Charting China's Changes
China's seemingly unstoppable march to economic-superpower status is increasingly a hot topic for the rest of the world. But while optimism about the Middle Kingdom's prospects has soared in the West, China's own movers and shakers don't seem to be so sure.
A quarterly business survey, released June 23, showed a broad decline in sentiment from the Chinese companies that responded. The survey was conducted by Xinhua Finance, one of China's leading financial-services firms, and its Market News International subsidiary. It found that the index for overall business conditions fell to 67.83 for the first quarter, from 78.03 in the preceding quarter.
What's behind the drop in confidence? Companies are feeling the effects of increasing government regulation, according to Fredy Bush, the CEO of Xinhua Finance and Market News. Bush, an American who started Xinhua Finance in 1999, has been involved in Asian finance since 1985, when she left the U.S. for a job with the Taiwanese government helping to establish the country's first official futures market. Since then, she has founded one of the first businesses to distribute in Asia international market data and has had a front-row seat to witness the rise of the Chinese stock exchange over the last 12 years.
BusinessWeek Online reporter Burt Helm recently spoke with Bush about the survey, its implications for the country's economy, and what American investors should know about getting involved with China. Edited excerpts from their conversation follow:
Q: What do you think drove this recent decline in sentiment? A:
Q: What do you think drove this recent decline in sentiment?
A:It's due to the fact that certain industry segments have been restricted by the Chinese government to control overheated areas of the economy. The [regulation on] these industry sectors have had a ripple effect into other areas.
For example, the survey comment from one steel company stated, "Production capacity for iron and steel was enhanced greatly. However, evidence shows that the prices for iron and steel for construction use are dropping due to the [government's] adjustment of real estate policy." It's evident from the survey that these respondents feel the decline is temporary and due primarily to these kinds of government restrictions.
Q: What should foreign investors take away from that? A:
Q: What should foreign investors take away from that?
A:When the Chinese government announced their intent to take measures to cool the economy, there was much handwringing by the U.S. media. Everyone wondered if the government could orchestrate a soft landing or whether would it be much more severe.
But China's actions here are only new to the U.S. media because China is now on their radar screen. What they didn't consider is that China has been successfully guiding growth like this for 10 years, and the track record would indicate they may know what they're doing. I think investors should take from this that China's government is actually doing a damn good job.
Q: How developed is China's investing climate at this point? A:
Q: How developed is China's investing climate at this point?
A:The stock market is 12 years old, but fund management is relatively new. I think in 2000 or 2001, you had about eight fund-management companies, and now you've got more than 50. So it's very much a burgeoning market, and interest from the West has, of course, taken off. We launched an exchange-traded fund in New York last October, with $20 million invested [iShares FTSE/Xinhua China 25 Index Fund (FXI )]. Now, it has reached $900 million in a period of months.
Q: What's still developing? A:
Q: What's still developing?
A:The bond market in general is still very small, and the corporate bond market isn't open yet. So investors right now have options to invest in real estate, or they can invest in the stock market. As a result, you've got stock markets trading at a price-earnings ratio of 60 times -- there's just not enough available investment.
But in order for there to be a very deep bond market, there still need to be changes. Right now, financial futures aren't allowed in China, [and] neither is selling short. So there are a number of investment tools that aren't yet in place there.
We hear in the marketplace and from regulators that the corporate bond market will open the second half of this year. That will begin to grow our credit-rating business significantly. Depending on how you look at some of these restrictions, they can be a challenge -- or an opportunity.