Holding China stocks can be an uphill slog

Fears of bird flu failed to deter me from making a trip recently to climb Taishan mountain in Shandong province, China.

Taishan is billed as the chief among the five sacred mountains in China, revered by scholars and poets for more than 3,000 years.

What lured me to the mountain were pictures of the thousands of tourists daily who climbed the steep and windy staircase hewn out of rock to reach its summit.

Getting there has never been easier. A high-speed rail network connecting Shanghai to Beijing completed two years ago conveniently has a stopover at Taian, the city near the mountain.

For those daunted by the prospect of climbing the 6,000 steps, taking a cable car to the top is now an option.

In climbing the mountain, they are continuing a grand tradition first started by Qin Shi Huang, the first emperor who unified China more than 2,200 years ago. He had ascended Taishan and built a big bonfire at its summit to proclaim his achievements to the gods.

There at the summit were numerous items of memorabilia left by 72 other Chinese rulers who made similar trips there.

Among them was a 5.2m stele, or stone slab, left without the usual inscriptions by a great Chinese emperor, Han Wudi, who climbed the mountain about 100 years after Qin Shi Huang, so that future generations could debate his legacy.

However, it was the silhouette of the skyscrapers against Taishan in the background that captured my attention.

They resembled modern steles extolling the gigantic achievements of modern China which have lifted hundreds of millions out of poverty.

But the frenetic construction activity there and all over China encapsulates the ongoing furious debate over the red-hot Chinese real estate market: Who will occupy all these buildings when their construction is completed?

Taking the night train on the 900km journey back to Shanghai, it was disconcerting to find that many of the completed skyscrapers were shrouded in darkness, devoid of any human occupation.

The sight reminded me of a similar spectacle which I witnessed in Bangkok 16 years ago - rows upon rows of empty high-rise buildings put up by overzealous developers who paid no heed to the lack of demand for them.

That ended in grief in July 1997 when speculators attacked the Thai baht and sent it into a free fall, sparking off what is now known as the Asian financial crisis.

With other currencies such as the Indonesian rupiah also battered, millionaires became paupers overnight when they could not repay the US-dollar loans which they had taken out to expand their businesses, as their local currency plunged against the greenback.

If even a mid-sized economy such as Thailand could trigger a financial crisis which hobbled Asia for years, imagine what a giant economy like China might do to the rest of the world if it capsizes.

It explains the morbid fascination which analysts have with the financial data reported by China. Thus, when China reported first-quarter growth that was less than stellar by mainland standards - 7.7 per cent - after a decade of double-digit growth, it made headlines causing stock markets to be clobbered across Asia.

Still, I am not overly concerned over such worries.

Unlike Thailand in 1997 which ran out of foreign reserves to fight speculators, China can tackle any economic slowdown caused by a collapsing property market as it sits on a massive US$3.3 trillion (S$4 trillion) of reserves.

Also, most Chinese debt is owned by the Chinese, unlike heavily indebted countries such as Greece which have to rely on bailouts from the European Union because they could not raise the funds themselves.

If any problem arises, it will be an issue which the Chinese will resolve by themselves - without meddling from outsiders.

Of course, miners and other commodity producers will have to make painful adjustments with the slower Chinese growth, as the new Beijing leadership steers China away from an infrastructure-driven economy towards a service-oriented one.

But even with 7.7 per cent growth, China is expanding at a rate far outpacing, for instance, the United States where the the International Monetary Fund is expecting a 1.9 per cent growth rate.

Despite the anaemic US growth, Wall Street is dancing at record highs with the widely watched S&P 500 Index trading at 15.27 times price-to-earnings (PE) ratio and a dividend yield of 2.13 per cent.

In contrast, the H-share Index, made up of giant China firms listed in Hong Kong, has a PE ratio of only 8.55 times and a dividend yield of 3.58 per cent.

Sure, investors may find holding China stocks as exhausting as ascending Taishan, given the multiple walls of worries they have to scale. But the exhilaration when they finally get to the top may well be worth the journey.

engyeow@sph.com.sg

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