The Australian | By Florence Chong | April 7, 2004
THE door is about to swing open for adventurous Australian investors to enter the promising Chinese stock market.
Small funds dedicated to Chinese stocks have started to come on the market, offering retail Australian investors the opportunity to leverage on to China's dynamic economic growth.
"Our clients are aware of what is happening in China. They read about it in the newspapers. And some want to know how they could get exposure to China's growth," says Noel White, director external sales, Westpac Institutional Bank.
At Westpac's instigation, Deutsche Bank last week launched Australia's first China fund, Capital Protected ChinaOpportunity Receipts.
The product, aimed at "sophisticated investors", has already received "positive feedback from financial planners," says White.
AMP Capital Investors expects to launch its version of China fund in the first half of this year.
AMP Capital's spokesman Justin Kirkwood says "the shape of the fund is being worked through".
Elio Garino, head of marketing and Product at HSBC Asset Management (Australia) Ltd, says: "We are assessing the appetite in Australia for Chinese equities."
If it can be justified, Garino says instead of creating a new fund, HSBC will find a way to allow Australian investors to access its HSBC Global Investment Fund -- Chinese Equity fund, set up in 1992.
Similarly, global funds manager Aberdeen Asset Management is assessing the demand and will consider opening its specialised China fund to Australian investors in "the near future".
Pete Gunning, chief investment officer with Russell Investment, confirms the "significant interest" in China's growth story among Australian investors.
He says China's entry to the World Trade Organisation, and more recently the opening of its A share markets to foreigners have caused a "flurry of interest".
(Until last year A shares were reserved for Chinese investors with foreigners restricted to B shares trading on the Shanghai and Shenzhen stock exchanges).
Gunning says the firm has launched specific China funds in Europe and is always looking for new products for the Australian market.
Collectively, global funds managers have placed billions of dollars on China's dynamic economic growth in the past decade.
However, funds managers take the safer route of investing in Chinese companies listed in Hong Kong.
Or they do the "China play" by proxy, meaning they invest in Hong Kong, Taiwanese, South Korean and even Australian companies that supply the Chinese market.
The HSBC China fund, for instance, which manages US$1.66 billion ($2.2bn), invests almost entirely in leading Chinese enterprises, including China Mobile, Citic Pacific and Petrochina, listed on the Hong Kong Stock Exchange.
Out of its portfolio, just 1.1 per cent is allocated to B shares on the Shenzhen Stock Exchange.
First State, the Edinburgh-based subsidiary of Colonial First State, has invested US$500 million in direct and indirect China stocks.
Angus Tulloch, First State's legendary fund manager, says that 5 per cent of the fund is invested directly in B shares.
"We could invest in more B shares, but we find that the market is not terribly liquid and not so well regulated," he says.
Although a few bad companies have slipped through, the majority of Chinese companies listed in Hong Kong meet its listing regulatory requirements and international accounting standards.
Matthew Scales, Putnam Investment's vice president of products and clients services in Australia -- manager of Westpac's BT Asia Share Fund -- says "China has a lot of potential yet to be realised".
But he adds that potential does not necessarily translate into better stock market returns when compared with regional markets.
He says investors have to be aware of regulatory concerns in the market which is not as efficient as it should be because of the legacy from its political system.
Putnam picks regional stocks for its China exposure.
The BT Asia Share Fund has 27 per cent absolute weighting in Korea, which is modestly overweight, relative to its benchmark.
Scales says the fund's largest holding is in Samsung, a world-class Korean conglomerate with multi-billion trade and investment in China.
He says that net of fees the fund returned more than 30 per cent for the year ending February 29.
Devan Kaloo, senior investment manager of Aberdeen Asset Management, agrees that China is a great macro story, but on a micro-level, its companies need to improve their performance.
Kaloo says the Chinese stock market itself is not big.
At the end of the January, the market capitalisation of China's A shares was US$580 billion, B shares was just US$13 billion and the H shares index in Hong Kong was US$40 billion.
The drawback is 70 per cent of China's A shares are held by state-owned companies and cannot be traded, he said. Beijing intends to eventually lift this restriction.
While the pool of China stocks will expand greatly in future as hundreds of Chinese companies including its four big state-owned banks, plan to list -- many in Hong Kong.
The first bank IPO -- the China Construction Bank -- is expected to raise between US$5-US$10 billion when floated in the next few months.
Tulloch cautions against investing in sectors such as automobile, steel, aluminium and ports. Over-investment in these sectors can lead to excess capacity.
For different reasons, he will be cautious with transportation and banking stocks.
Australia's first China-specific funds offer protection to investors.
Pia Cooke, with Deutsche Bank's Structured Product Sales, says the minimum capital ($25,000) invested would be protected during the 10-year life of the fund.
Cooke says the 30 stocks are selected based on market capitalisation and liquidity, price to book ratio, price to earnings ratio and dividend yields.
Commonwealth Securities (CommSec) was even more conservative when it launched a vehicle recently to allow clients to invest in the Hang Seng China Enterprises Index.
Julie McKay, a member of the CommSec's equities market and premium financial services team, says the three-year investment is hedged against currency exposure.The Australian:
