Good week, bad week for Chinese investment

29 October 2007
There is no denying that Asian markets have been bounding ahead in recent months, with China at the helm. Indeed, China now boasts the largest bank in the world, ICBC, and accounts for three of the five biggest stocks in the world, according to Standard Life Investment’s global investment strategist, Richard Batty.

And a recent alliance between Chinese securities firm Citic Securities and US investment bank Bear Stearns has helped to bolster the Chinese brokerage industry. The two companies will establish a joint venture in Hong Kong, offering financial services to clients across Asia.

The share swap deal will see Citic invest $1 billion for around a six per cent stake in Bear Stearns, while the latter will invest the same amount, which will eventually grant the company a two per cent stake in Citic.

Citic’s stock has risen 600 per cent in the last year and the company is currently trading at five times its book value. Meanwhile, Bear Stearns – which has been struggling amid the US credit crisis – is trading at just 1.2 times its book value. So, while Citic offers Bear Stearns a fast-growing investment opportunity and will help raise its Asian profile, it will also enable Citic to gain experience in offshore markets for the first time.

Despite the apparently positive progress in Asia, however, some experts are predicting that the region could eventually fall foul to the credit crackdown which has had far-reaching consequences.

Mr Batty says that although a lot of money has been made, investors should take a “speculative approach” to future investment in China. He says that the market has “run up a long way in a short period of time and is ripe for some sort of collection”. He also suggests that such rapid growth opens up risks, particularly if the US slowdown impacts upon the Pacific Basin.

However, he adds that “on the flip side, the amount of liquidity in China is still huge” and that Hong Kong’s stock market is also up 40 per cent. As the savings rate for consumers in China is 44 per cent, “a substantial amount of money is finding its way into the stock market,” he says.

Mr Batty concludes that the Pacific Basin is “certainly an area for investors to keep an eye on” but that a light position for the next nine to 12 months is in order. He adds Taiwan and Korea could see rapid growth if the markets are opened up to Chinese investment.

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