Professor Malkiel recently held an online question-and-answer session with users of FT.com, our parent website. The link to the full transcript is at the foot of the page, but here are some of the highlights.
■ On A-shares: "One anomaly that illustrates the inefficiency of the A-share market is that when some companies trade both in the Shanghai A-share market and in the Hong Kong in the H-share market or New York in the N-share market, the prices in Hong Kong and New York tend to be the same, but the prices of the same shares typically trade at premiums between 50 and 100 percent in the A-share market...The market is essentially restricted to Chinese nationals living on the mainland. Local Chinese institutions do take advantage of unsophisticated investors and that is why managed funds in China tend to outperform the market indices." [A-shares trade on the Shanghai and Shenzhen stock markets].
■ On corporate governance: "There is no question that transparency of Chinese accounting standards, standards of corporate governance, etc., are problematic. However, shares traded in Hong Kong and in other international capital markets must conform to international accounting standards and Hong Kong listed companies have somewhat better corporate governance. Even so, buying Chinese stocks is risky."
■ On the likelihood of a Chinese stock market crash: "The Chinese stock market is one of the most volatile in the world...A major correction is not only possible, but likely in any three year period. The Chinese government can take some actions to mitigate the volatility...But I do not believe that the government can prevent market corrections."
■ On China's pegged currency: "I believe the Chinese Yuan (RMB) is the most undervalued currency in the world today...I believe the Yuan will continue to appreciate against other currencies. The Chinese government is not letting the Yuan float freely, but it has allowed an annual appreciation during the past two years of more than 5 percent against the US dollar. I believe there will be upward pressure on the Yuan for many years to come and I believe that the undervaluation of the currency is one of the many reasons why investors should have some exposure to Chinese equities."
■ On China funds and ETFs: "I do not find that managed funds investing in H and N shares do better than some of the indexed ETFs. I therefore favor low cost ETFs that give investors a Chinese exposure. Such ETFs include: FXI, an index fund that tracks the FTSE/Xinhua large-capitalization index; GXC, an ETF of H and N shares; TAO, an ETF of Chinese property development companies; and HAO, an ETF of Chinese small capitalization companies. It is also the case that recently some closed in China funds have been selling at substantial discounts. If a fund such as the Templeton Dragon Fund is selling at a 20 percent discount, this would be a useful way of accessing a portfolio of H-shares."
■ On Aim-quoted China plays: "I do believe that an indirect strategy of purchasing non-Chinese companies that benefit from China’s growth is a useful low risk strategy for investors. These companies could be small entrepreneurial companies or even large international firms...Recently, all markets have been under stress and have tended to move together. In the long-run however, I believe investors will be rewarded by having some direct and indirect exposure to the growth of China."
