Chinese equity indexes have been weighed down with large positions in state-owned companies that tend to put political interests ahead of shareholder returns, according to Tony Hsu, a Shanghai-based money manager at Dalton Investments, which oversees $2.3 billion.
Corporate Governance
Under former President Hu Jintao, banks were directed to lend to local governments during the global financial crisis to boost growth, while artificially low fuel prices have hurt refiners such as PetroChina. ICBC, the Beijing-based lender, traded at a record low 4.9 times earnings last month, while PetroChina fell on June 25 to its lowest valuation since 2011.
More than 25 percent of China’s state-owned enterprises are unprofitable and their productivity growth has trailed that of private firms the past three decades, the World Bank said in February 2012.
China was ranked ninth out of 11 Asian countries for corporate governance as of September 2012 and had the biggest deterioration in the region since 2010, according to a survey by CLSA Asia Pacific Markets and the Asian Corporate Governance Association.
Slowing Growth
SOEs “primarily serve the interests of the government, frequently making decisions with little regard for return on investment,” Hsu said in an e-mailed interview on July 11. Hsu said he invests in Chinese companies run by entrepreneurs with large ownership stakes, while he’s selling short shares of state-owned companies.
In a short sale, traders sell borrowed stock, anticipating the price will drop so they can profit by buying back the shares at a lower price.
Earnings in the 137-stock MSCI China index have climbed about 5 percent during the past two years, versus 15 percent for the S&P 500, according to data compiled by Bloomberg. Profits in China are weaker in part because there’s too much competition, said Aberdeen’s Yeo.
“Any sectors that look interesting, you see a lot of players going in,” he said. “That has resulted in profits being competed away.”