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Olympic Host Could Bring
Home the Income-Investing Gold |
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Published:
August 4, 2008
So much has been written about the
economic boom in China that a savvy
international investor's eyes may
glaze over at more such talk. But
for all the funds and ETFs and and
ADRs invested in mainland China --
and for all the Hong Kong-traded
equities Westerners have been
purchasing for years -- very little
has been written about high-yield
stocks in China and Hong Kong.
There's good reason for the relative
silence on the income front: a
near-dearth of high-yielding Chinese
companies. But income investors need
not despair of participating in
China's economic boom, or in the
continued emergence of Hong Kong as
one of the world's financial
capitals. The fact is that
high-yielding stocks can be found in
the region.
China, the world's most populous
country with 1.3 billion citizens,
is also the fastest-growing large
economy in the world. China began
moving away from a purely socialist
economy in the late 1970s --
shifting away from collectivist
agriculture to family-owned
enterprises. In the 1980s, the
central government began expanding
private-property rights and allowed
prices for more goods and services
to be determined by market forces.
Capitalism began to take root in the
formerly communist land.
By the start of this century, China
had a vibrant stock market and was
enjoying the benefits of retaining
capitalistic systems in Hong Kong
and Macau.
Trade has been a powerful engine for
Chinese economic growth. The
government strategically allocated
resources toward light industry and
technology, using the country's
combination of strong education but
low wages to produce high-quality,
low-cost goods that it began
shipping around the world. At the
same time, China created "special
economic zones" in which foreign
companies were allowed to invest
directly. Over time, more foreign
companies began outsourcing their
production to China, with great
success. China's entry into the
World Trade Organization in 2001
accelerated this trend -- as does
China's ongoing policy of
undervaluing its currency, the yuan,
versus the U.S. dollar. As we know,
this makes Chinese exports cheaper
to foreigners.
As a result of these policies,
China's economy has grown ten-fold
over the past three decades, and
over the past 25 years, its economy
has grown at an annualized rate of
roughly +10% -- an astounding pace.
Although it's now the second-largest
economy in the world after the U.S.
(measured by purchasing-power
parity), China continues to grow
extremely rapidly -- about +11%, on
average, over the past three years.
Most economists expect that rate to
slow this year to +9-10%, though
it's a bit more difficult to
estimate Chinese GDP growth because
of the number of state-owned
businesses and the government's
complete control over information.
China isn't without problems;
inflation is fairly high (around +8%
currently), widespread poverty
remains (especially in rural areas),
and labor costs are beginning to
rise as skilled, experienced workers
shop around for better jobs in an
increasingly competitive
environment. In addition, China
faces expensive problems in the
coming 10-20 years, including the
need for continued infrastructure
construction and growing pollution.
Even so, economists think we're in
the early innings of China's
economic boom, and that the country
can continue to grow at a high
single-digit pace for the next
decade. If that happens, plenty of
Chinese companies will provide
handsome returns to their
shareholders over that time -- count
on it.
Indeed, China's stock markets -- in
Hong Kong and Shanghai -- soared in
recent years along with the
country's economy. Incredibly, the
Shanghai Composite Stock Index rose
from 1,000 in the summer of 2005 to
above 6,000 in October 2007. The
latter months of this bull market
increasingly resembled a bubble, and
since then we've seen a healthy
correction. I wasn't interested in
Chinese stocks six months ago; but
increasingly, I'm seeing the
valuations of healthy companies come
back down to reasonable levels.
For income investors, China has been
far from a happy hunting ground --
as was pointed out earlier. A handful
of Chinese stocks pay decent
dividend yields, though still lower
than the ones that might normally
tempt you. There are stocks like
oil refiner PetroChina Ltd. (NYSE:
PTR) with its 4.0% yield and
wireless leader China Mobile (NYSE:
CHL) with a 2.3% yield. However,
both arguably are attractive as
long-term investments, as their
share prices have come down
considerably from their highs. But
for true high-yielders, you have to
look closely -- and pick carefully.
Because China has enormous long-term
potential, but faces some short-term
difficulties, there are some Chinese stocks
that
would not make great investments
today -- namely, speculative growth
stocks with high P/E ratios. But
steady-growth, high-dividend
companies with sustainable cash
flows could do very well over the
next year or two.
In a recent issue of the
High-Yield International
newsletter. editor Nick Lanyi found
such a stock. This Chinese
company has increased its dividend
every year for the last five years.
And over the same period, its
revenues have grown +25% annually.
To learn
the name of this stock and to learn
more about
High-Yield International,
please
visit this link. |
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