(PUB) Investing 2015

August 2015

Morningstar FundInvestor

15

when there were some losses over the last few weeks. It’s unfortunate and it’s disappointing, but it’s not really surprising. The government has manipulated markets and intervened like this pretty often in the past. I think it was unnecessary. They did get pretty panicked, but things have at least stabilized now. RK So, does that mean that soon these stocks may resume trading? Have they communicated what the criteria are for returning to trading? AR Almost half of the companies listed on the main domestic board, the A-share market, suspended themselves. Remember, these weren’t suspended by the regulator; it was the companies asking to be suspended to halt trading. Obviously, this was done simply because they were worried that their share price was going to go down rather than for any more- substantive reasons. But within the last few days, more than a third of the companies that suspended themselves have unsuspended themselves and are back trading again. So, I think the process is moving back toward normal. The damage isn’t going to be all that severe with regard to investors, but it does illustrate that this is still a market that’s in its very early days—think the U.S. markets before the creation of the SEC in the 1930 s. RK Another interesting aspect to me is that large owners of Chinese companies have been told not to sell their shares. That makes me wonder whether the price-discovery mechanism of the market is really working when big sellers are not there. If I buy in today, am I at risk of getting an inflated price? AR Well, it’s interesting because the majority of shares in the A-share domestic market are held by large-scale investors—often the corporations themselves or some institutions that are connected to the government. But 80% of the turnover in that domestic market is from small-scale retail investors. That’s where you’ve had these waves of changes in sentiment. The government is trying to put a floor under it with the institutions now. We don’t know

yet, but my assumption is that the government advice, requests, or orders to the large-scale investors not to sell are probably coming off, given that the market has stabilized in the last few days. RK And if I buy today—though, in a way, that’s not really even possible when you’re talking about A-shares because those are largely limited to Chinese investors. So, let’s take a step back and say, for U.S. investors and for Matthews funds, which have a number of funds focused on Asia, what does this mean? I assume these effects are more secondary than direct. AR That’s right. The Chinese have deliberately limited foreign exposure significantly. Foreigners own less than 3% of the market, so hardly any Americans are in there. American exposure to China is primarily through the Hong Kong-listed shares, and that’s the same for us. Matthews Asia is the largest Asia- only investment manager in the United States. We have more than $30 billion under management [in the United States]—about 30% of that is in Chinese equities and almost all of that is not in the domestic A-share market that has had these roller-coaster rides. RK So, looking at the investment universe that you face, which is largely not the A-shares, do these stocks look attractive? Obviously, the drama in the Hong Kong shares has not been as wild as the A-shares. AR That’s right. It’s been a lot less wild. For example, if we go back about a month ago before the correc- tion in the A-share market, the median forward P/E in the A-share market was about 54 . The median forward P/E in Hong Kong, however, where there is more foreign participation or institutional participa- tion, was only 14 . That’s why, before the correction, the median forward P/E of all of Matthews Asia’s China equities holdings was 17 , which coincidentally was about the median forward P/E of the S & P at that time. K