There’s a saying in international investing circles: "When the U.S. sneezes, the rest of the world catches a cold."
So what happens when the U.S. has the flu? Today, we start a two-part series on worldwide reactions to this month’s Wall Street mayhem with a Chinese perspective.
The world’s most developed economy can’t figure out what the best medicine is, leading to a little market alchemy in financial markets like China’s that are still in their investment infancy.
After the Treasury’s takeover of Fannie Mae and Freddie Mac a couple weeks back, China’s Oriental Morning Post ran the headline Learn from the U.S. to Save Market. I wanted to scream, "No, don’t learn from us!"
But instead, the article reminded me that we have to keep up the appearance of knowing what the heck we’re doing, since Chinese observers aren’t just learning capitalism from us… they’re also keeping debt-ridden Uncle Sam from national bankruptcy.
Fact is, Chinese banks owned $24 billion worth of Fannie and Freddie bonds as of the end of June ’08. You’re not being silly if you think that making the mortgage giants wards of Washington was partially a move to pacify jittery bankers in the Middle Kingdom.
As the article points out, the management changes and planned restructuring of every takeover or bailout target announced by the Fed and Treasury make these rescues different from typical Chinese government interventions.
Beijing usually moves by dumping money onto troubled banks’ books and removing non-performing assets, rather than an actual share purchase or systemic approach that the U.S. has adopted.
So how quickly could Chinese officials put the American approach into action? Is today soon enough?
Investing in China ETFs: How A Market Move Could Lead to 20% Upside
On Friday in China, a branch of the year-old government sovereign wealth fund that manages $200 billion in foreign currency reserves announced that it will launch a massive share purchase in China’s biggest listed companies.
Wa Haijun, head of Power Pacific Corp of Canada’s Shanghai branch, told Reuters that the move "should allow the index to rebound around 20% over the next several weeks."
That uptick would follow a decline of nearly 70% from October 2007 in the past eleven months, punctuated by a springtime sell-off and September’s international freakout. All in all, $3 trillion disappeared from mainland stock exchanges during that period, since so many had piled in at the top of the market.
Another trick China is pulling out of its sleeve is its control over state-owned enterprises. SOEs like PetroChina and Industrial and Commercial Bank of China are being encouraged (more like told) to launch major equity buybacks in order to sop up orphaned A-shares. Those A-shares, which trade in Shanghai and Shenzhen, are not accessible to foreign investors.
Hong Kong traded H-shares, on the other hand, are available to you and me through many online brokerages and, most easily, through the FTSE Xinhua 25 ETF (NYSE:FXI).
We’re long FXI in the Global Growth Stocks portfolio, along with a select few other international exchange-traded funds. These index funds have taken a beating lately, leaving top global dividend payers and local market leaders at super discounts.
China alone is at a 3-year P/E low… That’s a steal!
What’s more, over the past year Hong Kong has rallied along with China, but when the Shanghai Composite index began its most dramatic decline in mid-May, Hong Kong’s Hang Seng fared much better, as we see in the chart below:
All of the world’s equity exchanges are up on Friday, hoping for the best. Even Russia’s Moscow big board, where trading had been completely halted earlier in the week, reopened to lead the MarketVectors Russia ETF (NYSE:RSX) to an 18% jump by midday.
We’re looking at these and other opportunities for supercharged gains in dirt-cheap international growth stocks, and we’ll keep you up to date.
Regards,
Sam Hopkins
