BEIJING Even morning smog can't completely obscure the bright facades of hundreds of new high-rise corporate structures as you motor down a thoroughfare of this city of 14 million people that will host the Olympic Games this summer.
Most buildings display international company names in large Chinese and English lettering. Streets are crammed with the latest-model Volkswagens, Porsches, Hyundais, Nissans, Hondas and Buicks. Noisy construction sites abound, and not just for the Olympics. Behind the chrome cosmetic counters of the high-tech shopping malls are huge photos of movie stars Liv Tyler and Hilary Swank.
Which shouldn't be surprising in a country whose gross domestic product grew 11 percent last year.
With critical global issues such as pollution, human rights, freedom of speech, product quality, Tibet and Darfur hanging heavily over the nation's government as the Games grow closer, there will be no escaping international scrutiny.
Discussions with Beijing citizens indicate money is also firmly on the mind of this emerging nation undergoing dramatic change in its economic system.
"My stocks are down 20 percent this year!" wailed one young Chinese woman who works in the tech field. "I am miserable and can't get it out of my mind!"
I asked how much her holdings increased the prior two years.
"Oh, about 300 percent," she estimated. "But 20 percent so quickly hurts nonetheless."
I asked an advertising agency owner, one of many new millionaires spawned by the hot economy, if China's real estate boom was a bubble. He responded with bubble logic: "There's absolutely no way this is going to stop because we're growing too much and there's too much demand."
Fear of U.S. recession abounds, because China could be dragged along with it. One government official asked me several times over the course of an hour to handicap for him the potential length and depth of a U.S. recession.
Meanwhile, U.S. investors who enjoyed tremendous gains in China mutual funds and exchange-traded funds the past couple of years have received a reality check:
• China region mutual funds are down 26 percent in 2008, reducing their 12-month performance to 10 percent, according to Lipper Inc. Still, their three-year annualized return is 26 percent and five-year 28 percent.
• The iShares FTSE/Xinhua China 25 Index (FXI), a $6 billion ETF of 25 blue-chip companies trading in Hong Kong and available to international investors, is down 25 percent in 2008. Its one-year return of 27 percent ranks first among Pacific/Asia (minus Japan) funds.
"While Chinese companies generally have no direct exposure in subprime-related issues, the weakening U.S. economy largely affected market sentiment in Chinese markets," said Samantha Ho, Hong Kong-based portfolio manager of AIM China Fund, who believes the fear of risk and volatility will hurt Chinese markets near-term.
But Ho expects economic growth of 10 percent in 2008, even with a U.S. slowdown, with that growth supported by growing affluence in the burgeoning middle class.
"In particular, China will spend about $1.1 trillion in different types of infrastructure investment, including some facilities that are environmental-related, under the five-year plan between 2006 and 2010," Ho said.
Her $317 million fund (AACFX), down 31 percent in 2008, is up 20 percent over the past 12 months to rank in the top 15 percent of Asia/Pacific stocks. Largest holdings include giant firms China Mobile Ltd., China Life Insurance and PetroChina.
The recent global flight to less risky assets had negative effect on China funds investing in high-growth companies. The $498 million Oberweis China Opportunities Fund (OBCHX), down 41 percent year-to-date and down 13 percent the past 12 months, includes aggressive stocks such as search engine Baidu.com Inc.
"We'll have to see how slower growth might affect things politically, especially in the Olympic spotlight," said James Oberweis, the fund's lead manager. "Things are less happy in China than six months ago, as manifested by riots in the Tibet region."
Yet Oberweis still expects it all to settle down and result in a buying opportunity with lower stock prices.
"It is still the early days for China, we're not surprised by the sell-off, and we don't think it signals an end to the fundamental story," said Alec Young, international equity strategist with Standard & Poor's Corp. "Chinese companies have become much more decoupled from the U.S. the past 10 years, with half their exports going to other emerging markets."
That doesn't eliminate risk, of course.
"China funds are extremely aggressive and inappropriate for most individual investors," said William Rocco, senior analyst with Morningstar Inc., who pointed out not all Chinese companies do equally well even in good times. "They had an incredible run-up for two or three years, and funds that can do that well are likely to go through periods of extreme pain."
You can get diversified emerging market exposure that still includes China through international or emerging market funds, he said. For example, funds such as Janus Overseas (JAOSX) and Masters' Select International (MSILX) will own varying amounts of Chinese stocks in their portfolios, depending on how they see market prospects at a given time.Many China mutual funds and ETFs are available. If you decide to invest a portion of your money in one, carefully check the expenses and also determine whether the portfolio manager and firm have proven track records in emerging and Asian markets, Rocco concluded.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ 85287-4702, or by e-mail at [email protected].