Mainland China’s reputation as an investment destination has been taking a beating lately. A collapsing real estate bubble, tepid global demand for Chinese exports and trillions of dollars invested in superfluous infrastructure mean that the Chinese economy is heading toward a much harder landing than many China specialists expected. Wealthy Chinese themselves are voting with their wallets as many are scrambling to take money out of China and invest it elsewhere in the world.
The poor performance of the Chinese stock market is making its impact felt in the portfolios of U.S. investors, as well.
Yes, there was a brief boom period, when the Shanghai Composite soared from a low of 1,030 in June 2005 to a high of 6,036 in October 2007.
The market then went bust, plummeting down to 1,706 by November 2008 — a drop of more than 70%.
Since then, Shanghai has rallied back to 2,118 — still well short of half of its peak.
Meanwhile, many U.S.-listed, privately owned Chinese stocks have been tarred by scandal and are now de-listing from U.S. stock exchanges.
So, can you still profit from the “Rise of China?”
Yes. But it won’t be by investing in mainland China itself…
Rather, you should focus on Asia’s other ethnically Chinese-dominated economies — Hong Kong, Singapore, and Taiwan — all of which have strongly outperformed the stock market of the inefficient, state-owned enterprise and banking-dominated stock market of mainland China.
“The Overseas Chinese”: China’s Secret Weapon
Mainland China is the big dog in the Asian neighborhood, boasting a population of more than 1.3 billion.
But on a per capita basis, it’s the roughly 60 million “overseas Chinese” that constitute the most potent Chinese economic force on the planet.
With the assets of the worldwide Chinese Diaspora estimated well over $3 trillion, 32 million overseas Chinese dominate the trading, banking and property industries throughout Southeast Asia.
The Chinese make up a majority of Singapore’s population (75%) and significant minority populations in Malaysia (24.5%) and Thailand (14%). Even in countries where their absolute numbers are small — Indonesia, the Philippines, and Vietnam — the Chinese account for a disproportionate level of economic influence. As a rule of thumb, if you do business in East and Southeast Asia outside of Japan and Korea, you actually are doing business with the Chinese.
The relative achievements of these Chinese-dominated economies are even more impressive. Consider that the combined foreign reserves of Hong Kong, Taiwan and Singapore stand at $929 billion at the end of 2011. That’s equal to 31% of the reserves of mainland China, while these three countries boast only about 1/40th of mainland China’s population. With this kind of efficiency, it’s not hard to see why these three “other Chinas” may be a better investment bet than mainland China itself.
No wonder that the World Economic Forum ranks the Chinese-dominated economies of Singapore, Hong Kong and Taiwan among the most competitive economies globally, ranking them 2nd, 11th, and 13th, respectively. In contrast, mainland China ranks a mere 26th.
With that, here are three ways you can invest in the “Other Chinas” at the click of a mouse.
“Other China #1”: Hong Kong
Hong Kong is a paradox.
Although it reverted back to Communist China’s rule in 1997, Hong Kong has remained the “freest” economy in the world for 15 consecutive years, as ranked by the Index of Economic Freedom. Hong Kong’s liberal tax regime, respect for property rights, flexible labor market, and highly motivated workforce all have combined to make this city-state one of the world’s most prosperous economies.
As one of the original Asian Tigers, Hong Kong also is one of the world’s great economic success stories. Hong Kong’s per capita gross domestic product (GDP) soared 87-fold between 1961 and 1997. By 2010, Hong Kong has successfully transformed itself into one of the world’s leading financial centers.
For the attention given to mainland China, Hong Kong’s rule of law, free press, open markets, transparency, unfettered capital mobility, and a fully convertible currency have given it a distinct advantage over its mainland rival.
For now, at least, Hong Kong, an original Asian Tiger, has the upper hand.
iShares MSCI Hong Kong Index (EWH)
Over the past two years, the performance of the Hong Kong stock market has put the Shanghai Exchange to shame.
“Other China #2”: Singapore
When this former British colony became a fully independent country in 1965, its per capita GDP was a lowly $511. Today, that figure has risen to $59,711, making Singapore wealthier per person than the United States.
The World Economic Forum ranked Singapore as the second-most competitive country in its annual Global Competitiveness Report. Singapore also has been ranked first as the world’s easiest place to do business, as well as having the most open economy for international trade and investment.
Singapore’s low levels of corruption, skilled workforce, stable environment and efficient infrastructure have made it arguably the greatest economic success story among the Asian Tigers.
The iShares MSCI Singapore Index (EWS) is up an eye-popping 180% since the market bottomed in March of 2009. As news of the Chinese slowdown is absorbed by the markets, the Singapore stock market is going in precisely in the opposite direction.
iShares MSCI Singapore Index (EWS)
The “Other China” #3: Taiwan
Economically, Taiwan is the success story that mainland China could have been — absent the millstone of 60 years of Communism. Taiwan has accumulated its breathtaking, $391 billion in foreign currency reserves — the sixth-highest total in the world — the old-fashioned way: Taiwan earned it.
Politically, Taiwan is a renegade republic in the eyes of mainland China. Yet economically, Taiwan and China could hardly be closer. With nearly 40% of its exports going to China, Mainland China is Taiwan’s No. 1 export market.
Taiwan is now home to some of the world’s leading technology companies. Taiwan Semiconductor has become the world’s top contract chip maker and HTC now rivals long-time global leaders in the manufacture of cell phones.
Much like Hong Kong and Singapore, the Taiwanese market has decoupled from China’s mainland market, and has started to move in lockstep with the other global emerging markets.
iShares MSCI Taiwan Index (EWT)
Nicholas A. Vardy
Editor, The Global Guru