China's economic boom likely to spawn many success stories

China's economic boom likely to spawn many success stories

Early-bird investors of foreign-listed mainland shares may turn out big winners

By Goh Eng Yeow, Markets Correspondent

Those who hold stocks linked to rising consumption, infrastructural development or corporate restructuring in China should reap a handsome reward eventually. -- AP INVESTING in a stock when it is still an undiscovered gem will probably be the closest that most of us will get to printing money. As the older investors will attest, buying into DBS Group Holdings, Singapore Airlines (SIA) or even unglamorous counters such as ComfortDelGro has delivered huge returns to the early birds as Singapore transformed itself into a First World economy over the past 30 years. But a fresh generation of investors trying to grow nest eggs wants to know if it has missed the boat and ought to give up on stocks altogether. Sure, there have been bumper profits generated in this latest boom, but those who look closer will find there has been plenty to scare the faint of heart, mostly caused by Shanghai and Shenzhen getting the shakes. Yet as risky as the bubble in China shares appears, these are the very stocks that may hold the key to securing the nest eggs of the next generation of investors. While there are many reasons to be nervous about the rocketing Chinese stock markets, look deeper and you will see reasons for optimism as well. One of the biggest sea changes is that we are even bothering about Chinese equity markets. Few investors even gave them a thought until two years ago. Shanghai and Shenzhen were mired in the doldrums, despite the many attempts to revive them, even as China's economy blossomed. But the country's fast-growing middle class, hungry for better returns on its savings than the paltry rates offered by Chinese banks, has changed all that. Retail demand has helped to push Shanghai's key index up by 62 per cent this year and 250 per cent for the past two years. The tiddler suddenly started packing a punch, as global investors discovered in February when a crash in Shanghai ricocheted around the world. There has been no end of warnings, not the least from former United States Federal Reserve boss Alan Greenspan, about the risk of the Chinese bubble. Others reason that any plunge in Shanghai would be self-contained. Chinese investors - there are 100 million of them now, more than the population of most nations - are effectively forbidden from investing overseas and most have bought their shares with cash, not bank loans. By some estimates, a 50 per cent plunge in Shanghai would wipe out about US$1.2 trillion (S$1.84 trillion) in market value - the equivalent of China's foreign exchange reserves - and unleash massive social upheaval. That is the last thing the Chinese government needs in the run-up to next year's Olympic Games, so many believe Beijing will try to deflate, rather than burst, the Shanghai bubble. But while the media and retail investors fret about a possible correction in China, foreign investment banks have been falling over themselves to issue glowing reports on China companies listed overseas, including Singapore. A recent forum hosted by foreign broker CLSA in Singapore attracted more than 600 fund managers keen to learn about fast-growing, mid-sized China firms. What captivates them is the chance to catch budding Chinese blue chips as they ride the wave that is turning the country into a financial superpower - and a rampant consumer society. A CLSA study shows that while the average middle-class family in China saves about 20 per cent of monthly income, its appetite for big-ticket items like cars is growing. About 20 per cent of middle-class families have bought funds or shares in the past year, and another 26 per cent plan to invest in the next 12 months. Investment banks such as UBS and Merrill Lynch believe that the structural changes in China to allow locals to invest more overseas will mean that those shares listed abroad will also get a boost. The ignition switch for the great investor boom has already been put in place. That came with China's decision to let its bank customers buy shares in overseas markets - mostly through funds - for the first time. The ceiling for overseas investment has been kept at a paltry US$7 billion to US$9 billion, but some analysts say that between US$100 billion and US$200 billion could find its way out of China in the next two years as Beijing frees up its financial markets. Most tip that the money will initially flow to Chinese companies already listed aboard. The H shares of giant corporations listed in Hong Kong are trading at only half the valuations of their Shanghai-listed A shares. And UBS noted that China shares listed in Singapore - the so-called S-chips - are even cheaper, trading at a 30 per cent discount to the H shares. Many have also noted that even though many China firms have expanded considerably, they are still growing at the astronomical rates normally associated with newer firms. Large Chinese banks such as Bank of China and Industrial & Commercial Bank of China regularly produce huge profit jumps. They also offer investors the opportunity to buy into financial institutions with a depositor bases as large as the population of mid-sized nations such as Mexico. So the faint-hearted who want to bail out of S-chips because of rising concern over the A-share bubble should think again. Merrill believes that any short-term cooling measures in China will cause only short-term volatility and are unlikely to derail the upward price trend of S-chips over the next 12 months. Hence, those who hold stocks linked to rising consumption, infrastructural development or corporate restructuring in China should reap a handsome reward eventually. Sure, there will be many bumps along the way and the ride will be full of surprises. But early-bird investors could also enjoy returns similar to those raked in by investors who got in on the ground floor with SIA, DBS and ComfortDelGro three decades ago.