C&B Notes

China’s Growth Doesn’t Translate

A macroeconomic tailwind is insufficient alone to make a good investment. Other conditions, such as rule of law, shareholder friendly management, and good capital allocation, are required and are best identified through ground-up research.

China’s 20-year economic boom has boosted the wealth of its 1.3 billion citizens at the fastest pace worldwide and spawned some of the biggest companies in history. Foreigners earned less than 1 percent a year investing in Chinese stocks, a sixth of what they would have made owning U.S. Treasury bills.  The MSCI China Index has gained about 14 percent, including dividends, since Tsingtao Brewery Co. (168) became the first mainland company to sell H shares to international investors in Hong Kong in July 1993.  That compares with a 452 percent return in the Standard & Poor’s 500 Index, 322 percent in the MSCI Emerging Markets Index and 86 percent from Treasuries.  Only the MSCI Japan Index had a weaker performance among the 10 largest markets, losing about 1 percent.

While China’s shift toward a market economy has lifted per-capita incomes by 1,074 percent and helped its companies raise at least $195 billion through stock sales in Hong Kong, corporate governance concerns, competition and state intervention have eroded returns for minority shareholders… “China is a case in point that great GDP doesn’t mean a great stock market,” Nicholas Yeo, a money manager at Aberdeen Asset, which oversees about $322 billion worldwide, said by phone from Hong Kong on July 10.  “The lack of quality in terms of corporate governance is one of the main reasons we find why companies don’t perform well over the long term.”