February 21, 2019 | 03:49 PM


18.04.2013Year Of The Snake Investment Guide: You Can Do Better Than China ETFs

China ETFs are relatively easy way to put your investment money to work.

Russell Flannery, Forbes.com

China ETFs are relatively easy way to put your investment money to work. You get exposure to some of its largest companies, they trade overseas, and the liquidity for some like the iShare FTSE China 25 Index Fund and SPDR S&P China ETF may be better than some China stocks. Yet they may not generate the best returns on your China investments.

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A reason is their weightings include a relatively large share of big cap, government-controlled businesses that on the whole aren’t managed as well as private-sector companies. Instead of focusing on shareholder returns and efficiency, the bosses may be focused on perks, empire-building and advancing a career that may also include government office or Communist Party work.

Those were some of the criticisms of the group leveled by some of China’s top business scholars at a “Business Editors Roundtable” discussion yesterday arranged by China Europe International Business School in Shanghai and Beijing.

“The current model is not sustainable” among the country’s big state owned companies because of limited growth prospects, said Yuan Ding, head of the school’s finance and accounting department.

Historical figures underscore the relatively lackluster performance of China’s state-owned enterprises, or SOEs. The return on assets of 102 large, non-financial state-owned companies in recent years averaged only 3.5%. That compares with 5.7% for private-sector ones, according to figures cited by Dingbo Xu, an accounting professor who also himself serves on the board of a large SOE. If China’s SOEs in the past several years had the same returns as top constituents of the Dow Jones Industrial Average, China’s GDP would have been as much as 9% larger in 2011 than it actually was, Xu said.

Some of China’s largest U.S.-listed SOEs include Chalco, an aluminum supplier, and PetroChina , one of the world’s largest petroleum companies.

Because of bureaucratic opposition to deep SOE reform in China’s ministries, don’t expect improvement in the near term, scholars said. In turn, the underperforming group will hold back China’s main stock indexes this year, Ding said. “In the coming year, we shouldn’t expect a big improvement in the stock indexes,” he said of China’s domestic exchanges.

Rather, Ding said, investors that wish to profit the most from what will likely be overall good economic growth in the country should go about it the old-fashioned way: pick individual stocks that have a better chance to outperform.

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