WHAT THE BEARS SAY:

The Chinese economy suffers from excess capacity in several key areas including automobiles, steel, chemicals, and electronics.

Chinese consumers remain constrained by job and income insecurity associated with economic restructuring and a largely undeveloped (and in some areas, virtually non-existent) social safety net.

China needs to reduce the wide income and wealth gaps between rich and poor, urban and rural populations, and coastal and interior regions of the country.

China's underdeveloped banking system and the existence of huge amounts of non-performing loans may be a hindrance to balanced growth.

The services sector of the Chinese economy is relatively undeveloped and a lags in job creation.

China equities do not appear to be cheaply priced.

Chinese interest rates may rise in an effort to slow fixed investment, decrease deflationary pressures, and reduce speculation about renminbi revaluation.

Macro-level issues have the potential to create great uncertainty in China over the intermediate term, for example, political developments in Taiwan, reform of China's taxation system, the external value of the currency (renminbi), and a USA consumer slowdown and/or protectionist backlash against Chinese exports.

Owing to the country's relatively low per-capita income, China needs to raise its energy efficiency or consider switching to alternative energy sources.

In the next two decades China needs to add total jobs equivalent to the aggregate European labor force.

Over the past 20 years, property, capex, and lending bubbles disrupted the Chinese economy and challenged the government's ability to manage them.

Ecological, environmental, and health crises highlight China's growing needs for food, oil, and clean water and may hold growth below potential.

Chinese banks hold billions of dollars in nonperforming loans (NPLs). As of late 2004, approximately 25-30% of Chinese domestic bank loans were not being repaid and the amount of NPLs held by China's banks was believed to be between 25-50% of China's annual economic output, compared with under 10% for Japan.

The Chinese legal system has inherent uncertainties that could limit legal protections available to investors including difficulties in effecting service of the legal process and enforcing judgments against Chinese companies' management.

WHAT THE BULLS SAY

In 2006, industrial output in the January to August period increased at a rate of 17.3% following years of strong growth. China has emerged as the world's manufacturing superpower. As far back as 2003, China produced 35% of the world's cell phones, 40% of color TVs, and more than half (55%) of every computer monitor was made in China. China is making strides to be a global player in advanced technological sectors.

Macro reforms continue and are now the highest priority of China's government. Premier Wen Jiabao has vowed to continue reforms and improve macro controls.

Chinese household wealth continues to rise and in 2003 was valued at 16.9 trillion Yuan or USA $2 trillion. (Contrast to the USA where net savings is now negative.) China's savings rate is equivalent to 50% of GDP.

Along with household saving, China's ample financial resources include foreign exchange reserves close to one trillion dollars (USA $954.5 billion at the end of July 2006).

China is one of the world's leading buyers of raw materials, supplier of manufactured goods, and is an increasingly important contributer to Asian and global economic trade and development.

In the 2004 National People's Congress, Chinese authorities announced a constitutional amendment that "the State respects and protects human rights," and another amendment granting private property and the private sector their strongest legal protection in more than 50 years.

Business and financial strategists consider China in a positive secular long-term trend for investment purposes that is still, however, subject to short-term cycles.

Chinese auto sales reached 5.0 million in 2004, up 11% from the previous year and up 35% from 2002 levels. China's auto fleet is relatively small (about 30 million versus 117 million in USA) but new, therefore most sales are net additions.

In the past two decades China has added total jobs equivalent to the entire USA labor force.

The Chinese government has renewed its commitment to reforms, many of which promote significant economic growth. These reforms include: restructuring of State-Owned Enterprises (SOE) through improved corporate governance, corporatization, and share reform; continued disposal of SOE's non-performing loans; further opening of industries to foreign investment; and agreement by the China Securities Regulatory Commission (CSRC) to allow private and foreign investors to acquire majority stakes in domestically-listed companies.

Experienced China specialists focus on the following long-term investment strategies: growth utilities, resource companies, and selected natural resource, technological, and other companies that supply Chinese markets.

Believers of China's growth potential say the country must focus on increasing domestic demand (consumption) while drawing somewhat less support from externally driven demand (exports) and improving the efficiency of its capital allocation mechanisms (reforming the financial systems).

Industrial Commodities

China has accounted for over half of the growth in global oil demand since 1999. In 2004 China became the world's second-largest consumer of oil (approximately 7 million barrels per day, equivalent to one barrel per person per year.

By 2010 China may consume 47% of the world?s steel, 37% of aluminum and 34% of copper global production, and 18% of the world's paper, and 9% of all eythylene.

Foreign Direct Investment

Annual foreign direct investment (FDI) in china doubled over the past 10 years. In 2005 and 2004, FDI topped USA $60 billion a year. Recently, investment flows into China exceed the combined flows into other Asian emerging market economies. Direct investment from Japan boomed after 1993 and reached almost USA $6 billion by 2004.

Foreign individuals can invest directly in the Chinese stock markets through "B" shares on the Shanghai and Shenzhen stock markets, and via (American) Depository Receipts (ADRs), shares of Chinese companies listed on major international stock exchanges.

USA Direct Foreign Investment in China

From 2001 to 2005 USA direct investment (on a historical cost basis) in China grew from $12 billion to well over $16 billion annually.

American companies have made significant foreign direct investment in China with the top 10 largest investors committing well over USA $10 billion combined. Four American multinationals have made billion plus dollar actual contracted investments in China:

+----------CHINA EQUITY MARKET OVERVIEW----------+

Select Indices

The Halter USX China Index (components: see chart left)

Xinhua Finance indices (Xinhua FTSE, Xinhua Lehman)

Hang Seng China Enterprises Index H Shares (more data coming soon)

MSCI China Index -- (more data coming soon)

The Dow Jones China Indexes

China Market Valuation - Stock Market Capitalization

From 1990 to 2000, mainland China's stock market capitalization went from under a billion (USA) dollars to one of the top ten stock markets in the world.

By 2001, Chinese market capitalization reached over half a trillion dollars and surpassed Hong Kong for the first time. For the next few years Chinese stock market capitalization equalled or was within range of the Hong Kong market.

A bear market brought the combined Shanghai and Shenzhen markets down and by January 2006, China's domestic stock market capitalization stood at approximately $284 billion making it the fourth or fifth (depending on calculations) largest in Asia (ex Japan).

Since that time Chinese markets are once again up and have already exceeded the projections of some economists that China's markets could reach $2 trillion by 2010.

In fact, as of May 2007 the combined market capitalization of China's stock markets total $2.3 trillion, far ahead of Hong Kong ($1.7 trillion) and behind only Japan ($4.7 trillion) in Asia. In global terms, the Chinese markets still rank well behind the USA's combined $16.5 trillion, the UK (London) at $4 trillion, and the EU's Euronext at around $2.9 trillion.

Chinese Treasury Bond Market

Chinese treasury bonds are traded on fixed income exchanges in Shanghai and Shenzhen. The outstanding amount of Chinese treasury bonds has more than doubled over the period 1999 to 2003. By the end of 2005, the outstanding balance of Chinese Treasury bonds was over USA $450 billion.

Chinese Corporate Bond Market

Chinese corporate bonds are traded on fixed income exchanges in Shanghai and Shenzhen. The corporate bond market has increased rapidly in China in just the last few years. In 2004, the outstanding balance of Chinese corporate bonds neared the USA $5 billion.

History (back to top)

Stock and share trading in China dates to the mid Nineteenth Century and probably earlier. By 1891 the first stock market was set up in Shanghai. It became the largest and wealthiest stock market in Asia before it was shut down by the Japanese in 1941.

Stock markets in China today arose again with the economic transformation of the economy that began at the end of the Mao era and with the 1982 Constitution. By that time, Chinese were once again trading shares in enterprises.

Firms in Shanghai began issuing shares around 1984.

A trading counter was established by the Industrial and Commercial Bank of China in 1986.

The need for stock markets was obvious but ideological rationalizations were debated for sometime. Additionally, Hong Kong Chinese helped develop the framework for what would become China's new stock exchange in Shenzhen and the revived trading floor in Shanghai. Both opened in 1990.

National regulatory authority over the securities industry currently comes from the China Securities Regulatory Commission under the State Council.

Authorization comes from China's Securities Law that took effect in mid 1999.

Chinese Equity, Commodities, and Futures Exchanges
(back to top)

In additon to the list of major exchanges above, China also has a nationwide computerized trading system called STAQ, the Securities Trading Automated Quotations system, which is modeled on the U.S. NASDAQ system. The STAQ system is the world's largest in number of outlets.

There is also the National Electronic Trading System (NET) which trades shares owned by state-owned enterprises and Treasury Bonds