Dear Mr. Berko: The Chinese market has collapsed. And, as you have commented, the best time to buy stocks is when there’s blood on the streets. I don’t want to buy individual Chinese stocks and would appreciate your recommendation of several Chinese closed-end funds. I have $17,000 to invest in Chinese stocks.
— HD, Ann Arbor, Mich.
Dear HD: I wouldn’t. That’s like sky diving without a parachute
I’m uncomfortable with the Chinese psyche that has morphed into a delicate and changing balance of communism, socialism, totalitarianism, capitalism and democracy. Therefore, with the exception of its food — especially hot and sour soup — there’s not much about China that I’d recommend investing in. Though I’ve commented on Chinese stocks at readers’ requests, I’ve never felt comfortable owning them. I don’t understand or trust their accounting systems, their banking systems and their value systems. Therefore, I’ve never been comfortable relying on the government’s publication of changes in its economic indicators. Berko’s Rule No. 1099 is: “Never purchase shares of any corporation that generates most of its business in a country where you don’t speak the language.” Be mindful of the many far better equities that are Made In America.
By the end of July, the Shanghai market had lost 30 percent of its value, and no one panicked, and the market continued to fall. Then, Black Monday, on Aug. 24, the index crashed a bone-jarring 8.5 percent, cumulatively wiping out over $2 trillion of market capitalization and 1,473 companies filed for a trading halt to prevent further disaster. Unfortunately, for several years Chinese banks willingly encouraged investors to borrow trillions of yuan to buy those shares before they tanked. Now those sucker banks are nervously holding securities worth trillions of yuan less than their purchase price. And during this process the Chinese government was also spending trillions of yuan buying back stock to support the market as it crashed. Unlike the U.S. government bailouts of 2008 and 2009 at the bottom of the market, China’s trillions of yuan purchased shares at the top of the market. Now, after this epic crash, the $64,000 question is: “What will the government do with, and how will it pay for, all the stock it has purchased?” And the next $64,000 question is: “How will the Chinese banks that lent trillions of yuan to individual investors be made whole again?” Even Janet Yellen lacks an answer, but the Chinese government better find a way to deal with this problem lest it weigh heavier on an economy that’s been slowing for over a year.
There are more Chinese closed-end funds, or CEFs, than you can wave a flag at, but if your guts are on the same page as your logic then the following five CEFs are excellent rank speculations. (1) China Fund (CHN-$17.09), with $330 million in assets, has leverage of 10 percent, trades at a 16.1 percent discount to its net asset value, or NAV, and is off almost 35 percent for the year. The annual cost to manage CHN is 1.30 percent of assets. (2) Aberdeen Greater China Fund (GCH-$9.06) has $101 million in assets and is not leveraged. GCH trades at a 17.10 percent discount to its NAV, and the shares are down 29 percent from a 12-month high with an annual management fee of 1.98 percent. (3) JP Morgan China Regional Fund (JFC-$15.76), with 12 percent leverage, manages $129 million in assets, trades at an 16.4 percent discount to NAV and is off nearly 35 percent in the trailing 12 months. (4) Morgan Stanley China A Share Fund (CAF-$24.97) manages $754 million in assets and is not leveraged, though it trades at a huge 27.2 percent discount to NAV. CAF is down 36 percent for the last 12 months, and its annual costs are 1.81 percent. Finally (5) there’s Templeton Dragon Fund (TDF-$19.72) that’s off 33 percent during the last dozen months. Templeton Dragon manages $847 million, trades at a 12 percent discount to NAV and has no leverage. The annual management fee is 1.32 percent.
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.
