The Ignorant Investor

The Wall Street Journal has an article today that notes American investor's enthusiasm for new stock issued by the Bank of China. In the past year, two other Chinese banks have gone public, and their shares have soared. So naturally when people get a shot at owning shares in the biggest bank in China, they go a little crazy. China is growing, they think. It's hot. And the Bank of China is right in the middle of the hottest economy on the globe. It's risky, sure. But how bad can the risk be?

For me, it's a matter of restating the term "Bank of China" into more specific, descriptive terms. When I see Bank of China, what I hear is: "Largely state owned bank, run by chinese communist, that is part of web of local financial institutions with notoriously lax lending standards, fraud, cronyism, and poor risk management in a country that has no disinterested regulatory body like the SEC or FDIC." Now what about that sounds attractive to anyone who doesn't have the risk appetite of a Vegas gambler or cliff divers in Brazil?

Thinking of it that way makes it a lot easier for me to give it a pass. Banks and corporations in this country are shifty enough even with all our regulations and government oversight. I can't imagine what it's like to be around quasi-capitalists in an institution that is essentially subject to no rules but it's own. If I really wanted to invest in China, I'd pick some kind of index fund/ETF like iShares FTSE/Xinhua China 25 index fund, which tracks 25 of the largest, most liquid companies in China. Or, probably a more conservative choice, a managed mutual fund like Fidelity's China Region Fund. The managed fund will cost more in expenses (1.16% of assets per year, according to the Journal), but active management may add a level of local knowledge that adds value in what are to me utterly unfamiliar markets.

Note that investing in these markets is not for the faint of heart. After a strong run up, there's a good argument that they're fully valued and not worth the risk of the high volatility they've displayed in the past. For instance, today the Associated Press reported:

HONG KONG (AP) -- China's benchmark stock index marked its biggest one-day drop in more than four years on Wednesday as investors sold shares to gather cash for upcoming IPOs, while other Asian markets continued slides fueled by worries that higher U.S. interest rates might slow global growth. . . China's benchmark Shanghai Composite Index dropped 5.33 percent to 1,589.55, the index's biggest daily fall since Jan. 28, 2002, when it fell 6.33 percent. The Shenzhen Composite Index fell 5.79 percent to 405.88.

Swings of this magnitude tend to play havoc with the emotions of our inner worrier. I'm giving China a pass right now, though I may come back to the issue later.