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Christmas in China

Written By Brian Hicks

Posted December 24, 2007

I’ll never forget how confusion turned into shocked giggles the first time I heard a Christmas song in China.  The electronic midi strains of "Santa Claus is Coming to Town" chased me around a corner in the far western city of Xining.  It wasn’t Saint Nick’s band of elves heralding his arrival, though.  It was a city trash truck-and this was in the middle of July!

China has a strange relationship with Christmas.  Though it’s been the target of many a protectionist screed for its polluting, job-taking, religion-suppressing ways, Mao’s People’s Republic probably churned out more than half of the presents under your tree.

Be you Christian or otherwise, this holiday season you may notice the country of origin on your favorite brand of tinsel to be China. The cool new remote control race car and Xbox game Timmy wants? Hubby’s nose hair trimmer? Your fiber-optic Christmas tree?

All from China.

A recent article in Asia Times Online says that a staggering eight out of ten artificial Christmas trees sold in the United States are made in China.  That adds up to about $130 million worth of yuletide glee, mostly from the Shenzhen Special Economic Zone just outside of Hong Kong.    

Your ornaments?  The nativity scene in the front garden?  Thank the Communists.

Starbucks had already broken out the Bing Crosby and Christmas Muzak by the time I got to China in mid-November this year, showing the truly international appeal of the holiday–and of café latte.

But the economic news has been a little more frightful than delightful lately around the world, and China’s November was no smooth sleigh ride.  

Here we see the Shanghai Composite Index in blue, compared to the Dow in green and the Hong Kong Hang Seng benchmark on top in red.

Shanghai Hong Kong Dow

Notice that the more volatile Chinese mainland market is actually below the negative Dow return over the period, while Hong Kong (considered a foreign exchange for Chinese investors) has stayed above break-even.

How to Invest in China this Christmas

The international credit crunch is part of the concern rippling through world markets, but in Asia there is a different dynamic at work.  Hong Kong is benefiting from the flight to quality taking place among regional investors, who are now more reluctant to take on the speculative Shanghai exchange.

For you to play Hong Kong, I recommend the iShares MSCI Hong Kong Index ETF (NYSE:EWH), which has delivered nearly a 43% gain over the past year.  Hong Kong’s market is much more accessible to international retail investors, who are not allowed to participate in the Shanghai and Shenzhen exchanges except through the Morgan Stanley China A Share Fund (NYSE:CAF).

NYSE:CAF is up nearly 98% since late December 2006, but the past few months have been brutal, knocking off nearly a quarter of the ETF’s value.

While China, Christmas trees and all, deals with its worst inflation in over a decade, the Hong Kong dollar is pegged to the greenback.  That’s a benefit in terms of price stability, but a detriment to Hong Kong-based managers when it comes to purchasing power on the world market.

China also got a lump of coal in its stocking last week when the World Bank changed the way it calculates the size of developing economies.  With a major adjustment to China’s GDP in terms of equivalent purchasing power (purchasing power parity, or PPP), the country’s Dragon economy is not as imposing as previously thought.

Actually, it was only two years ago that the same statisticians told us that China was now the second-largest economy in the world.  Now they say the 2005 numbers were overdone by about 40%.  

Does that mean this Waking Dragon economic story has been a lot of hot air?  Not hardly, because this says nothing about the rate at which the Chinese economy is growing.  

China’s GDP growth is still measuring in the low double-digits, at 11.5% for 2007.  That’s nearly triple the increase for most developed economies.

What this tells us, aside from reiterating Benjamin Disraeli’s adage on the three kinds of lies ("lies, damned lies, and statistics"), is that hyperbole is no basis upon which to invest.

What’s inflated will pop and what’s good but underappreciated will gain its due.

As we consider Christmas wishes and New Year’s resolutions going into 2008, remember that a wish is only as good as action, and action is only as good as the knowledge you base it on.

Happy Holidays,

Sam Hopkins