Aaron Boesky, chief executive and former portfolio manager for the Rosenberg family office, made several presentations with Humphris in Australia last month. He described the vagaries and opportunities in what was now the biggest share market in Asia. “The Chinese like to deal,” Boesky said. “The turnover in the (‘A’ shares) market is about 60 per cent retail, but the ownership is about 70 per cent institutional. So, it’s a retail market on a daily basis.” Total market cap was just over US$4.5 trillion but the total QFII allocation was estimated at only $20 billion spread among 95 foreign institutions and remained very difficult to get.
An estimated paltry $30 million was currently unused. “It’s less than half a per cent of the market,” Boesky said. “That means that China is actually an homogenous market, it’s 99 per cent Chinese, who are predominantly male and city dwellers. It’s like it’s just one guy.” As it turned out, this guy was quite smart. He sold near the top in 2007 and got back into the market around the bottom in October 2008. “It amps up the volatility because it’s so homogenous,” Boesky said. China had the worst-performing stock market in the world in 2008, despite having the best-performing economy. Because of the volatility, Marco Polo put a lot of emphasis on its risk management systems: “People in less volatile markets don’t think about risk as much as we do,” Boesky said.
“They’re not swimming with sharks.” Another quirk of the Chinese market was the big share – about 60 per cent – taken by state-owned or related enterprises. Even though the definition of state-owned was sometimes grey, they accounted for only 30-odd per cent of the country’s GDP and were heavily concentrated in a few industries such as financials and energy. Boesky said investors should not be too wary of these stocks, though. They could produce as good a risk/return profile as others. When a state-owned enterprise was called on to do “community service” they were always well-rewarded, he said. For instance, the banks had been called on to tighten or relax lending from time to time and had been effectively re-capitalised by the Chinese government on three occasions in the past 15 years when non-performing loans were just written off.