A popular example is represented by the domestic sale of bonds by a CEFC China Energy unit back in 2014, with domestic rating agencies granting it a solid “AA” rating, one robust enough to make investors feel confident that purchasing the bonds in question represented a very low-risk endeavor. As time passed, the unit in question managed to hang on to its rating and even exceed it, with that only changing… a few weeks prior to it defaulting. In May of 2018, it missed its first payment and 10 more defaults followed, bringing the grand total to $4.2 billion in defaults.

Needless to say, the credibility of any rating agency takes a major hit whenever a blatant example of excessive optimism such as this one manifests itself. And unfortunately, this issue by no means represents an isolated incident, with recent data indicating that in China, roughly 8 of 10 issuers receive a rating of “AA” or above.

How does this compare to global rating agencies, for example Fitch, Moody’s as well as Standard & Poor’s?

According to research published in 2017 by the BIS (Bank of International Settlements), Chinese bonds which were issued offshore and therefore rated by global players ended up receiving a rating 6-9 notches lower compared to what domestic rating agencies awarded. This lack of clarity is more than troublesome, especially in light of the fact that even in these beginning stages, China represents the world’s #3 bond market.

Why are domestic rating agencies proving to be more optimistic?

We could speculate about potential reasons quite a bit, for example:

1. Regulators being excessively stringent, with a minimum rating of “AA” being required for a bond to be sold to the general public and as such, domestic rating agencies oftentimes feel compelled to be more generous because otherwise, the entity in question would not be able to secure financing via issuing bonds at all
2. Domestic players not having enough experience
3. There not being that much of a track record with respect to Chinese bond ratings
4. Issuers not providing accurate information to rating agencies, with the latter having to frequently work with numbers that are overly-optimistic and inevitably lead to an overly-optimistic rating which isn’t exactly backed by… well, reality

The list of examples could continue but the bottom line is this: domestic rating agencies have been suffering a relatively serious credibility hit and this state of affairs inevitably ends up hindering growth as far as China’s vital bond market is concerned.

What solutions are there?

Quite a few, including solutions which revolve around letting more experienced global rating agencies take over. And, indeed, China has been gradually allowing just that, with S&P Global representing the very first global rating agency which was granted a license with respect to issuing scores for Chinese bonds.

However, even so, suspicions persist with respect to whether or not global standards will be maintained, with there being a very high likelihood that scoring methodology will be “adapted” to Chinese realities. This aspect, correlated with other issues such as potential pressures from the authorities makes observers once again raise an eyebrow when it comes to the effectiveness of the entire endeavor.

There are of course other solutions as well, for example “punishing” domestic rating agencies, with China occasionally doing just that. For example, one of China’s top agencies (Dagong Global Credit Rating) ended up with suspended licenses and other rating agencies had to deal with investigations involving potential conflicts of interest, methodology problems, quality control issues, update track records and so on.

Of course, not all observers are as eager to point the proverbial finger toward domestic rating agencies and considering their global counterparts angelic entities. On the contrary, the observers in question oftentimes consider the entire endeavor deeply hypocritical in light of the fact that global rating agencies have sins of their own to atone for, with the most (in)famous of them revolving around the Great Recession, when rating agencies were ridiculously optimistic and ended up even granting sky-high ratings to Mortgage-Backed Security bundles which included various combinations between quality loans and subprime loans.

As such, a more than compelling case could be made that information provided by rating agencies in general (whether Chinese or global) should be taken with a grain of salt when making decisions pertaining to bond-related opportunities.

While the ChinaFund.com team does consider that rating agencies provide more than useful information, it does tend to agree that in light of case studies such as the previously mentioned Great Recession, it would be wise to double down on the “do your own due diligence” perspective. In other words, rather than blindly trusting rating agencies (again, both domestic and global), we would strongly recommend simply considering the information provided by them (including ratings) a data point just like any other and nothing more.

By all means, include rating agency-provided data in your overall strategy but do not make investment decisions exclusively based on it, a mistake made by investors in a wide range of jurisdictions, from China to the US. Should you be in need of “hands-on” assistance when it comes to precisely critical research, the ChinaFund.com team is at your disposal and would be more than happy to work alongside you and/or your team (to send us a message, simply use the Contact section of ChinaFund.com).

Just because the Chinese economy is growing, doesn’t mean that America’s success going anywhere. America’s success is rooted in its ingenuity and entrepreneurship which will continue to be staples of its DNA no matter what happens in the world. Buying stock in a Chinese company isn’t going to change that fact. When you think about it, lots of major industries actually thrive when they have two dominant players.

1. Walmart vs.Target
2. Uber vs. Lyft
3. Apple vs. Android
4. Nike vs. Adidas
5. Visa vs. Mastercard
6. Square Cash vs. Venmo

Add the United States vs China to that list. China does hot intend to “hurt” the U.S. just because it is getting bigger. Lyft rose in popularity right after Uber did and as such, you could make the argument that the sudden appearance of Lyft was a direct challenge to Uber. Instead, it just gave more validity to the ridesharing industry and was actually good for both companies.

This is why it’s time to give investing in China a second look.

Growth of the Chinese Economy

It’s no secret that the Chinese economy has been on a tear over the past couple of decades and when you start to take a look at the data, it becomes even clearer. When you start to compare the total GDP (Gross Domestic Product) of the world’s countries, the totals currently sit at:

1. The United States: $20.49 trillion
2. China: $13.4 trillion
3. Japan: $4.97 trillion
4. Germany: $4 trillion
5. United Kingdom: $2.83 trillion

China is the only country that even comes close to competing with the United States in terms of total economic output (the U.S has been atop this list since 1871)

➢ China has seen an average growth rate of 9.52% between 1989 and 2019
➢ They also have approximately $23 trillion in natural resources
➢ Worker efficiency has largely contributed to their growth

Source: World Population Review

Most of this growth was triggered by economic reforms and trade liberalizations that were made nearly 40 years ago, with the initial ideological shift taking place even earlier on. The government decided to open up foreign trade and investments as well as implementing free-market reforms in 1979. Since then, they’ve been one of the fastest-growing economies.

The WorldBank described their growth rate as “the fastest sustained expansion by a major economy in history.” This growth has allowed China to essentially double its GDP every 8 years.

However, this historic growth doesn’t mean that things are going poorly for the U.S. You don’t need to look further than a list of the world’s most valuable companies to see that things are going well. The overwhelming majority of these companies are U.S. companies and many were founded fairly recently (Facebook, Apple, Amazon, Alphabet).

When it comes to their relationship with the U.S., China is actually a major commercial partner of the United States. China is the largest U.S. merchandise trading partner, biggest source of imports and third-largest U.S. export market. China is also the largest foreign holder of U.S. treasury securities, which help fund the federal debt and keep U.S. interest rates low.

So what does this mean for you as an investor?

Hidden Gems

If you consider yourself an opportunity-seeking investor and entrepreneur, you wouldn’t look any further than China to start investing. Here’s why:

1. U.S. companies are very mainstream – Facebook, Amazon, Apple, Netflix, Google. Practically everyone in the world knows about these stocks. Their prices, earnings reports, P/E rations, and news announcements are all watched like a hawk. The very first stock that most new investors buy is probably one of these or another huge American mega-corporation. This doesn’t mean these companies are bad investments and it doesn’t mean they’re bad companies. Each of them are exceptional and there is a reason why they’re the most valuable companies in the world. It just means that these are the stocks that everyone else is investing in. And when has anyone gotten rich by doing what everyone else is doing?
2. Not everyone is sold on China yet – Despite the growth of their economy and all of the doors that are opening for foreign trade/investment, many investors still don’t take full advantage of the opportunity. This is mainly due to the reluctance to invest anywhere but in the U.S. and in this situation, it might pay to be an early adopter
3. Many quality companies may be flying under the radar – Due to the two factors listed above, many quality companies may be flying under the radar in China. To dust off a good Warren Buffet quote, “price is what you pay. Value is what you get.” Just because a company isn’t listed on the NYSE or have a market cap in the billions, doesn’t mean that it isn’t a good investment. The timing is prime to be an early adopter of Chinese investing. You’re probably more likely to find bargains by scouring Chinese stock exchanges in search of gems than U.S. markets

Starting to reconsider investing in China? If so, let’s take a look at some different ways you can approach getting started.

Potential Chinese Buys

There are a few ways to get started investing in China. Of course, you can always go the brick & mortar route of starting up your own physical business in China. We’d consider this a solid option as well but that topic is out of the scope of this article and has been covered through a dedicated post. Instead, we will start with investing in Chinese companies that are already performing. There are several mutual funds you can buy that consist of Chinese stocks. To name a few:

● iShares MSCI China ETF
● Matthews China Small Companies Fund
● Eaton Vance Greater China Growth Fund
● Columbia Greater China Fund
● Aberdeen China Fund

If you’re not familiar, a mutual fund or exchange-traded fund (ETF) is just a fund that tracks the movements of several different stocks. By purchasing a share of a mutual fund or ETF, you can take advantage of the growth of an entire industry or sector (as opposed to just one individual stock).

These ETFs will give you exposure to many different companies and industries in China. Some of them are definitely worth investigating further, however, we think the real money is better found by finding individual Chinese stocks, such as:

1) Netease – Netease is an internet technology company providing online services centered on content, community, communications and commerce. They focus on the following segments: online games, advertising, e-mail services and e-commerce. In 2019, they had $9.8 billion in revenue. Compare this to Activision Blizzard’s 2019 revenue of $6.5 billion

2) JD.Com Inc. – JD.com is an e-commerce company and one of the two largest B2C online retailers in China (the other is AliBaba). There is nothing investors like talking about more than Amazon and how they rode they wave of the e-commerce giant to becoming the dominant force that they are today. JD.com and AliBaba could be riding a similar wave in China right now

3) 58.com – 58.com poses themselves as “the Craigslist of China”. Its business consists of its online classifieds and listing platforms. Its online classifieds and listings platforms enable local merchants and consumers to connect, share information and conduct business in China. They currently have a market cap of $7.19 billion

Lots of people lament that they wish they could flashback to the early 2000s and pick up stock in a company such as Amazon, Google, or Netflix. “If I had just thought to invest $10,000 in any of these companies, I’d be a millionaire today”. Hindsight is always 20/20. However, we believe that the proper foresight today should be placed not in the next big trend in the U.S. but instead in the next big trend associated with the global economy. That trend is China.

People are going to start investing in China over the next decade regardless of what happens because all of the economic data points to that being the smart choice. This does not have to mean that the U.S. economy will start to struggle in comparison. If you’re kicking yourself for missing the last big investing trend, don’t be late to miss this one!

Please note that we are not recommending specific investment decisions. Before making an investment in any of the stocks or funds mentioned in this article, you should conduct your own research based on your investment needs and strategy. We are simply offering suggestions as to places where you can start your search.

We hope you found this article valuable when it comes to learning why it’s time to give investing in China a second look. If you’re interested in reading more, please develop the habit of dropping by frequently (new articles are posted each day) and, of course, visit our New Here section for an overview! Additionally, we are happy to help answer any questions you may have and offer more personalized consulting. Please send us an email or message if any of this is of interest to you and we will do our best to set things in motion.

Why?

Technically speaking, the NPC is supposed to be the #1 organ of the state according to the 1982 constitution, with Xi Jinping himself as well as the other Politburo Standing Committee (a topic covered through a stand-alone article) members also being National People’s Congress deputies. In reality, however, its role is oftentimes to the point of pretty much always rather formal.

To put it differently, let’s just say laws are drafted well before they reach the NPC floor, with the NPC essentially giving them the proverbial seal of approval, a status quo which revolves around the ceremonial dimension more so than meaningful separation of power. In fact, the Ash Center for Democratic Governance (Harvard University) famously or infamously called the NPC “a ceremonial legislature” and not much else.

Simply put:

1. There are indeed approximately 3,000 delegates who hold office for 5 years but they only formally gather once per hear
2. As such, a so-called standing committee of roughly 150 members (which meets every couple of months) and consists of members chosen from the previously mentioned delegates holds more influence
3. Theoretically speaking, the NPC is allowed to enact laws and even alter the constitution (even the top leaders of China are elected by it, including the President and Vice-President) but in reality, pretty much all initiatives originate from the Communist Party of China, with the fact that most delegates are also CPC members speaking for itself
4. There have been instances where the NPC delayed the passing of laws such as a one involving a controversial fuel tax back in 1999, but such episodes (even if they have increased in frequency) are sporadic
5. When it comes to certain aspects (for example drafting laws pertaining to human rights), the NPC does tend to have a greater degree of independence, with “greatER” being the operative term… let’s just say that, again, it would be overly optimistic at best to expect Western separation of power levels

Does this mean the NPC doesn’t have that much of a “real-world” utility?

Not necessarily.

While it is true that its role is oftentimes ceremonial, at least we are referring to… well, the most important ceremonies that have to do with China and its interests/goals.

For example, the most important policy directions of China are famously announced via the NPC platform, with the most recent headline-grabbing example most likely being the 2018 decision of eliminating term limits from the equation, thereby paving the way for Xi Jinping to remain the Paramount Leader… indefinitely, something which can most definitely be considered a game changer with respect to geopolitical implications.

Formally speaking, it is also worth noting that the so-called Chinese People’s Political Consultative Conference takes place at the same time as the gathering of 3,000 NPC delegates, with the two of them being referred to as “lianghui” as a duo, the “two sessions” if you will. Again, grandeur and festivity are the operative terms, with the events in question being hard to ignore, from headline value (the important policy shaping initiatives that are announced) to prestigious attendees and guest speakers.

All in all, when it comes to this topic and many (many!) others, we are once again in “this time it’s different” territory.

The manner in which things work over in the National People’s Congress is in downright blasphemy territory from the perspective of Western democratic values. Why? Simply because in the West, meaningful separation of power represents a core pillar of democracy, with systems of checks and balances meant to ensure that independent entities keep each other in check.

But China is… well, not a democracy.

As such, as true as it may be that the activity of the NPC tends to be in masquerade territory compared to the far more independent Western parliamentary bodies, you as an investor in Chinese assets simply have to come to terms with the realities surrounding China. Not just the pleasant ones which revolve around generational wealth building opportunities but also (or should we say especially?) the less than pleasant ones.

The de facto Communist Party of China dominance is here to stay.

China is not exactly in a hurry to embrace democracy.

Socialism with Chinese characteristics isn’t going anywhere anytime soon.

China doesn’t make embracing Western-level human rights values a priority.

Legislatively speaking, China is anything but an oasis of predictability, with a select few entities being powerful enough to shape policy in whichever manner they deem necessary and the NPC as a legislative body oftentimes doing little more than granting a formal seal of approval.

The list of “things are different in China” examples could go on and on. As an investor in Chinese assets, you can literally not afford to be a contrarian when it comes to the direction toward which China is heading. You may very well be right and your values may very well be a better choice for China’s future but it matters little what you think at the end of the day.

China is what it is, with the good, bad and frequently ugly this tends to come with. Your journey as an investor will therefore be anything but a walk in the park compared to more established jurisdictions but, needless to say, there financial incentives more than make sense. Should you be interested in guidance from a team of experts with its fingers firmly placed on the pulse of the “real” China and who don’t hypocritically hide under various platitudes with little actual real-world applicability, the ChinaFund.com team is only a message away.