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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

In both cases, the SEC said, illegal trades were led by a China-based Wharton School grad, Shaohua "Michael" Yin, exploiting inside information from Chinese investment bankers. Yin's lawyers were in court in New York earlier this month, arguing the SEC can't prove who said what.

China skepticism is familiar if you've followed short-seller advisers such as Dan David and Maj Soueidan, whose adventures catching Chinese companies ripping off U.S. shareholders are chronicled in the movie "The China Hustle," picked up for distribution by Magnolia Pictures this month. Buying China stocks as HSBC recommends "is an epically bad idea," David told me. "Most of the big-cap (China companies) are state-owned enterprises or frauds by design of the government."

So many Morgan Stanley-backed China firms attracted fraud accusations, David said, he's thinking of a "China Hustle" sequel.

Matthews Asia says careful investors are finding more sensibly priced bargains as China continues to grow faster than the U.S. or Europe. The view that the China outlook is improving is echoed by the nearly $5 trillion asset Vanguard Group. It has minimal direct exposure to China, but its FTSE index-based funds, already more China-focused than Morgan Stanley, will be adding more.

"We advise investors to remain patient, yet vigilant," as China slowly improves its markets and legal system and eases foreign investment, Vanguard economist Qian Wang and colleagues Jessica Mengqi Wu and Zoe Bryn Odenwalder wrote in a white paper earlier this year. "In the long term, we remain constructive about China."

But investing there remains tough to track on a big-picture scale, the Vanguard researchers acknowledged. Indeed, China stock returns have "little correlation with economic growth."

That's a sobering admission from a broadly focused index-fund manager. It makes a case for stock-picking China specialists like Matthews.

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