China's long-ailing B shares - those available to foreigners - have begun rallying amid signs that China's inflation is now better under control.
The development has surprised some investors who had for some time been ignoring the China market, mired by economic and political woes.
But the investing coast certainly isn't yet clear. In fact, close observers are divided over whether the market is now a good buy. While optimists tout signs of economic improvement and an array of still-cheap stocks, others worry the volatile market could still spring some nasty suprises.
On one hand, the overall market remains decidedly cheap. As of mid-August, Chinese B shares trading in Shanghai had an overall price/earnings ratio of about 10 times 1995 earnings, while those in Shenzhen had a comparable p/e of five, reported Carol Chuang, portfolio manager of the Matthews Pacific Tiger Fund in San Francisco.
China's markets had been pummeled by tight credit conditions that were imposed two years ago to fight spiraling inflation. But by mid-1995, China's inflation had fallen to just less than 17%; that, and other statistics suggest China was successfully engineering a soft economic landing. Many hope that by sometime in 1996, the goverment will loosen credit conditions.
But questions surround just when this would happen. As a result, some investors, including Ms. Chuang, remain leery of China's market. This camp worries China's market could still disappoint investors because credit conditions remain tight. Therefore, corporate profits could still suffer.
But some optimists believe now is the time to buy. And to get the best bargains, some of these investors already have gone shopping for more China stocks.
Fred Zhang, manager of Claflin China Partners fund, Boston, recently invested more of the fund's cash in China, and now his China fund is almost fully invested. To Mr. Zhang, the China market is "in an improving phase" and should be even higher by year's end. Therefore, "this is the time to pick up some fundamentally sound stocks," including some attractive recent listings, he said. He likes such stocks as those of Guangdong Electric Power Development, Jianshe Motorcycle and Shanghai New Asia.
Since the second quarter, the PRC fund of San Francisco-based G.T. Capital Management has been selling its Hong Kong-listed "red chip" stocks (companies with a substantial presence in China or whose parent company is based in the People's Republic of China) and buying more China B shares. Now, the fund is about 50% invested in B shares and about 45% in Chinese-related listings in Hong Kong, said Oscar Wong, a G.T. senior vice president in Toronto. By year's end, he expects the fund - which he founded - to be 75% in B shares.
Mr. Wong believes the Hong Kong market is fully valued. In contrast, he believes China B shares will gain further, even this year.
Nonetheless, investors don't have to rush into China, he said. After all, G.T. doesn't expect China to ease credit conditions until the second half of 1996. (Related story on page 19.)
Very recently, Dunedin Fund Managers, Edinburgh, Scotland, bought one unspecified B share and two H shares (Chinese companies listed in Hong Kong) for its specialist Asia and emerging markets funds. The firm isn't going "gung-ho into China," but had been what investment manager William Low called "very negative" on that market for the prior two to three years.
Still, Dunedin prefers H shares listed in Hong Kong to B shares for investing in China. With H shares, investors enjoy better trading liquidity, corporate disclosure and a wider array of attractive companies, said Mr. Low.
Ms. Chuang of the Matthews Pacific Tiger fund "wouldn't say that I am very positive on B shares" right now. She believes these stocks already reflect recent good economic news in China. Moreover, earnings reports by some China companies are still disappointing, she said; in addition, China's credit conditions are very tight, and state-owned enterprises remain in critical condition. Thus, Matthews Pacific Tiger fund has a 35% exposure to the overall Hong Kong and China markets combined (31% for Hong Kong - which is mainly in stocks with at least some investments and business in China - and 4% in Chinese stocks) and no H shares.
In China, Ms. Chuang does like the consumer spending sector. But even here, some preferred stocks, such as those of Shanghai New Asia in fast foods and hotels, and Shanghai Shanling, which makes refrigerators, already have posted sizable gains this year, she noted.
Raymond Lin, investment analyst with Sit/Kim International Investment Associates Inc., San Francisco, said his firm has never bought any B shares. Instead, its China investments are limited to direct stakes in Chinese companies, investments in China play-companies listed in Hong Kong and Taiwan, and in U.S. companies doing business in China. In terms of China plays, it prefers companies listed in Hong Kong and Taiwan because of greater disclosure and overall management quality compared with companies listed in China.
Two Hong Kong companies Mr. Lin likes: Concordia Paper Holdings Ltd. (listed on the Nasdaq in the United States), which plans to expand its operations in China, and Vitasoy International Holdings, a Hong Kong-listed firm whose food products - including soy bean milk, tea and tofu - are well-suited to the Chinese market.
On a risk-reward basis, Baillie Gifford & Co., Edinburgh, Scotland, prefers Hong Kong's market to China's right now. "The data coming in seems encouraging. It suggests that China is successfully (engineering) an economic slowdown and that inflation is gradually coming under control," said investment manager Harvey Hammonds. What's more, B share valuations look attractive, he said.
But at the same time, China's austerity measures to cool inflation are still intact. That means earnings disappointments are possible. Thus, although "a number of our specialist funds have some holdings in B shares, these are still small, and we're just holding on to them," said Mr. Hammonds.