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Berko: Some thoughts on investing in Chinese stocks

By Malcolm Berko

Published: August 19, 2018, 6:05am

Dear Mr. Berko: Our stockbroker wants us to invest about 20 percent of our $510,000 joint account in Chinese stocks. He has given us a list of 20 stocks to buy that sell for between $8 and $21 a share. I don’t recognize any of the names (list included), but they’re supposedly the best and biggest stocks on the Hang Seng index. Our broker is very enthusiastic and believes that this Chinese portfolio could double in three to five years. We are conservative investors in our late 40s and can’t afford to make mistakes. We figure we have 20 years to build value. Please share your thoughts on these Chinese recommendations.

— JP, Joliet, Ill.

Dear JP: I think that brokster has a cortical neuron deficit and is unable to generate the synchronous presynaptic spikes to initiate a postsynaptic spike for an asynchronous gain. His fixation on China suggests that he’s dumber than a bowl of mice, too! Read on, John.

His Excellency Xi Jinping was elected president of the People’s Republic of China by the National People’s Congress in 2013. In December 2016, Xi (pronounced like “she”) warned the 2,980-member NPC, the largest legislature in the world, that China’s democratic dictatorship was facing an imminent economic crisis. Xi sternly cautioned the NPC: “Currently, financial risks are volatile and frequent.

Although systemic financial risks are generally under control, risks are accumulating from nonperforming assets, liquidity, bond defaults, shadow banks, external shocks, a property bubble, government debt and internet financing, and the financial markets are also in a mess. Some financial risks are long-standing, lurking sources of infection that are concealed very deep but may erupt in a flash. … This demands high vigilance.”

That sounds as if the gates of Armageddon are beckoning. Those comments were made almost two years ago, but the key metrics of the Chinese economy continue to deteriorate and remain alarmingly shaky. The volatile commodity boom, which accounted for 72 percent of China’s industrial growth in 2017, has created dangerous and widening cracks in various economic sectors. So stay away!

A longtime reader of my column who is employed by a large public U.S. company and has been living in Chengdu, China (population: 14.5 million), for six years tells me that there are huge overbuilt ghost towns throughout the country and that the economic expansion continues to lose steam. He sees weakening investment in factories, low and falling household consumption, and factories producing goods (just to keep people employed) that will never be sold. He tells me that borrowers are struggling to repay loans and that banks are shouldering an increasing burden of bad debts. Personal and corporate debt levels are soaring, and China’s debt as a share of its gross domestic product is nearly 250 percent. He believes that policies allowing credit to be given too easily have made China’s enormous debt a long-term threat to the world economy and that a trade fight with the U.S. is not sustainable and could seriously hurt the politics and economics of the country. Since January, the Hang Seng has fallen by nearly 14 percent.

You might have a better chance of making money by shooting craps in Chicago than by investing in issues on the Hang Seng. A $100,000 investment in Chinese stocks would not be in keeping with your conservative goals. Among the 20 stocks on that list, I care for only three of them: JD.com (JD-$34.25), an e-commerce company and retail infrastructure service provider, Tencent Holdings (TCEHY-$44), an investment holding company that provides value-added services and online advertising in China, Hong Kong, Europe and North America, and Alibaba Group Holding (BABA-$173.16), which is basically a successful copycat of Amazon.com.

However, a safer Chinese portfolio (which I’m reluctant to recommend) would own the following ETFs: the iShares China Large-Cap ETF (FXI-$41.42), which tracks the investment results of the FTSE China 50 index, the iShares MSCI China ETF (MCHI-$60.26), which must invest 90 percent of its assets in the Morgan Stanley Capital Index, the iShares MSCI Hong Kong Index Fund (EWH-$24), which must invest 80 percent of its assets in the MSCI Hong Kong index, and the SPDR S&P China ETF (GXC-$97.48), which seeks to invest in all public companies above a certain size; there are 351 stocks in its portfolio.

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