U.S. investors take the China road But rising economy proves hard to tap

January 13, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Like vassals making their annual pilgrimage to offer up tribute, U.S. investors are flocking to China in hopes of securing economic prosperity for the coming year.

With many market strategists already predicting a below-average year for U.S. equities, China and its booming economy are becoming irresistible to many investors, despite its volatile politics. All the big Wall Street investment banks have sent top executives to visit China over the past few months, and many companies are beefing up Hong Kong staffs in anticipation of further economic reforms and continued double-digit economic growth.

In addition, one open-end and three closed-end China stock funds have been launched in recent months to take advantage of interest in China. Unlike open-end funds, in which shares can be created to meet market demand, closed-end funds have a fixed number of shares.

Investors have also started trying to identify U.S. companies poised to benefit from China's economic growth, which is expected to top 10 percent this year and has averaged 9 percent since reforms were started 15 years ago.

"China is one of the best long-term prospects of any place in the world. What I've seen has impressed me greatly," said Michael F. Holland, vice chairman at Oppenheimer & Co. brokerage.

But tapping into this potential is proving harder for investors than might be expected. With China's two stock markets so rudimentary as to be useless for most investors, brokers have been trying to pinpoint companies or stock markets that will reflect China's growth.

"What everyone wants to buy is something that reflects China's economic growth and to sit on it for 10 years. But that doesn't exist," said Francis Scotland, editor of the International Bank Credit Analyst, which publishes a newsletter on emerging markets.

Mr. Holland, who recently completed a tour of China and met top officials, said investing in China may be too risky for individual investors, who could lose their shirts if the country's on-off reform movement conks out again.

Oppenheimer, for example, issued 8 million shares in a closed-end fund called the China Fund at $15 a share, but the fund closed yesterday at $14.

This has been the fate of the two other closed-end China funds, with the Greater China Fund, with 6.75 million shares, and the Jardine-Fleming China Fund, with 6.8 million shares, both selling beneath their offered prices. The two funds also own shares on China's two fledgling stock markets.

Groups that study the performance of funds have no rating for the three China funds because they are so new, but George Cole Scott, who publishes the Scott Newsletter on closed-end funds, urged caution.

"China is a very long-term prospect. We would buy to hold for a long period," Mr. Scott said.

To counter the unpredictability of China's two stock markets, some funds spread the risk by investing in markets near China.

The Jardine-Fleming fund, for example, also owns shares in the Macao and Hong Kong markets, and the Greater China Growth Fund, a mutual fund started by Eaton Vance Distributors Inc. in November, is almost exclusively invested in Hong Kong.

In fact, the Hong Kong market has been the most popular vehicle for most investment banks keen on China's prospects.

Despite the ongoing rift between China and Britain over control of the British colony before its official handover to China in 1997, Hong Kong remains the biggest investor in China's prosperous southern provinces and the principal conduit for Chinese exports.

Investors have pumped money into Hong Kong, with the Securities Industry Association (SIA) reporting that U.S. net acquisitions of Hong Kong equities topped $1.8 billion in the first nine months of 1992, compared with $1 billion for all of 1991.

By contrast, investment in the Chinese exchanges was negligible, with no net acquisitions in the first nine months of 1992, as investors were scared away by the lack of accounting regulations for companies, said David Strongin, director of international finance for the SIA.

Another possibility is to invest in certain Japanese companies that do business with China.

Paul Ehrlichman, a partner in Brandywine Asset Management Inc., said that unlike Hong Kong stocks, Japanese stocks are underpriced.

For example, stocks for Yamaha Motor Co. Ltd., which makes the motor scooters that many Chinese are now able to afford, is trading at 760 yen, down 50 percent in two years. Mr. Scotland of the International Bank Credit Analyst observed: "Everyone wants some of that China growth, but no one really knows how to plug in to it."

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