventional wisdom is that a correction is overdue. Fundamentally, the iShares FXI ETF has no Shanghai market components—all 25 companies are mainland-based but tradeable on the Hong Kong market; about two-thirds are privately owned “H” class (which means the government authorizes them to list on the Hong Kong market) and one-third are government-owned “red chips.” FXI was up “only” 81% in 2006, and has a P/E of 19 and a yield of 1%…while not cheap, really not egregiously overpriced here given the growth potential.We will hew to our risk management policy here…but if we get taken out of this investment (which we would consider doing with a 20% decline), we will most likely be back, once it is evident that the setback has run its course. Long term, you gotta be here.
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FoolishMage (95.53) Submitted: 12/21/07 5:45 PM
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I went long this ETF last Nov/Dec and I just bought more today. I don't know what else to say about China. You've said it all. I agree with your assessment as well as Jim Rogers. Long term, 10+ years, hold.
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fewl10 (70.61) Submitted: 1/01/08 5:05 PM
You are absolutely nuts if you think China's poverty level is 10%.
intelledgement (98.85) Submitted: 1/02/08 5:14 PM
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fewl10 wrote:> You are absolutely nuts if you think China's poverty level is 10%. LOL just getting some use from my tax dollars. You need to take this dispute up with the CIA.https://www.cia.gov/library/publications/the-world-factbook/geos/ch.htmlScroll down to "Population below poverty line".Keep in mind that how China defines "poverty" may be different from how you define it. We should expect that a more interesting argument might be - regardless of the absolute percentage number - is the percentage of folks in poverty declining or increasing? That is, clearly the pie is growing quickly, but if the distribution of the goodies is skewed towards the top, then inequality will increase and, with it, the potential for social/political unrest. So far, it appears that there is enough upward mobility to keep everyone more or less happy, but the jury is still out here. Next to ecological concerns - pollution, rising sea levels, scarce resource bottlenecks - economic inequalities engendered by rapid growth/change is probably the biggest risk factor to a Pax Sinoian.
fewl10 wrote:
> You are absolutely nuts if you think China's poverty level is 10%.
LOL just getting some use from my tax dollars. You need to take this dispute up with the CIA.
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
Scroll down to "Population below poverty line".
Keep in mind that how China defines "poverty" may be different from how you define it. We should expect that a more interesting argument might be - regardless of the absolute percentage number - is the percentage of folks in poverty declining or increasing? That is, clearly the pie is growing quickly, but if the distribution of the goodies is skewed towards the top, then inequality will increase and, with it, the potential for social/political unrest. So far, it appears that there is enough upward mobility to keep everyone more or less happy, but the jury is still out here. Next to ecological concerns - pollution, rising sea levels, scarce resource bottlenecks - economic inequalities engendered by rapid growth/change is probably the biggest risk factor to a Pax Sinoian.
TMFOtter (99.61) Submitted: 5/18/08 1:23 PM
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Though you were somewhat rude in response to my pitch, I will now take some time to explain why your thesis on FXI is totally wrong. Too many people confuse the FXI with a way to invest in Chinese growth. It isn't. FXI was set up by the Chinese government and is a set of 25 Chinese State Owned Enterprises (SOEs), with the pot sweetened a bit with the inclusion of PetroChina.Launching FXI was little more than a public relations move by the Chinese government, and they include mostly second tier SOEs, which as a group are not run by entrepreneurs who are delivering the sizzling growth rates seen in China. Investors should, for the most part, stay away from Chinese SOEs, and yet most American fund managers do just that. China's growing in spite of these dinosaurs, not because of them.SOEs have traditionally been the dominant component of the Chinese economy, and they tend to be headed by executives that are part bureaucrats hand picked by the government and without any responsibility to shareholders. These people have not been selected based on their ability to manage -- they are being rewarded for loyalty and patronage to the Party. One outgrowth of this fact is that many SOEs have leadership which does not draw boundaries between the company's finances and their own. Throughout Beijing you'll find "princelings" driving around in expensive cars, consuming prodigious amounts of wealth on the back of the SOE that they or their family runs. These people are untouchable. China is growing despite the SOEs (and there are a few well-run ones, like CNOOC and PetroChina). In 1980 there were 300,000 SOEs, which made up 80% of the country's economy. Now there are fewer than a third that amount, and they comprise about 30% of GDP. The government keeps many of them alive by infusing them with capital -- and one of the ways that they've done so is by -- ta daaaa!!! -- taking them public. These companies generally lack any sort of transparency, their accounting is a shambles, and they are going to get crushed by the entrepreneurs in China who are actually driving the country's astounding rate of growth. The only reason to invest in SOEs is to find the ones that have special status that the entrepreneurial companies will not be able to ford. But one will do much better investing in the companies than investing in a basket that has a few speedboats and 18 anchors. That's what FXI is, and it's why, during the height of the Shanghai stock market bubble, I said, with confidence, that the outcome was "not in doubt." Garbage doesn't float forever, and when the Chinese government finally opens up its investing regime so that Chinese citizens can choose to invest beyond Chinese companies, the thesis on FXI will be dependent on little more than the proclivities of the retail Chinese investor to become overenthusiastic about today's answer to Dutch tulips.This is a copy of the update on my rating on FXI on my own CAPS page, but I thought that your reply warranted special attention. I'm getting ready to head back to China to talk with some of the real drivers of the Chinese miracle. Some day there will be a good Chinese ETF, based on its growth engine companies. This isn't it. It's a public relations and a capital raising ploy.Buying FXI to take advantage of Chinese growth is like buying cow chips because you like steak. Sure, there's some value in there, but who wants to dig through that other stuff?
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