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Joseph N. DiStefano: Is China big enough for US investors yet?

Joseph N. DiStefano, The Philadelphia Inquirer on

Published in Home and Consumer News

I was skimming headlines at Bloomberg.com when an ad for HSBC Corp. filled the screen like a news-killing fog.

It urged us to buy China stocks -- now! -- before the Morgan Stanley stock indexes follow the rival Financial Times indexes in adding Beijing and Shanghai companies over the next couple years and the dumb money from American index-fund investors arrives in billion-dollar waves to inflate share values.

Everyone who's paying attention knows China has grown past socialism and millions have gotten rich. But buying stocks there still sounds exotic to people here.

"Even if you're not ready to invest in Chinese equities, you need to understand what's going on there, because China now drives global growth," said Andy Rothman, who manages the Matthews China Fund for Matthews Asia, a $31 billion asset San Francisco firm. Matthews Asia actively manages more than $5 billion in China stocks, more than any other U.S.-based firm, the company says.

Rothman has been active in China for 30 years, starting as a Foreign Service officer. But he sounds like a missionary, repeating China market basics even to sophisticated U.S. investors. Chinese stocks, he noted, are worth $12 trillion, up from $2 trillion 10 years ago. "But when you pick up the paper or go online, nine of 10 stories predict China is going to collapse any day now, for a variety of reasons."

We're past that, he insisted. China is the second-largest global economy. Its state-controlled heavy industry, export manufacturing and overlarge state-bank-funded real-estate projects have been eclipsed, as to revenues and new investment capital, by new tech and consumer stocks. (The most familiar include Alibaba, "China's eBay," and Tencent, "China's Facebook.") Most new Chinese jobs and most new sales come from smaller private companies.

China stock indexes don't yet reflect that. Matthews investment strategist Andrew Mattock said his firm makes money for its clients by picking 100 of the most promising of the 5,000 listed China stocks, whose collective price-earnings ratio he estimated at 15, which sounds like a bargain compared with big U.S. stocks.

For sure, there's no shortage of warnings about Chinese business practices or investment risks that go beyond earnings reports. President Donald Trump got investors' attention last month when he shot down the proposed sale of Lattice Semiconductor Corp. in Oregon to a firm controlled by Chinese government investors, citing "national-security risk."

Never mind that Lattice says it makes "zero military product," or that its would-be Chinese buyers had promised to hire 1,000 Americans. The company's shares tumbled, costing Vanguard funds and other investors millions. China's Xinhua propaganda agency said Trump was using the law as "a tool to implement protectionism."

The president and his trade advisers weren't the only ones worried. In February, the Securities and Exchange Commission cited insider trading of Lattice shares as well as those of DreamWorks SKG, which Comcast acquired after outbidding a would-be Chinese buyer. The SEC said a few Chinese investors made millions buying U.S. stocks just before mergers were announced, ripping off U.S. shareholders.

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