NEWS/BLOG

China - The Biggest of the BRICs

Ways to Invest in China

Some experts see China as the “new tech” and some believe there’ll be a China wreck just as there was a tech wreck. But those who are determined to invest in China need to know the different types of stocks and funds that currently exist.

A shares: companies incorporated in the People’s Republic of China (PRC) and traded in the mainland A-share markets. As of now, only mainlanders and selected foreign institutional investors are allowed to trade A shares.

B shares: companies incorporated in the PRC and traded in the mainland B-share markets (Shanghai and Shenzhen). B shares are quoted in foreign currencies. In the past, only foreigners were allowed to trade B shares, but as of March 2001, mainlanders can trade B shares, but they must trade with legal foreign currency accounts.

H shares: companies incorporated in the PRC and listed on the Hong Kong Stock Exchange and other foreign stock exchanges.

Exchange-Traded Funds and Closed-End Funds for China

EWH - iShares MSCI Hong Kong Index Fund tracks the MSCI Hong Kong Index, which consists primarily of stocks traded on the Hong Kong Stock Exchange. It offers a way to invest in Hong Kong real estate, which is where over a third of the fund’s investments are. Other investments include banks and utilities. In operation since 1996, the fund shows a gain of almost 30% gain in 2006.

FXI - iShares FTSE/Xinhua China 25 Index.Fund tracks the FTSE/Xinhua China 25 Index. (FTSE refers to a U.K. based financial firm which provides a number of indices and is pronounced foots-see.) The index consists of China’s 25 largest and most liquid companies. As a result, most of the fund’s investments are former state-owned enterprises, typically traded as “B Share” listings in Shanghai. Its portfolio encompasses a broad array of stocks in different industry groups, including financials, energy stocks and telecoms. Major holdings include PetroChina, China Mobile, Comm Bank of China, and China Life Insurance Co. Nearly half are ADRs American Depository Receipts). Founded in 2005, the fund shows a gain of over 80% in 2006. A possible drawback - shares sell higher than other China related funds, about $110 at year’s end. The average volume is 575,000 shares.

PGJ - PowerShares Golden Dragon Halter USX China Portfolio normally invests over 90% of its assets in companies that comprise the China Index, which currently consists of 38 U.S. exchange-listed stocks of companies that derive most of their revenues from the PRC. The mix includes technology, manufacturing, transportation, and insurance; all are ADRs. (Largest holdings are China Mobile, Petrochina and Huaneng Power International. In the past year, shares have increased over 50%

TFC - Taiwan Greater China Fund is a closed-end fund with investments in Taiwan Stock Exchange-traded companies that derive or anticipate revenues from business in mainland China. Tops holdings are Hon Hai Precision Ind. Co., Taiwan Semiconductor Mfg. Co., and China Steel Corp. The fund is now trading at a discount of 6.8%. The share price is up nearly 25% for the past year. A drawback is that the average volume is only 32,500.

CHN - The China Fund is a closed-end fund which invests at least 65% of its assets in China-related companies, including common stock, preferred stock, convertibles, warrants, and rights. The Fund may invest up to 25% of assets directly in unlisted securities. Currently 25% of its assets are invested in Taiwan and 39% in Hong Kong. Major holdings are Chaoda Modern Agriculture, Shanghai International Airport, and Shanghai Zhenhua Port Machinery. It currently trades at a 3.87% discount. With a track record dating back to1992, the fund gained over 60% last year. It is thinly traded with an average volume of 92,500 shares.

JFC - JF China Region Fund is a closed-end fund that invests at least 80% of its assets in common stock, preferred stock, or equity-related securities of China-region companies. The Fund may invest up to 25% of assets in non-listed securities and may also hold assets in high-quality debt obligations, including U.S. treasuries. Tops holdings include Taiwan Semiconductor Manufacturing and China Mobile Ltd. Its inception was in 1992 and its increase for last year was over 67%. It currently trades at a slight discount.

CAF - Morgan Stanley China A-Share Fund, a closed- end fund, is the first publicly traded fund in the U.S. focused on China’s A-share markets. It exists because Morgan Stanley holds QFII (Qualified Foreign Investor) status in China. With at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges, it offers a way to participate in China’s booming domestic markets. It may also invest up to 20% of its assets in other types of investments, including B-shares of companies listed on the Shanghai and Shenzhen Stock Exchanges. The fund made its debut in September of 2006 and its share price has increased over 50% since then. It trades at less than 1 % premium.

GCH - The Greater China Fun is a closed-end fund that invests virtually all of its assets in listed equity securities of companies which derive, or are expected to derive at least half of their revenues from goods produced or sold, investments made or services performed in China. Under normal market conditions, the fund invests at least 65% of its assets in companies listed on stock exchanges in China or Hong Kong. It may also invest in equity securities of Chinese companies listed on stock exchanges located elsewhere. Most investments are in common stock but may also include preferred stock, rights or warrants to purchase common stock or preferred stock and convertible securities. Up to 15% may be invested in unlisted equity securities of Chinese companies and up to 20% may be in debt obligations of Chinese companies that may be lower-rated or non-rated. Major holdings are Guangzhou R&F, Zijin Mining Group, and China Life Insurance. The fund has existed since 1992, now trades at a 7.28% premium and is up over 100% in one year’s time.

Behind the Boom of the BRICs

The BRIC countries - Brazil, Russia, India and China - are of interest to international investors, but that’s a different topic. These countries are also preparing to host increased numbers of travelers. China commissioned I. M. Pei to design its new Suzhou Museum and Rem Koolhaas for the CCTV tower in Beijing. Meanwhile a Ritz Carlton resort hotel is coming to the island of Hainan. In Brazil, Philippe Starck is designing a new Ipanema hotel, while the state of Minas Gerais will soon have a new arts center. Russia is building an eco-friendly Moscow City Tower designed by Sir Norman Foster while the new Grand hotel and Spa Rodina have just opened on the Black Sea. India’s middle class has grown 20% in two years, and India is inaugurating safari tours to its game parks.

The term BRIC was coined by Goldman Sachs in a paper “Dreaming with BRICs, The Path to 2050,” which predicted that these four countries would surpass Europe, though not the U.S., by 2050. But here’s something to think about. Is this what Goldman Sachs really expects will happen or is it what they want to happen? Is it perhaps a warning to the democracies of Europe that their economic demise may be in their generous “social nets” consisting of universal health care, maternity leave, unemployment insurance and pensions? Such luxuries aren’t part of the BRIC recipe for success. For more on this point of view, see
http://www.moonofalabama.org/2005/02/bric_ascendant_.html

Chavez Wants More Power

Venezuela had been a country where both working and retired expats have felt welcome for decades. Great beaches, friendly people, cheap beer, cheap gasoline.... What more could anyone ask for?

Change is afoot. President Hugo Chavez, who was re-elected by a wide margin last month, claims he is committed to democracy, but he is now leaning toward authoritarianism. He has asked the National Assembly, which is entirely pro-Chavez, for “special powers which would enable him to enact laws by decree for a period of 18 months. The National Assembly will wait until next Tuesday to grant final approval.

The laws Chavez want to enact include nationalizing the Electricidad de Caracas and C.A. Nacional Telefonos de Venezuela (CANTV) the country’s largest publicly traded company. He also wants to increase taxes for Venezuela’s rich.

Some 400 to 500 protesters, blowing whistles and carrying flags, voiced their opposition in a peaceful protest in Caracas this week.. 

Mexican Police Get Slingshots

The police department in Tijuana, Mexico, has issued about 60 slingshots to officers after confiscating police weapons two weeks ago following allegations of collusion with drug traffickers. The sling shots are equipped with ball bearings.

Mexico’s federal investigators allege that a corrupt network of officers supports smugglers who traffic drugs into the U.S. The weapons are still being checked.

Mexico has recently extradited four major drug kingpins to the U.S. 

It’s So French!

Few would disagree that the French, although they have elaborate rules for politeness, are actually rude, especially to those who have the misfortune not to be French. The Paris Ile-de-France tourism office not only acknowledges this but has turned it into a marketing ploy.

Their latest campaign “C’est so Paris” is addressed to the British, who have been visiting France less frequently of late. The website www.cestsoparis.com provides an explanation of some common French gestures so that visitors can decode them and perhaps mimic them as well. Here are a few.

•Bof (pronounced, roughly, BOHFF) — the famous Gallic shrug to deny knowledge or avoid agreement or responsibility. Stick out your lower lip and raise your eyebrows and shoulders at the same time.

•La moue (la MOO) — the classic pout, which conveys discontent or disgust. Start by looking bored, then purse your lips and shake your head slowly. French actress Brigitte Bardot did it well.

•Les boules (lay BOOL) — a gesture of exasperation made with both hands up, fingers curled back toward you as if you are holding two tennis balls. It indicates you are unlucky, upset or just can’t take it anymore. Perhaps useful with cab drivers and waiters.

Others include the camembert (camonBEAR), named after the famous cheese — “a rude way to tell someone to shut their mouth” — and the ras le bol (rah le BOWL), which lets you “show that you’re sick and tired.”

The website, which shows young people demonstrating these gestures, says to use them with care but that mastering them can result in being mistaken for a native. That is, until you start butchering the language.

Then there’s the contest. Take up to three photos of yourself imitating classic French gestures and upload them to the site, where viewers will vote on the best. Winners will be selected by a team of experts and the prize is a luxury weekend for two in Paris. The website also has an events calendar and travel tips. 

CEFs and Mutual Funds

While an index fund is one way to start following emerging markets, an investor with an interest in specific regions or countries, may want to managed funds, either mutual funds and closed-end funds, CEFs. In areas where risks and rewards are high, a managed fund can be a wise choice although it usually means paying more in fees.

CEFs have been around for decades but they don’t get the press that mutual funds and ETFs do. They are traded on the exchanges throughout the day just as stocks are, while the price for mutual funds or net asset value is set every afternoon at 4 P.M., eastern time. CEFs, unlike mutual funds, have a fixed number of shares. When investors pull out of a mutual fund, the manager is forced to liquidate holdings, which often isn’t advantageous to investors still in the fund.

Two figures are important in considering CEFs, net asset value and market value or share price. The net asset value refers to the underlying value of the securities held in the fund just as it does for mutual funds, while the market value indicates what investors are willing to pay for the shares. CEFs trade at a discount when the net asset value is greater than the share price, so it’s possible to shop for a bargain in CEFs. Some CEFs trade at a premium, which could be less than 1% or up to 50% or more. A high premium is likely to be a sell signal. 

BRICs Are Flying

BRICs - The term refers to four large emerging market countries that are growing very fast: - Brazil, Russia, Indian and China. While the MSCI Emerging-Market Index is up 171% since the end of 2002, the MSCI BRIC Index has surged 262%. (MSCI stands for Morgan Stanley Capital International, which also has separate indices for all four countries.

The term BRIC first appeared in Goldman Sachs paper in October 2003, “Dreaming with BRICs: The Path to 2050.” The paper predicted that by 2050, the lineup of the world’s largest economies would be toppled, with China emerging as the largest, followed by the U.S., India, Japan, Brazil and Russia, surpassing the social democracies of Europe.

The firm issued an update in 2004, an echo to this awesome prediction. Europe currently accounts for approximately 15% to 20% of most global stock indices, compared to 3% to 3.5% for the BRIC markets, but these four countries could account for 10% to 17% by 2020. Market capitalization in the BRIC economies could increase by a factor of four times or $4 trillion. While the BRICs would still be dwarfed by Wall Street, they would approach the size of Europe within 15 years. Or so the prediction goes. (Editorial comment on this will appear elsewhere in this blog.)

Altogether, the BRIC countries account for nearly half the world’s population, while their rapidly growing economies presently make up only 13% of global economic output.

What all four have in common is rapid growth, but otherwise they differ vastly. China and India are commodity importers, while Russia and Brazil export commodities, and a great proportion of their growth, especially for Russia, is the payoff from a commodity windfall. Brazil has managed to attract foreign investment and has a modern industrial base, however, Russia is burdened with an obsolete industrial apparatus, falling population and an administration that is undeniably corrupt.

Nevertheless, Russia is the world’s number one exporter of gas and its second exporter of oil. Energy-related revenues account for more than 20% of GDP, which means that high oil prices have allowed the Kremlin to ignore the need to diversify the economy. Brazil, India, and China do not have Russia’s oil and gas resources, however, lacking this advantage makes them more open to foreign investment and economic diversification.

An ETF that invests in all four is the Claymore/BNY BRIC ETF with the symbol EEB, which tracks the performance of ADRs from Brazil, Russia, India and China. Launched in August of 2006, it has a portfolio of about 70 holdings. Country breakdown is currently 50% Brazil, 30% China, 15% India, and 5% Russia.

Switzerland Lures Rich Expats

Rock stars, movie people and super-rich folks from all over the world are choosing Switzerland as a place to live. They number about 3,700, enough to populate a small town. The reason is simple - taxes.

French rock star Johnny Hallyday, who noted in a New York Times article that his tax bill would be 70% of his earnings in France, has decamped for Gstaad. The list of expatriates in Switzerland includes Ikea founder Ingvar Kamprad, racing champ Michael Schumacher, cyclist Jan Ullrich, singers David Bowie, Phil Collins, Celine Dion, and Tina Turner, and actor Roger Moore.

Switzerland’s appeal derives from the fact that each of its 26 cantons writes its own tax code, and there’s nothing to stop these cantons from negotiating with expats on a one-by-one basis. The canton usually asks for a one-time tax payment based on the value of the expat’s Swiss home in exchange for tax immunity from then on. There’s no scarcity of attorneys and other advisers who stand ready to help wealthy expats score a deal.

Some Swiss are in favor of this type of arrangement, which brings in revenues at a time when Swiss corporate and personal taxes have been slashed. Others have cried foul, however, saying that it is not fair to ordinary Swiss citizens and to the countries these expats have left behind. But if the expat tax perks were abolished, the super-rich would simply go somewhere else where taxes are less punitive than in their home countries, somewhere like Belgium. 

Attention: Claimants to the English Throne

A search is on the way for historical heirs to the English throne. English Heritage, an organization devoted to protecting the country’s historical environment, asks in its advertisements: “Can you trace your family tree back to 1066? Might your ancestors have claimed the English throne? Are you of Edgar the Aetheling’s lineage and believe you have a legitimate claim?”

Ads are running in British, U.S., Australian, German and Norwegian newspapers. “Were your ancestors Anglo Saxon or Danish nobles before 1066? Perhaps you can trace your heritage back to Harold, Edward the Confessor or Edgar the Aetherling.”

Edgar Aetheling was named heir apparent by his great-uncle King Edward the Confessor but was not crowned when the King died in 1066 because he was too young. Harold II was crowned instead. William the Conqueror, who crossed from Normandy, then defeated Harold at the Battle of Hastings. Aetheling later surrendered to William.

And so, to mark the opening of the new visitor center at Battle of Hastings Abbey and Battlefield in February, English Heritage are researching what might have happened if Aetheling had been crowned. If you believe your family could have a claim to the English throne, send copies of your supporting documents and the name of your “gateway ancestor” to this address:

Claimants to the English Throne
English Heritage
1 Waterhouse Square
138-142 Holborn
London EC1N 2ST

Wanted: Good Used Jet

Chile’s President Michelle Bachelet wants an inexpensive second-hand jet for her travels. The Chilean government is willing to pay about $50 million for a plane that will become part of the Chilean Air Force’s aging fleet and will be used part-time for presidential travel. A new plane, would cost $150 million to $300 million.

Such a move might seem in character for Bachelet, a single mother and a socialist, however, frugality is actually a tradition of Chilean presidents. Most have continued to live in their own homes after taking office, as does Bachelet. Her predecessor, Ricardo Lagos, sometimes even rode the subway to work.

Currently, though, Chile is experiencing a bonanza because copper, its chief export, has been bringing record prices. The Bachelet government is saving its copper revenues for leaner times despite calls for more state spending.

A poll by the conservative organization Center of Public Studies indicated 52% of Chileans approved of Bachelet in December, up from 46% in July 2006. The disapproval rate is unchanged at 31%.

Somalia - What’s Going On?

And why does it matter? News from Somalia presents more questions than answers. Where did the trouble start? When the Europeans left or before they got there?

The area was overrun by warlords long before the Europeans arrived. Historically Somalia has been divided between Africa and the Arab world, a division which has caused much bloodshed on the African continent.

In the 1970s, the U.S. failed to assist Somalia in its war against its communist neighbor Ethopia, and a civil war ensued. In the 1990s. President Clinton sent in the military, but with two Black Hawks down and 18 dead, withdrew. Al-Quada established a base in the country, very possibly planning the attacks on U.S. embassies in Kenya and Tanzania from there.

When the Islamic Courts Council or ICC seized power, at least the Somalis had some hope of order. Truckloads of soldiers no longer roamed the streets. The price of AK-47s dropped. Drug use was abolished. The warlords retreated to their villages. But Ethopia wasn’t pleased at having an Islamic state as a neighbor and preferred having Somalia weakened and divided as it had been before. Washington gave its approval and Ethopia invaded, driving back the ICC. The U.S. is offering an aid package of $17 million to assist the new transitional federal government of Prime Minister Ali Mohammed Gedi. Meanwhile, order has not been restored.

This just in - the U.S. has carried out air strikes against Al Quada operatives in Somalia.

New Borders? No Problem!

In 1919, 39-year-old Mark Sykes died of the Spanish flu in a posh Paris hotel room. Despite his dying young, he had one major achievement to his credit. Along with his friend Francois Georges-Picot, he had created a “New Middle East.” He did it simply by bending over a map, erasing old boundaries and replacing them with British and French “zones.” Before his death, his new map of the region became international law at the signing of the Treaty of Versailles. His intention was simply to bring the Arabs into the modern world. Finding out what the Arabs themselves wanted was an idea that didn’t occur to him or to those in power at the time.

Royal Treat in France

Will France elect a woman president before the U.S. manages to do so? Ségolène Royal is holding on to the top position in the race to be the next president of France. According to a recent poll, 31% of respondents would vote for the Socialist Party (PS) candidate in the next presidential election. In response to criticism that she has no foreign policy experience, she made a whirlwind visit to China.

Voters in France’s upcoming primaries will be able to cast their votes online. However, most of France’s 40 million voters are not members, so they aren’t eligible to vote in primaries. The general election will be held in April.

U.K. Housing Soars

Housing in London and in southeast England are the most costly places to live in the U.K. Only one town in the whole U.K. - Lochgelly in Fife, Scotland - recorded average prices below £100,000.

Northern Ireland housing prices rose at the fastest pace of anywhere in the U.K. In the town of Newry, which had the strongest growth, prices climbed 54% in 2006. The extraordinary growth in Northern Ireland is considered by many to be a peace dividend following “the troubles.”

The rise in house prices eased off slightly towards the end of 2006, according to says the Land Registry for England and Wales. Nevertheless, living costs in the U.K. create a challenge for expats, especially those from the U.S.

Ban the Veil?

Cultures differ in their attitudes toward, well, cultural differences. In the Netherlands, where tension between Europeans and Muslims has been fierce, the government now seeks to make it illegal for women to wear the Islamic veil or burka. In 2004 France banned not only the veil but various religious symbols, including crosses, in schools in an effort to reaffirm the country’s secular identity.

Now a poll by Harris Interactive published in the Financial Times shows how adults in five European countries and the U.S. actually feel about whether women should be permitted to wear the veil.

Americans seemingly have more of a “live and let live” attitude. A total of 59% of Americans believe Islamic women should have the right to wear veils if they want to. Support is significantly lower in the five European nations surveyed, with Spain at 39%, Italy at 34%, Germany at 33%, Britain at 23%, and France at 23%.

The survey seemingly didn’t extend to Islamic women (or men, for that matter). Some Islamic women like the veil and feel safe under it. The trouble is, however, that bad guys can get away with murder and/or slip through airport security by donning a veil and posing as a woman. That’s what British authorities believe may have happened in London on Dec. 20 when a man wanted in the murder of a policewoman disappeared.