In 2007 the telecommunications industry in China will see major changes as issuance of new wireless licenses by the government will pose challenges to China Mobile’s market share of wireless subscribers, which has a customer prospect base growing at50,000,000 new subscribers per year. Beneficiaries of the new licenses could be China Net. We believe there are arbitrage opportunities between these two companies by either shorting China Mobile later in the year and buying China Net, or buying China Mobile for the short term. However, the telecommunication industry seems to be richly priced based on historic price earnings ratios.
The large banks are chartered by the state or province with similar structures to our national versus state charters. The large state-owned banks include China Bank of Construction, ICIBI, and Bank of China. Deposit rates are regulated and loan quality was perceived as poor for China’s large banks. However the banks have been able to re-capitalize themselves by raising capital in the global markets over the last year, reducing the bank’s loan portfolios’ exposure to underperforming loans with a shot of equity infused by the IPO’s. China Construction Bank, Bank of China and China Merchants Bank have sold their shares on the Shanghai Exchange and in the Hong Kong, New York and European markets.
The banking industry in China subsidizes China’s enterprises through regulations that keep interest rates at zero to 2% for the Chinese depositor, making cost of funds for lending cheap. With the ability to raise capital through stock offerings these banks have been able to cleanup their balance sheets and should be in a position to lend to profitable companies in the main-land. Global investors were hungry for bank shares, sometimes oversubscribing IPO issues by a ratio of ten to one. Banks in any market are seen as a proxy on the economic growth of any market, and the same is true in China. China banks also have the prospects of banking a surging middle class customer base with over300,000,000 qualified savers and borrowers in China.
China Merchants Bank was New China’s first privately chartered bank in 1987.RT China Capital recommended buying this stock in October, 2006.We recommend buying China Merchants Bank today on the Hong Kong market. Throughout the Chinese State exists a strong mercantilism that emphasizes manufactured exports.
The first American to profit in trade with China did so a year after the Revolutionary War ended and Americans were free to trade outside the sphere of Britain’s influence. James Brown of Providence, RI shipped a cargo then valued at $32,000 to China and Brown’s ship returned four years later with cargo valued at over $250,000in 1783.
The old China trade, as they called it back then, created millionaires among the Eastern board Yankee families and stimulated trade relations with China ever since. Ships in the early 19th century would leave port from the U.S. carrying with them gold, ginseng (a native plant of the Appalachians) and cot-ton and they would bring back manufactured furniture and clothing for sale in the U.S. Ever since, Americans and Chinese have been doing business together. With Chinese liberalization of markets it is going to be easier for Americans to try to profit from our two countries’ economies by investing in stocks that can capitalize on China’s economic growth.
After 130% increase in equity markets in China last year, the leading indices in China are catching up from the lows of the past five years. Currently in China, a boom in IPO’s is occurring that is stimulating speculation in the markets. There are global IPO’s that are dually listed on the exchanges out-side China for the large state-owned enterprises and banks to get their share-float spread around the world. There is also a robust smaller IPO market taking place with small and mid-size companies in China seeking to capitalize themselves with the newly reinstated IPO laws.
China is indeed creating many multi-millionaires out of their entrepreneur class and a healthy investor class is growing and is speculating in equities. Options trading in China is not yet avail-able nor is short-selling; this leads to a market with volatility typical to emerging markets. However, China is not atypical emerging market in that it is a military and economic powerhouse endeavoring to find its place in the global leadership of the 21st century. We believe that China is creating future multinational corporations that will dominate industries from banking, electronics, medicine, telecommunications, to automotive and transportation.
A foreign visitor to China 20 years ago would have noted the poor infrastructure of highways, airports and trains from the major cities into the rural areas. It is now a subject of constant comment how quickly the Chinese State is transforming its transportation infrastructure into an efficient, modern behemoth. It is estimated there are over 150 million migratory workers within China laboring on infrastructure projects, including air-ports, expressways, high-speed rail, shipping and bridges across bays.
The casual observer of China beholds the breathtaking transformation as airports seem to pop up overnight and expansion bridges and expressways link rural communities with thriving metropolis communities. The800,000 newly minted engineers and scientists graduating annually from Chinese universities are able to assist in this titanic task of modernizing an ancient world.
In a sense all economic promise embedded in China’s future rests on the success of this modernization and the results in the last 10 years have been phenomenal. Internal shipping throughout the country has aided supply chain management, agricultural industry has been able to sell their products into the booming middle class, travelers have easy airline connections to every part of the country, high speed sleeper trains move officials and vacationing families, north, south, east, west on hourly schedules, and luxury trains from Beijing to Tibet cater to tourists seeking to view the old and new magnificence that is China. In2008 the Olympics will be hosted in Beijing and the massive influx of foreign tourists will use these transportation infrastructures. The result for investors is to look at toll road companies, airlines, automobile manufacturers, and construction materials companies.
China’s major airlines can boast some of the most modern fleet in the skies. Air China, China Air, Hainan Air, Regional carriers pepper the airports of China as well, shuttling visitors from city to city much like our discount air-lines in the U.S.
The cost of highway build-out is absorbed through the formation of toll road companies so that users of the road pay. These private public companies are able to collect steady revenue and post stable dividends.
The shipping container business is virtually monopolized by Chinese operators.
China has made incredible strides to improve their transportation systems since the early 1990’s, undergoing drastic changes that will forever change the accessibility of its cities’ for future generations. China’s ever growing economy will necessitate these ongoing updates and changes, which will provide further evidence of the Chinese people’s commitment to modernization and economic growth. The opportunities for investors are immense.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment in this report. Investing in Non-US securities, including ADR's is subject to risk.
The opinions and commentary provided by the advisors in the My Automated Advisor Newsletter are the opinion of those advisors and not of My Automated Advisor.
Next Article: The O. Report: The Wall of Worry & Risk Reward
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