Investors in China
BEIJING — I haven’t been completely straightforward about this trip with you. I’m not here in China just to uncover superior investing ideas. I’m also helping The Motley Fool explore the possibility of expanding to China. We think that would be fantastic for global investors and for the Fool’s international stock research. And like Warren Buffett, we think we are better investors because we are businessmen and better businessmen because we are investors.
Thanks to our business research, we’ve come to a powerful — and unexpected — revelation about investing in China. It runs so contrary to conventional wisdom that I didn’t believe it the first time I heard it. But after it was reinforced in four meetings in four days, it started to sink in: The
people in the best position to invest in China don’t live in China. They live in the United States.
Pick Your Jaw Up Off the Floor
This didn’t make any sense to me at first. Given how different the business culture here is, it would seem that investors who are in China every day, talking to consumers and reading the papers, would have a leg up.
But the reason Americans are best-positioned to invest in China is that we can all access the Chinese companies listed in the United States. Despite the falling stock prices and fraud accusations that some of them have experienced recently, we’ve heard over and over again that these companies are the best China has to offer. They’re the most likely to have reliable accounts, the most likely to be thinking about shareholders, and the most likely to be left alone by the government. And Americans aren’taffected by the policies the Chinese government uses to influence the stock market, such
as imposing stamp taxes or controlling the IPO schedule. This means U.S. investors can think about investing in China for the long term — something that, for structural reasons, Chinese investors might be foolish to do.
Because of all this, most Chinese investors are speculators, clinging to talismans like momentum or lucky numbers to trade in and out of stocks daily. After all, the potential for an abrupt change in government policy would make their stock research useless. With a wave of a wand, a government official can make a bad business great or put a great business under.
But China Is a Long-Term Story
Heaping volatile trading on top of an already volatile Chinese market and economy is a recipe for disaster. So we’re putting time on our side. We recognize that investing in China will be a rocky ride, but we believe the country still has decades of growth ahead. We want to be invested here for the next 10, 20, or even 30 years as hundreds of millions of people move into China’s cities and out of poverty, creating a consumer culture the magnitude of which the world has never seen.
The way to take advantage of that megatrend is not to trade in and out of it, but to ride it on the backs of high-quality, innovative companies.
We’re not the only ones who know this. We’re hearing that Chinese investors are also reaching this conclusion and moving their money into Hong Kong, where they can fund brokerage accounts that can freely trade in the United States. The estimates are hazy, but we’ve heard that anywhere
from 60,000 to 1.5 million people have done this. That’s a drop in the bucket compared with the total number of Chinese investors — though the trajectory is clear.
Music to Our Ears
And we liked hearing this. As businessmen, we’d love to be able to bring Foolish U.S. investment advice to the massive and growing Chinese market. But what’s even more empowering is the idea that if Chinese investors are jumping through hoops to invest in U.S.-listed Chinese stocks,
then China isn’t rigged against foreign investors. In fact, it may be just the opposite. The prospect of Chinese growth within a free-market framework just might deliver the best returns.
If you’ve avoided investing in China because you figured you need to live in Shanghai or Shenzhen to get the best companies, it’s time to reconsider that notion.
Tim Hanson is co-advisor ofGlobal Gains, The Motley Fool’s international stock-picking service.