Reprinted from THE BOSTON GLOBE
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Monday, May 6, 1996
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INVESTORS NEED TO APPROACH CHINA'S MARKET WITH CAUTION
By Marla Brill/
THE MONEY MANAGERS
[GRAPHIC: PHOT OF BIN SHI]
BIN SHI, Portfolio manager
United Services China
Region Opportunity Fund
Many Portfolio managers talk about investment opportunities arising from
economic growth and prosperity China. Bin Shi, portfolio manager for the United
Services China Region Opportunity Fund, is one of the few who knows the subject
first-hand.
Shi lived in China until 1989, when he moved to the United States at age 23
to attend Tulane University. "When I was growing up, China was largely secluded
from other parts of the world," he says. "We didn't have some items most Western
cultures would consider basic, such as televisions or refrigerators. The
government rationed rice through a coupon system. And the pursuit of wealth was
looked down upon as a means of exploiting other people." Today, he says, over 90
percent of Chinese households own a television set, and accumulating wealth is
no longer considered exploitive.
The country's new, more capitalistic attitude started in 1978, when China's
Central Committee launched its ambitious program of economic liberalization
designed to bring in foreign capital and technological skills. In the years
since the door opened, the country has become one of the fastest growing
economies. Personal incomes are rising, the middle class is expanding, and
household savings rates are high. In the last decade, GDP growth rates in China
have been two to three times higher than in the United States and European
countries. With a population of 1.2 billion, the largest of any country, China
has the potential to be the world's largest consumer market.
Despite these positive trends, investors need to approach this nascent stock
market cautiously. Investing in China over the last two years has been an
unnerving experience, as the market soared in 1993, only to plunge in 1994 and
1995. When United Services took over management of the fund in February 1994,
its net asset value was $9.85. Today, it stands at $6.32.
Shi points to several factors that contributed to past corrections. One of
the largest blue chip companies in China announced that it reduced its
previously projected earnings for 1995, which affected the entire market. The
Chinese government's curtailment of low-interest, subsidized loans brought fears
of higher interest rate expenses for corporate borrowers. And, concerns mounted
that the Chinese government would consider discarding its currently favorable
tax treatment toward foreign investments and joint ventures.
These fears, he believes, have been exaggerated. "The Chinese government
wants to strengthen China's economy, not weaken it," he says. "I feel that it is
highly unlikely that the subsidized loan and favorable tax treatments will be
completely canceled right away. Emotional selling has driven the market down,
making valuations extremely low. Some Chinese companies are selling well below
their book value, although they are still making significant money. The gap
between the strong growth of the Chinese economy and the performance of the
Chinese stock market has been overlooked by most investors, and may leave room
for a healthy recovery in 1996."
While few dispute the region's growth potential, many prefer to tap it
through stocks of large multinationals with growing operations there, such as
Coca Cola, McDonald's, General Electric, and General Motors. While that may
offer some upside potential, says Shi, it is not as pure a play on the region as
the companies he invests in. At least 65 percent of the fund's assets must be
invested in stocks issued by China Region companies. To qualify, they must be
organized under the laws of countries in the China Region, have at least half
their assets in China Region countries, or derive at least 50 percent of their
gross revenues or profits from providing goods or services to China Region
countries.
Most Westerners have never heard of the companies that dominate Shi's
portfolio, and many are quirky little niche players that would seem out of place
in the US public market. One Chinese favorite, Dazhon Taxi, operates a taxi
fleet in Shanghai and has plans to expand into long-distance passenger
transportation. "Sure, it's not a big multinational," he acknowledges, "but it's
a good company with a strong niche in a growing market."
About one-third of the portfolio is invested in companies headquartered in
Hong Kong that derive most of their revenues from sales in mainland China.
Because it is a more established market with formal reporting requirements, says
Shi, Hong Kong companies are easier to follow and have a better track record and
operating history than those based in China. Chaifa, one holding, is a Hong Kong
retailer that derives 80 percent of its revenues from mainland China.
The company holds exclusive rights to sell garments and other items under the
Playboy brand name. "Many people in the US associate Playboy with a magazine,"
he explains. "In China, Playboy symbolizes a sophisticated Western life-style."
Even though the Chinese may like the swinging image behind the Playboy
name, investors may not appreciate the same quality in a mutual fund. That's why
United Services, the fund sponsor, suggests in its marketing literature that the
China Region Opportunity Fund is appropriate only for investors seeking capital
appreciation who are willing to endure high share price volatility. And, even
these individuals should commit no more than 3 to 10 percent of their assets to
the fund.
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Reprinted with permission of the author.
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For a free prospectus containing more complete information, including charges
and expenses, call 1-800-US-FUNDS (1-800-873-8637). The prospectus describes the
special risks of investing in emerging markets. Please read the prospectus
carefully before investing. Past performance is no guarantee of future results.
Investment return and principal value will fluctuate. You may have a gain or a
loss when you sell shares. Average annual total rate of return for 1 year period
ended 7/31/96, -6.38%. Average annual total rate of return for life of the Fund
(2/10/94 through 7/31/96), -15.07%.
