China's stockmarket is being hailed as the next big thing, but getting in as a retail investor is not easy. Chris Wright talks to the experts about getting a slice of the action.
You've seen the headlines. You're convinced China will be the big investment story of the decade, with the strongest growth in the world. You want to play a part in it, but how?
The simple answer is that, from a retail perspective, getting investment exposure to mainland China's growth story isn't easy. Everyone can trot out the familiar mantras about China's prospects: 1.2 billion people means 2.4 billion feet to fit for shoes, and so on. But there is no Australian-based, easy-access fund that allows small investors to take part.
Australia's largest fund manager, Colonial First State, has two suggestions: the Global Emerging Markets Fund and the First State Asia-Pacific Fund. Both are fine products but neither is China-specific, instead investing in a range of Asian or emerging market countries within a broader portfolio. Plus they're wholesale, not retail. The entry level on the GEM product is $500,000 and the Asia-Pacific fund can be bought only by investors in the United Kingdom.
There are several Australian products that invest in China and which are open to retail investors, but only as part of an overall Asia fund. "Most of the Asia ex-Japan international equities managed funds will have some country allocation to China," a spokesman for Morningstar, Phillip Gray, says. "For example, the HSBC Dragon Trust and HSBC Asian Equity Wholesale Funds are currently about 8 per cent China, while the Dresdner Taipan Equities Trust is about 14 per cent, and the Dresdner Tiger Opportunities Trust about 9 per cent. Fund managers tend to focus as much on sector as country selection these days."
Typically, Asia funds will follow the approximate country weighting of the MSCI Far East Ex-Japan benchmark. "We run ours neutral to the MSCI in country weights and that's currently about 10 per cent [to China]," says Kerry Series , managing director at Perennial, which runs a wholesale Asia fund.
There is merit in considering Asia-wide funds and some managers argue that exposure to Asia is necessarily exposure to China to a much greater degree than the country weighting would suggest. "The reason you would put money into a regional fund rather than a dedicated China fund is the argument that the rest of the region benefits from the greater China story," Series says.
It's also the approach financial planners suggest. "If this client came to me, we'd be looking at putting a portion of their funds into managed funds with exposure to the Chinese market," a planner at HLB Mann Judd, Michael Hutton , says.
But it's not a pure China play. Some global institutions do offer Australian clients exposure to China-specific products, but they tend to have high entry levels.
Take Merrill Lynch, which recently closed a $US50 million ($73 million) issue of Protected China Dragon Notes. These are 104 per cent principal-protected notes linked to the Merrill Lynch China Dragon Index.
A glimpse at the prospectus pushes all the right buttons for the Sinophile investor, listing impressive statistics on China's gross domestic product ($US1.23 trillion in 2002), its entry into the World Trade Organisation (which is forecast to increase GDP by between 2 per cent and 3 per cent annually), foreign direct investment ($US50 billion in 2002, higher than the United States), demographics (a middle class of 500 million by 2010 with 33 per cent under 20 years of age) and tourism (China is predicted to be the world's No. 1 tourist destination by 2020). Merrill's fund is open to Australian investors and about 5 per cent of the capital was raised here. But the product was offered only through the private banking group in Australia, through global accounts with a minimum investment level of $1 million, and with a minimum entry level in the notes of $US50,000.
Merrill Lynch's first vice-president for investments, Chris Bell , says the bank is "bound to do another one", but retail investors shouldn't hold their breath.
Another possibility is to buy managed funds that are managed overseas. HSBC, for example, runs a Chinese equity fund which had $US282.66 million of funds in it at the end of May and has been running for 11 years, returning 106.7 per cent since its launch and 17.6 per cent to date this year. This, like many China or Asia funds, gets most of its exposure to China in H shares and Red Chips, or Chinese companies listed in Hong Kong. Its largest holdings are Petrochina, China Mobile, Sinopec, China Telecom and Huateng Power.
Other such funds come from Aberdeen, Templeton and Barclays, among others. But here, too, there is a disadvantage, because although there is nothing illegal about investing in non-Australian funds, there is a regulatory issue. The Australian Taxation Office's foreign investment fund guidelines can mean that investors in overseas funds have to pay tax on unrealised gains.
"There is nothing tax-wise preventing the Australian investing in the foreign fund," explains Deloitte Tax Services partner Peter Kennedy. "However, there are regulatory restrictions on the foreign fund actually selling the investment in Australia [as opposed to offering the investment from Hong Kong on the internet]. The fund would be caught under the Australian FIF rules, so income would be attributed to the Australian investor, even if he or she did not receive any."
In practice, this is off-putting for potential investors. "If an investor just wanted to invest in China, they would have to invest in one of our offshore funds, which are not Australian registered and therefore not FIF compliant," Fidelity investment director Charles Wall says. "If a fund is not FIF compliant, then the investor may have to pay tax on unrealised gains."
The small investor might begin to think they're up against it, with all the best opportunities going to the big end of town. Tom Murphy , director and head of investment research at Deutsche Bank, thinks there are great changes afoot in Chinese investment as the qualified foreign institutional investor regime gets under way allowing institutions to invest in the previously off-limits A sharemarket, the broadest domestic stockmarket.
"That gives them better sectoral reach by a country mile" than the alternative B sharemarket, he says. "That doesn't help the small investor because it's an institutional initiative but the best access directly into China will be under that regime or through private equity, which really is getting the pick of the investments in China."
But unlisted private equity funds, filled with the best expertise on China investment, rarely reach below the $500,000 investment market.
Direct ownership is another possibility. This requires a strong and committed view on individual stocks, but it isn't the voyage into the unknown it might seem. Retail investors ought to forget about direct ownership of shares in the domestic A and B sharemarkets of Shanghai and Shenzhen: it's either impossible for regulatory reasons, or inadvisable at such a distance because of the lack of transparency about listed companies.
Many Chinese companies are listed on the Hong Kong Stock Exchange and several are listed on the New York Stock Exchange through American depositary receipts. Both exchanges have good disclosure standards and are covered by CommSec (but not E*Trade for Australian investors), if clients register for the international securities trading service.
Trades up to $10,000 on either exchange cost $39.90 (0.4 per cent for anything over that amount), all forex requirements are done through the Commonwealth Bank and settlement is in Australian dollars.
This opens up access to dozens of Chinese companies but investors should be careful about direct share ownership: Hong Kong might be better regulated than China, but it's still a long way from home and has its own idiosyncrasies.
"I wouldn't try to pick stocks," Citigroup strategist Adrian Blundell-Wignall says. "If I was going to invest directly, I'd take a basket of companies listed in Hong Kong and take BHP (Billiton) and Rio (Tinto) as clean plays on China."
This is the last alternative. Investors who have been put off by the hurdles can gain exposure by buying shares in Australian companies that export to China.
It might not sound like a bold venture into the mainland, but at least you know what you're getting.
STOCKS EXPLAINED
A SHARES: Domestically listed stock on Shanghai and Shenzhen exchanges, until recently off limits to foreign investors. Some institutions are now allowed to buy them under strict limits.
B SHARES: Shares in Chinese companies listed in Shanghai and Shenzhen but denominated in US or Hong Kong dollars and open to foreign investors, within limits.
H SHARES: Chinese companies listed in Hong Kong.
RED CHIPS: Companies controlled by mainland government interests but listed in Hong Kong
You've seen the headlines. You're convinced China will be the big investment story of the decade, with the strongest growth in the world. You want to play a part in it, but how?
The simple answer is that, from a retail perspective, getting investment exposure to mainland China's growth story isn't easy. Everyone can trot out the familiar mantras about China's prospects: 1.2 billion people means 2.4 billion feet to fit for shoes, and so on. But there is no Australian-based, easy-access fund that allows small investors to take part.
Australia's largest fund manager, Colonial First State, has two suggestions: the Global Emerging Markets Fund and the First State Asia-Pacific Fund. Both are fine products but neither is China-specific, instead investing in a range of Asian or emerging market countries within a broader portfolio. Plus they're wholesale, not retail. The entry level on the GEM product is $500,000 and the Asia-Pacific fund can be bought only by investors in the United Kingdom.
There are several Australian products that invest in China and which are open to retail investors, but only as part of an overall Asia fund. "Most of the Asia ex-Japan international equities managed funds will have some country allocation to China," a spokesman for Morningstar, Phillip Gray, says. "For example, the HSBC Dragon Trust and HSBC Asian Equity Wholesale Funds are currently about 8 per cent China, while the Dresdner Taipan Equities Trust is about 14 per cent, and the Dresdner Tiger Opportunities Trust about 9 per cent. Fund managers tend to focus as much on sector as country selection these days."
Typically, Asia funds will follow the approximate country weighting of the MSCI Far East Ex-Japan benchmark. "We run ours neutral to the MSCI in country weights and that's currently about 10 per cent [to China]," says Kerry Series , managing director at Perennial, which runs a wholesale Asia fund.
There is merit in considering Asia-wide funds and some managers argue that exposure to Asia is necessarily exposure to China to a much greater degree than the country weighting would suggest. "The reason you would put money into a regional fund rather than a dedicated China fund is the argument that the rest of the region benefits from the greater China story," Series says.
It's also the approach financial planners suggest. "If this client came to me, we'd be looking at putting a portion of their funds into managed funds with exposure to the Chinese market," a planner at HLB Mann Judd, Michael Hutton , says.
But it's not a pure China play. Some global institutions do offer Australian clients exposure to China-specific products, but they tend to have high entry levels.
Take Merrill Lynch, which recently closed a $US50 million ($73 million) issue of Protected China Dragon Notes. These are 104 per cent principal-protected notes linked to the Merrill Lynch China Dragon Index.
A glimpse at the prospectus pushes all the right buttons for the Sinophile investor, listing impressive statistics on China's gross domestic product ($US1.23 trillion in 2002), its entry into the World Trade Organisation (which is forecast to increase GDP by between 2 per cent and 3 per cent annually), foreign direct investment ($US50 billion in 2002, higher than the United States), demographics (a middle class of 500 million by 2010 with 33 per cent under 20 years of age) and tourism (China is predicted to be the world's No. 1 tourist destination by 2020). Merrill's fund is open to Australian investors and about 5 per cent of the capital was raised here. But the product was offered only through the private banking group in Australia, through global accounts with a minimum investment level of $1 million, and with a minimum entry level in the notes of $US50,000.
Merrill Lynch's first vice-president for investments, Chris Bell , says the bank is "bound to do another one", but retail investors shouldn't hold their breath.
Another possibility is to buy managed funds that are managed overseas. HSBC, for example, runs a Chinese equity fund which had $US282.66 million of funds in it at the end of May and has been running for 11 years, returning 106.7 per cent since its launch and 17.6 per cent to date this year. This, like many China or Asia funds, gets most of its exposure to China in H shares and Red Chips, or Chinese companies listed in Hong Kong. Its largest holdings are Petrochina, China Mobile, Sinopec, China Telecom and Huateng Power.
Other such funds come from Aberdeen, Templeton and Barclays, among others. But here, too, there is a disadvantage, because although there is nothing illegal about investing in non-Australian funds, there is a regulatory issue. The Australian Taxation Office's foreign investment fund guidelines can mean that investors in overseas funds have to pay tax on unrealised gains.
"There is nothing tax-wise preventing the Australian investing in the foreign fund," explains Deloitte Tax Services partner Peter Kennedy. "However, there are regulatory restrictions on the foreign fund actually selling the investment in Australia [as opposed to offering the investment from Hong Kong on the internet]. The fund would be caught under the Australian FIF rules, so income would be attributed to the Australian investor, even if he or she did not receive any."
In practice, this is off-putting for potential investors. "If an investor just wanted to invest in China, they would have to invest in one of our offshore funds, which are not Australian registered and therefore not FIF compliant," Fidelity investment director Charles Wall says. "If a fund is not FIF compliant, then the investor may have to pay tax on unrealised gains."
The small investor might begin to think they're up against it, with all the best opportunities going to the big end of town. Tom Murphy , director and head of investment research at Deutsche Bank, thinks there are great changes afoot in Chinese investment as the qualified foreign institutional investor regime gets under way allowing institutions to invest in the previously off-limits A sharemarket, the broadest domestic stockmarket.
"That gives them better sectoral reach by a country mile" than the alternative B sharemarket, he says. "That doesn't help the small investor because it's an institutional initiative but the best access directly into China will be under that regime or through private equity, which really is getting the pick of the investments in China."
But unlisted private equity funds, filled with the best expertise on China investment, rarely reach below the $500,000 investment market.
Direct ownership is another possibility. This requires a strong and committed view on individual stocks, but it isn't the voyage into the unknown it might seem. Retail investors ought to forget about direct ownership of shares in the domestic A and B sharemarkets of Shanghai and Shenzhen: it's either impossible for regulatory reasons, or inadvisable at such a distance because of the lack of transparency about listed companies.
Many Chinese companies are listed on the Hong Kong Stock Exchange and several are listed on the New York Stock Exchange through American depositary receipts. Both exchanges have good disclosure standards and are covered by CommSec (but not E*Trade for Australian investors), if clients register for the international securities trading service.
Trades up to $10,000 on either exchange cost $39.90 (0.4 per cent for anything over that amount), all forex requirements are done through the Commonwealth Bank and settlement is in Australian dollars.
This opens up access to dozens of Chinese companies but investors should be careful about direct share ownership: Hong Kong might be better regulated than China, but it's still a long way from home and has its own idiosyncrasies.
"I wouldn't try to pick stocks," Citigroup strategist Adrian Blundell-Wignall says. "If I was going to invest directly, I'd take a basket of companies listed in Hong Kong and take BHP (Billiton) and Rio (Tinto) as clean plays on China."
This is the last alternative. Investors who have been put off by the hurdles can gain exposure by buying shares in Australian companies that export to China.
It might not sound like a bold venture into the mainland, but at least you know what you're getting.
STOCKS EXPLAINED
A SHARES: Domestically listed stock on Shanghai and Shenzhen exchanges, until recently off limits to foreign investors. Some institutions are now allowed to buy them under strict limits.
B SHARES: Shares in Chinese companies listed in Shanghai and Shenzhen but denominated in US or Hong Kong dollars and open to foreign investors, within limits.
H SHARES: Chinese companies listed in Hong Kong.
RED CHIPS: Companies controlled by mainland government interests but listed in Hong Kong
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