Investing in China

By John Kuhns

LIME ROCK, Conn. (MarketWatch) — I have been investing in China for two decades. I haven’t changed my investment philosophy much, and don’t see any reason to do so in 2011.

I have always invested in China based on my belief that it is an economy a century behind ours in terms of where the PRC is now compared to what it will become. So by looking back at what worked for investors in the United States between the World Wars, I believe I can peer into a time capsule to see what will work for investors today in China. 

Stateside, the best investments in the first half of the 20th century were in companies led by excellent managements producing goods for a burgeoning middle class at a fair price; investments in things such as information technology (like Smith Corona, who once offered the fanciest typewriter) were peripheral, and doomed to underperform. Therefore, when investing in China today, I focus on the same basic sectors that created so much value in the U.S. last century: energy and infrastructure; agricultural commodities and food products; and natural resources, to name a few.

Before I comment on two appealing investment themes in the energy sector in China today, two notes of caution:

First, for investors looking at offerings of Chinese companies traded on the mainland or Hong Kong exchanges, steer clear of “SOEs.” An SOE is a state-owned enterprise. Many of China’s largest and most prominent companies are SOEs. These organizations, many of which would be included in any “Fortune 100” in China, are entities of the state that often get their power from special rights granted for political reasons. Unlike international companies, SOEs get most of their funds from the central government and therefore do not see public shareholders as the party to whom they owe their ultimate allegiance.

Second, for investors investing in Chinese companies that have listed their shares on exchanges like the NYSE and the Nasdaq in the U.S., carefully review the transparency of the companies. Do they have a Big Four auditor? Do they have an internationally recognized law firm?) Does their chief financial officer have acceptable credentials (a CPA, CFA or at least an MBA), or were they hired mainly because they speak passable English?

Any investment I make in China in 2011, the year of the rabbit, must certainly be made with one eye on the country’s 12th Five-Year Plan; Feb. 3 brings the lunar spring festival in China, with the plan unveiled soon afterwards.... [..]

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