Wall Street Warms to China Story

Consider that global initial public offerings of Chinese companies amounted to $104 billion in 2010, according to data-tracker Dealogic, up from $54 billion in 2009. Last year’s tally amounts to $126 billion if Hong Kong companies are included, though it includes domestic markets not fully accessible to foreigners.

By comparison, less than $34 billion of U.S. IPOs took place in 2010, the second consecutive year that Chinese companies topped U.S. companies in IPO issuance. Bankers that didn’t participate in Chinese IPOs risked seeing smaller bonuses. No Chinese investment bank has emerged as a global power, reducing alibis for not establishing a presence in deals available to foreigners.

Meanwhile, mergers-and-acquisitions specialists are racing to China to work with companies like China National Offshore Oil Corp., known as Cnooc, and China Petroleum & Chemical Corp., or Sinopec, among the biggest deal makers in 2010. Chinese companies completed 3,235 acquisitions valued at nearly $190 billion, or 9% of all global deals in 2010. That was more than any other nation except the U.S. and more than the $162 billion of deals by U.K.-based companies. China also was the second-most frequent target of purchases by foreign companies in 2010, after the U.S.

In currency markets, analysts say more traders are laying big bets on whether the yuan will be allowed to appreciate further in 2011. Stock-trading volume on Chinese and Hong Kong exchanges now rivals that of U.S. markets. And some strategists, such as Tobias Levkovich of Citigroup, view the Shanghai market as a leading indicator for U.S. shares.

The Chinese economy is expanding so quickly it’s helping to offset stagnant growth elsewhere in the world for a growing number of companies. And Chinese demand increasingly drives global commodity prices and shares of commodity providers.

That all helps explain why some of the largest investors are boosting wagers on—and against—China. The bulls say power will continue to shift to developing makets from developed countries. They cite China as exhibit A of this trend, arguing there are more opportunities in China and elsewhere in Asia than in the U.S. or Europe.

Already, some of the hottest investments over the past year, including rare-earth shares like Molycorp Inc. and Rare Element Resources Ltd., get their mojo from tightening Chinese controls or rising demand in the country.

Daniel Arbess, who runs a hedge fund for Perella Weinberg Partners, has been profiting by buying shares of global companies helped by Chinese growth, a strategy he calls “Shake Hands With China,” and betting against those having a hard time competing with Chinese rivals. (By GREGORY ZUCKERMAN, The Wall Street Journal, JANUARY 2, 2011)

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Why Investors Need China in Their Portfolios

China represents more than 10% of the world’s GDP, adjusted for purchasing power, but few investors have anywhere near a 10% China allocation.

One of the most common mistakes detracting from investment performance is the “home country bias” that afflicts both individual and institutional investors. Investors in the United States tend to limit their portfolios to U.S. stocks and bonds. Investors abroad do likewise.

As an investment strategy, that doesn’t make sense. In our increasingly global economy, the U.S. has only about 20% of the world’s GDP, and the developed economies as a group account for just over half of world economic activity. Moreover, the developing economies are growing much more rapidly than the developed ones. Inadequate international diversification seriously limits investor returns.

Neglect of China is a striking example of the lack of adequate diversification. For almost 30 years, the Chinese economy has been the fastest growing major economy in the world. Since the early 1980s, following the economic reforms of Deng Xiaoping, it has expanded at more than a 9% rate of increase after inflation. China’s economic performance is unprecedented—no country has ever grown so fast for such an extended period of time.

It is very likely that China will continue to grow rapidly for at least the next decade, if not longer. While the eastern part of China is now well developed, the vast central and western regions are still largely underdeveloped. There are 500 million unemployed or “underemployed” people living in those regions who are anxious to enjoy some of the riches that have been created in the east. They are mainly educated, motivated and often highly entrepreneurial. The Chinese government promotes growth in the region by developing new cities and investing in infrastructure such as power plants, roads and high-speed rail service. The Chinese growth miracle is only in the middle innings. (By BURTON G. MALKIEL, The Wall Street Journal, DECEMBER 15, 2010)

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Selling Health Food to China – Multinationals Use Traditional Ingredients in Market Battle

BEIJING—In China, where diabetes, cancer and other chronic illnesses are on the rise, people are growing more health conscious, creating a fast-growing market for companies selling health foods.

Food-product giants such as Nestlé SA and PepsiCo Inc. have begun introducing foods that have a traditional Chinese folk-medicine twist. Among the ingredients the multinationals are using: wolfberry plants, chrysanthemum teas and tremella, a fungus commonly thought in China to help improve the skin, strengthen bones and control weight.

In 2009, sales of wellness foods and beverages in China increased 28% from five years earlier to $1.5 billion, driven by the elderly and women, according to Euromonitor International, a market-research firm. The figure is small compared with the category’s $162 billion in U.S. sales last year, but the world’s biggest food companies are eager to cash in on the growing Chinese market.

The Swiss food giant Nestlé is investing $500 million globally over 10 years to develop foods that can claim health benefits, and it’s currently testing five of them in China. An estimated 92 million Chinese people suffer from diabetes, for example, and one of its clinical trials involves a mulberry yogurt for diabetics that is supposed to naturally regulate blood sugar and aid the digestion of glucose.

The yogurt and Nestlé’s wolfberry cereal drink, for improving immunity in the elderly, are not yet available in Chinese markets.

By completing clinical trials—a two-year scientific process of laboratory work and human testing—Nestlé will be able to introduce the food with special packaging, which generally has more influence on Chinese shoppers than it does on their Western counterparts. The company will also be able to distribute the foods at pharmacies and hospitals. (By LAURIE BURKITT, The Wall Street Journal, DECEMBER 13, 2010)

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