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SynopsisThis book is aimed at individual investors who are interested in investing in stocks that enables them to profit from China's rise as an economic super-power.
There are three main ways to play China. Investing in Chinese companies is the most direct and obvious one. Investing in commodities and commodity producers is the second route given China's ravenous demand for commodities; in other words, "buy what China buys". Investing in non-commodity multinational companies with exposure to China is the third; I use the qualifier "non-commodity" since multinationals (globals) that mine or produce commodities are covered in the second category. In this book, I cover all three methods in sequence.
There is overlap between the categories. In particular, I discuss Chinese commodity producers and miners, especially the rare earths and other precious / valuable metals miners. In rare earths, Chinese miners have a virtual monopoly on global (not just Chinese) demand. Many of these Chinese miner stocks are only available as A-shares; I discuss how non-Chinese citizens can access these through funds.
In all three cases, you can either pick stocks individually or invest in stock funds. Stock funds are either passively managed index funds or actively managed funds. China play mutual funds are mostly actively managed and hence more expensive. Closed-end funds (CEFs) are actively managed funds that trade like stocks; they also have high expense ratios. Exchange-traded funds (ETFs) are, for the most part, passively managed, and relatively less expensive; they trade like stocks but are like index mutual funds, so they are quite popular. I cover funds as well as stocks.
I discuss and compare the different investment plays, and the complex dynamics involved in selecting an investment option. For example, consider Caterpillar which is an example of a commodity play since it manufacturers mining and construction equipment. It benefits directly from China since it sells to construction and mining firms in the Chinese market. It also sells to Latin American miners and commodity producers, and therefore benefits indirectly from the Latin American commodity exports to China. However, Caterpillar also faces increasing competition from low-cost Chinese manufacturers (like Sany Heavy Industry Co.) who, in some cases, are current / former joint-venture partners that acquired know-how and technology from Caterpillar. These Chinese manufacturers are also increasingly exporting equipment to Latin America thereby posing a long-term threat to Caterpillar. So, some of these investment plays come with an "expiry date" which might be sooner than you think.
I also discuss the dynamics of the declining U.S. dollar and the rising Chinese currency (the Renminbi, a.k.a., the Yuan). Since the Yuan is not freely convertible, direct plays are mostly limited to currency funds (ETFs) that use non-deliverable forward contracts, swaps or other derivatives to capture the appreciation of the Yuan. Other indirect ways include Chinese real-estate developers and Chinese consumer stocks such as airlines and utilities. I also explain what Contango is, and its effect on commodity futures-based ETFs.
This is a hands-on nuts-and-bolts "how-to" type investing manual, based on my personal experience and research spanning nearly a decade. No knowledge of economics, finance, or accounting is assumed or needed. Some basic knowledge of stock market investing, and some exposure to valuation metrics, such as price-to-earnings (P/E) for stocks, and expense ratios for funds is sufficient.
I cover stocks and funds traded in the U.S. and in Hong Kong, including Pink Sheets / OTC stocks and ADRs. I also provide tips on which brokerages to use for trading in the U.S. and in Hong Kong. The stocks and funds I discuss are accessible to U.S. citizens and residents; however, many of these, especially those traded in Hong Kong, are accessible to citizens of other countries as well.