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What’s So Great About China?

What country is basically carrying the world economy, both as a resource vacuum and with its growing middle class? China. Which country outside of the US fixed income investor is the largest financier of the US? China…again. When it comes to investing, few people are bearish about China. It’s fast replacing the US as the engine of growth worldwide. It’s 1.4 billion people can turn something as unglam and ordinary as a touristy Taiwenese pineapple cake into an item so hot that Taiwan barely has enough pineapples to keep China visitors buying. In short, China is to the world economy what Oprah Winfrey is to book sellers.

Sure there are China naysayers out there. Their argument is that China banks are riddled with bad loans from real estate projects gone sour, and nobody truly knows how bad it is because China is not transparent.  China’s had this problem before with its big four government owned banks and basically did what the US government did by creating an entity to buy up all that bad debt in order to keep the big four’s books squeeky clean. How bad is the real estate and credit bubble in China? Agnes Deng, the portfolio manager at the closed-end Greater China Fund (GCH) run by Baring Asset Management Asia Ltd. in Hong Kong says China’s non-performing loans are actually quite low.  The banking crisis that the bears are forecasting will take China down from its pedastal may never prove valid.

“From where we sit here in Hong Kong, I personally don’t believe there is a credit or asset bubble in China,” Deng told Forbes recently.

“A lot of money has been going into construction and that kind of debt is heavy in the overall banking system. But it is reasonably OK. In terms of property, we don’t believe there is any national bubble for the property sector. We do see it in the first tier cities like Beijing and Shanghai, but notice that the overall demand and economic growth in China has been quite steady over the last many years and that growth will continue to carry out the momentum we have seen in the last two to five years. So we will eventually adjust to some of the oversupply in construction projects in the pipeline,” she says. “I wouldn’t bet on a housing developers crash or a broadbased asset bubble in China. The leadership in Beijing should be able to solve this issue.”

China’s central government has been forcing a slowdown of the national economy. Inflation remains high, mostly due to consumer demand, a stronger currency, higher incomes, and imported inflation from commodities. However, the government has taken a special interest in reducing demand for residential construction and existing properties.

If the government is successful at keeping inflation in check, then China’s growth might not be in the double digits, but investors expect it to remain well above 7%.  Housing will trend higher, but grow below inflation levels of 5.5%.  A gradual appreciation of the currency, the yuan, and higher incomes is making Chinese consumers richer. It’s a homogenous society, so if one Chinese person likes Twinkletoes shoes, then a million more are sure to like it, too, says Deng.

Her $443 million fund is overweight real estate, but underweight financials compared to the benchmark Russell Greater China index. She holds China Construction Bank — their biggest holding currently — and the Industrial and Commerical Bank of China, both state owned. Even though banks are an underweight for the fund, Deng thinks China banks are solid assets for long term investors.

China Construction Bank’s loan to deposit ratio is less than 80%, so it is not leveraged at all, she says. For banks, if you have 10 dollars and lend out 75 cents, you’re conservative. If they have 10 dollars and lend out 100, they’re Goldman Sachs.

The People’s Bank of China has been requiring banks to keep 20% of their reserves in central bank reserves as a guarantee. China’soverall non-performing loans (NPL) is below 2%, even though the market is thinking the numbers are higher because some government development projects have gone sour.  “If you include those projects since the financial crisis of 2008, then the NPL ratio is still going to be below 5%,” she says, cheerleading for China’s financials. “As an aggregate amount, five percent is quite big. Computed with the overall loan book that the China Construction Bank or Chinese banking overall has, then it is really quite small. China’s banking regulators have done a good job getting the financials to deleverage quickly after 2008.”

Deng’s take on China has paid off. The Greater China Fund’s sales growth percentage as of March 31, 2011 was 10% compared to a sell-off in the China fund category averages of 22%. Deng’s fund’s long term earnings percentage is 20.3% compared with 16.3% for the Russell Greater China index and 15.9% for the category average.

Year-to-date, the Greater China Fund has outperformed the iShares FTSE Xinhua China 25 (FXI). Both are down on the year thanks to their real estate and banking positions, but the FTSE China is down 1.7% as of July 31, 2011 and GCH is down 1.1%. Over the last 12 months, GCH has clobbered the FTSE China, up 11.4% to the iShares’ gain of 2.7%. Deng’s fund has even outperformed the Matthews China Fund (MCHFX), up 8.7% and another closed-end competitor from Boston, the China Fund (CHN), which is up 6.3% YTD. Since the fund launched in the early 1990s, its beat its benchmark. It’s up 9.1% as of June 30, 2011, while the benchmark Russell Greater China is down 0.5%.

Besides real estate, the fund is also overweight telecom and technology. On the telecom side, Deng likes China Unicom (CHU) because it is the only wireless mobile provider that uses the iPhone and iPad, and Apple (AAPL) dominates China’s tablet market.

“China Unicom sells iPhones and iPads and that’s a big plus for that stock. China Mobile, China Unicom and China Telecom all use different technology, so Apple is just China Unicom,” she says. “China Mobile is 3G and uses a home grown technology that the overall big brand names do not use. China Mobile ends up losing market share because of that and China Unicom gains market share. We still like China Mobile because it trades at a discount, but China Unicom is more of a growth story and that is the main reason why investors invest in China…for growth.”

On the tech side, it’s SINA Corporation (SINA) all the way. Sina’s an internet and social networking powerhouse that runs the weibo platform, a China microblog that has more users nationwide than Twitter has worldwide.

“China’s internet penetration is still low. There is a long way to grow. Many China internet stocks have been quite expensive, like Tencent Holdings a few years ago it was around $2 to $3 and now its around $140. Baidu (BIDU) has always been expensive, but they just keep reporting amazing earnings with upside and that has them trading at fifty times p/e because they are growing phenomonally.”

Not too long ago, the Chinese government, in its attempt to lend a fig leaf to its offshore political rival, Taiwan, allowed for Chinese nationals to travel to the island. Politically, the permission slip is like Washington letting Americans travel to Cuba and bring back cigars. While Chinese aren’t returning from Taiwan with cigars, they are returning with Taiwan’s signaturepineapple cakes. As a result, says Deng, Pineapple cake sales are up 40% year over year because of China demand. China’s growing relationship with Taiwan is also good for Taipei listed companies.

What’s so great about China is basically what’s been great about China for the last 10 years. When 1% of the population earns enough to buy an automobile and trades in a bicycle for a Buick, it makes China General Motors’ biggest market; it drives the fundamentals behind oil futures over $100 on average in the years ahead. When the same amount are eating more, it drives the price of soybeans as much as the weather and keeps farmers from Iowa to Parana, Brazil with a reliable customer.

The International Monetary Fund expects China to grow around 9.1% in 2011.

 

 

Kenneth Rapoza, Contributor

Covering Brazil, Russia, India & China.

 

http://www.forbes.com/sites/kenrapoza/2011/07/31/whats-so-great-about-china/2/

 

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China Picks From The World’s Largest Money Managers

U.S. listed Chinese equities, as represented by the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) have been in a downturn since April, off by 40% peak-to-nadir, dragged down by weakening fundamentals in the developed economies of the U.S. and Europe, and slowing growth in China. Recently, however, since the beginning of October, most Chinese stocks have staged a strong 25% rebound off of the lows at the end of September. While the short- to intermediate-term outlook is uncertain, the long-term outlook for China and most emerging economies continues to be bullish. As such, we believe that a well diversified portfolio focused on the long-term ought to have some weighting among Chinese equities.

In this article, via an analysis of the investing activities of the world largest fund managers, managing between $100 billion and over a trillion dollars, in China stocks, we aim to wade through the minefield of over 200 Chinese equities, and identify the ones that these mega fund managers are most bullish and bearish about. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

We determined based on our analysis that mega fund managers are bullish on the Chinese companies. During the June quarter, these mega fund managers together added a net $1.39 billion to their $21.06 billion prior quarter position in the group, selling $2.44 billion and buying $3.83 million worth of stocks in the group. While Chinese solar companies were included to determine the overall tone of mega fund managers toward the China group, we excluded describing the investing activities of these mega managers in Chinese solar companies, since they were covered separately in another article that focused on the investing activities of these mega fund managers in the solar sector.

The following are the major (non-solar) China companies that these mega fund managers are most bullish about (see Table):

  • Baidu Inc. (BIDU): Often touted as the Google (GOOG) of China, BIDU is a leading Chinese provider of internet search, targeted online advertising and other internet content services. Mega funds added a net $157 million to their $1.04 billion prior quarter position, and taken together mega funds hold 23.5% of the outstanding shares. The top buyer was T Rowe Price ($324 million), and the top mega fund holders are T Rowe Price ($2.53 billion) and Fidelity Investments ($1.56 billion). Overall, 517 institutions hold 70.7% of BIDU shares, with Baillie Gifford & Co ($3.61 billion) and T Rowe Price being the largest holders with 9.2% and 6.8% of the outstanding shares respectively. We recommended buying BIDU in our coverage of Chinese equities on October 3rd when it traded at $105, identifying it as the best opportunity among Chinese equities; it is now up 35% from that price in the last four weeks.
  • Sina Corp. (SINA): SINA is a Chinese internet portal offering media content and services for China and global Chinese communities. Mega funds added a net $305 million to their $1.46 billion prior quarter position, and taken together mega funds hold 32.3% of the outstanding shares. The top buyers were Capital Research Global Investors ($282 million) and Goldman Sachs Asset Management ($95 million), and the top holders were T Rowe Price ($503 million) and Capital Research Global Investors ($317 million). Overall, 250 institutions hold 72.6% of SINA shares, with T Rowe Price and FIL Ltd. ($364 million) being the largest holders with 7.8% and 6.3% of the outstanding shares respectively. We recommended selling SINA in our coverage of Chinese equities on September 26th when it traded just north of $82; it closed Monday at $81.29 while the average Chinese stock is up 10% during that same period.
  • Youku.com Inc. (YOKU): YOKU, China’s largest video-streaming company, is more popularly known as the YouTube of China. But in reality, it is more a combination of Netflix and YouTube; Netflix, because it offers mostly professionally-generated content licensed from movie studios and TV companies, and YouTube due to its reliance on advertising as a main source of revenue. Mega funds added a net $240 million to their $147 million prior quarter position, and taken together mega funds hold 23.6% of the outstanding shares. The top buyers were Janus Capital Management ($74 million) and T Rowe Price ($65 million). Overall, 134 institutions hold 66.4% of YOKU shares, with Brookside Capital Management ($290 million), Maverick Capital ($201 million) and Marisco Capital Management ($189 million) being the largest holders with 12.1%, 8.4% and 7.9% of the outstanding shares respectively. We turned bearish on YOKU in our coverage on August 15th when it traded at $26; it closed Monday at $21.24 while the average Chinese stock is down about 5% during that same period.
  • Renren Inc. (RENN): RENN, often called the Facebook of China, is a Chinese operator of a social networking platform that enables users to communicate and share information via Renren.com. Mega funds taken together added a new $192 million position during the June quarter, and taken together mega funds hold 10.4% of the outstanding shares. The top buyers were Morgan Stanley ($65 million), Goldman Sachs Asset Management ($48 million) and Fidelity Investments ($46 million). Overall, 73 institutions hold 12.7% of YOKU shares, with General Atlantic LLC ($95 million) and Morgan Stanley being the largest holders with 1.8% and 1.2% of the outstanding shares respectively. We recommended buying RENN in our coverage of Chinese equities on October 3rd when it traded at $4.80s; it closed Monday at $7.04, up 45% from where we recommended it four weeks ago.
  • Focus Media Holdings Ltd. (FMCN): FMCN operates the largest out-of-the-home digital advertising network in China through 131,006 flat-panel and 324,364 poster frame displays. Mega funds added a net $169 million to their $542 million prior quarter position, and taken together mega funds hold 17.9% of the outstanding shares. The top buyers were Fidelity Investments ($155 million) and Capital World Investors ($45 million). Overall, 200 institutions hold 56.6% of FMCN shares, with Fidelity Investments ($274 million) being the largest holder with 7.3% of the outstanding shares. We recommended buying FMCN in our coverage of big movers on October 5th when it traded in the $20 range; it closed Monday at $27.18, up over 35% from where we recommended it four weeks ago.

The following are the major (non-solar) China companies that these mega fund managers are most bearish about (see Table):

  • Sohu.com Inc. (SOHU): SOHU is the third largest internet portal and a leading brand in China. It offers Chinese language web navigational and search capabilities, twelve main content channels, Web-based communications and community services, and a platform for e-commerce services. Mega funds cut a net $139 million from their $714 million prior quarter position, and taken together mega funds hold 24.5% of the outstanding shares. The top sellers were Oppenheimer Funds ($120 million) and Vanguard Group Inc. ($94 million). Overall, 213 institutions hold 65.8% of SOHU shares, with Orbis Holdings Ltd. ($468 million) and Morgan Stanley ($227 million) being the largest holders with 17.7% and 8.6% of the outstanding shares respectively. We recommended buying SOHU in our coverageof Chinese equities on October 3rd when it traded at $47, identifying it as a screaming buy, especially in relation to its peer SINA; it is now up 30% from that price in the last four weeks.
  • E-commerce China Dangdang (DANG): DANG is a Chinese online retailer offering books and other media, personal care and general merchandise via Dangdang.com. Often called the Amazon (AMZN) of China, DANG is the number two e-Commerce player in China, behind TaoBao. Its business model is similar to AMZN except that it employs a courier-based delivery system that collects cash on delivery. Mega funds cut a net $26 million from their $52 million prior quarter position, and taken together mega funds hold 4.6% of the outstanding shares. The top sellers were Fidelity Investments ($16 million) and Wellington Capital Management ($8 million). Overall, 85 institutions hold 12.5% of DANG shares, with Morgan Stanley ($13 million) being the largest holders with 2.3% of the outstanding shares. We recommended buying DANG in our coverage of Chinese equities on October 3rd when it traded at $4.80s; it closed Monday at $6.97, up over 45% from where we recommended it four weeks ago.
  • Chanyou.com Ltd. (CYOU): CYOU is a Chinese provider of free-to-play massively multi-player online role-playing games (MMORPGs), which are interactive online games that can be played simultaneously by various game players. Mega funds cut a net $24 million from their $83 million prior quarter position, and taken together mega funds hold 4.3% of the outstanding shares. The top sellers were Oppenheimer Funds ($9 million) and Barclays Global Investors ($6 million). Overall, 78 institutions hold 14.0% of CYOU shares, with HSBC Holdings ($38 million) being the largest holder with 6.5% of the outstanding shares.
  • Harbin Electric Inc. (HRBN): HRBN is a Chinese manufacturer of electric motors, including industrial rotary, linear, and specialty motors. Mega funds cut a net $25 million from their $56 million prior quarter position, and taken together mega funds hold 4.2% of the outstanding shares. The top sellers were Vanguard Group ($17 million) and Bank of New York Mellon Corp. ($7 million). Overall, 106 institutions hold 35.4% of HRBN shares, with Pentwater Capital Management ($49 million) being the largest holder with 6.9% of the outstanding shares.

(Click chart to expand)

General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Can Stevia Cash-in BIG as a Healthier Alternative to Sugar? STEV, IPSU, GLGL, SUWN & TATE : Blog

Can Stevia Cash-in BIG as a Healthier Alternative to Sugar? STEV, IPSU, GLGL, SUWN & TATE : Blog.

If you are looking for more exposure to agricultural commodities, sugar and sweetener stocks Imperial Sugar Company (NASDAQ: IPSU)GLG Life Tech (NASDAQ: GLGL),Sunwin International Neutraceuticals (OTC: SUWN)Tate & Lyle PLC (LON: TATE;TATYY) and Stevia Corp. (OTC: STEV) could all help to sweeten up your portfolio with profits. For starters, the huge clamor for corn, soybeans, wheat and just about every agricultural crop in general has been a huge boon to the agricultural industry. In fact, the Wall Street Journal has recently reported that the US Department of Agriculture is projecting total cash receipts, or income for agriculture will jump 9% this year to a record $341 billion. However, its also important to remember that not all agricultural commodities or crops, especially when it comes to sweeteners, are the same or have the same potential to deliver huge growth and profits as consumers are becoming more health conscious.

For example: USA Today pointed out last year that there is a heated debate going on over the health risks associated with consuming too much sugar, high-fructose corn syrup (HFCS) and other similar types of sweeteners. On one side of the debate are groups representing the sugar and high-fructose corn syrup (HFCS) industries who say their products are natural and do not cause weight gain or other health problems while on the other side of the debate are health and public interest groups who argue that these products come with health risks and need to be regulated more.

Whichever side comes out a winner in this debate over sweeteners will have major repercussions for the food and beverage industry and agricultural producers alike as Americans eat and drink an average of 22.2 teaspoons (or 355 calories) of sugar a day.

What is Stevia?

One lesser known agricultural crop that is an alternative to sugar and high-fructose corn syrup (HFCS) is Stevia. In case you are not familiar with Stevia, its actually 240 species of plants that are native to South America, Central America and Mexico (plus several species can be found in Arizona, New Mexico and Texas) that has long been used as a folk medicine by natives of these regions.

What makes Stevia attractive for farmers and food processors seeking a sweetener is the fact that its extract has up to 300 times the sweetness of sugar. Moreover, Stevia has also attracted attention due to higher demand for low-carbohydrate and low-sugar food alternatives. Since Stevia has a negligible effect on blood glucose, it also makes a great natural sweetener for those who are on carbohydrate-controlled diets.

Today, Japan consumes more Stevia than any other country in the world and accounts for 40% of the Stevia market. In fact, the Japanese have been using stevia for table use, food products and soft drinks (including in Coca-Cola).

Otherwise and in 2008, the US Food and Drug Administration approved Stevia extract Reb-A for use in the USA and in less than a year, Stevia’s US sales surpassed sales figures for saccharine and aspartame. Today, Stevia can be found in over 6,000 products ranging from beverages to foods to medicines and its increasingly heading towards mass commoditization like sugar and high fructose corn syrup (HFCS). Sales of Stevia sweetened products also topped $2 billion in 2011.

On the production side, China is now the largest producer of Stevia in the world followed by other Asian or South American countries. The Stevia plant itself is a perennial but its growing cycle can vary greatly depending on the type of Stevia and the growing location plus the plant is also sensitive to frost. Hence and in China, its common to only have one or two Stevia harvests but closer to the equator, its possible to harvest Stevia year round.

Who Produces Sugar, Stevia and Other Sweeteners?

For investors looking to sweeten their portfolio with Stevia along with sugar or other types of sweeteners, the following companies trade publicly:

  • Imperial Sugar Company (NASDAQ: IPSU). A processor and marketer of refined sugar and other sweeteners in the North American Free Trade Agreement (NAFTA) region, the Imperial Sugar Company had missed its last quarterly earnings estimate because it could not pass on raw material increases to its customers. In fact, Imperial Sugar Company’s stock then lost three-fourth’s of its value – despite the fact that it should otherwise be considered a safe and defensive food stock. On Friday, Imperial Sugar Company rose 6.32% to $7.07 (IPSU has a 52 week trading range of $5.75 to $25.68 a share).
  • GLG Life Tech (NASDAQ: GLGL). A Chinese integrated producer of Stevia extract, GLG Life Tech had issued a press release in early October that discussed operational obstacles that have negatively impacted the company’s business. A few days later, a short seller issued a detailed blog post outlining on-the-ground due diligence that concluded that the stock will not be staging a rebound. Nevertheless, GLG Life Tech and other Chinese Stevia producers face a bigger problem: When it comes to sweeteners, the Chinese do not care about calorie content as much as Americans do. However and on Friday, GLG Life Tech rose 7.69% to $1.96 (GLGL has a 52 week trading range of $1.34 to $12.45 a share).
  • Sunwin International Neutraceuticals (OTC: SUWN). Another Chinese company that is involved in selling Stevia based products as well as herbs used in traditional Chinese medicines is Sunwin International Neutraceuticals. However and while Sunwin International Neutraceuticals has not faced the same types of allegations as GLG Life Tech, its still a Chinese stock and would face the same problems with Chinese consumers as GLGL. On Friday, Sunwin International Neutraceuticals rose 9.18% to $0.345 (SUWN has a 52 week trading range of $0.21 to $0.40 a share).
  • Tate & Lyle PLC (LON: TATETATYY). With its headquarters on Sugar Quay Lower Thames Street, Tate & Lyle PLC has two operating divisions: Speciality Food Ingredients (SFI) and Bulk Ingredients (BI). In 2010, Tate & Lyle PLC sold its iconic sugar business to American Sugar Refining but the company kept Splenda – its sucralose zero-calorie sweetener. On Friday and on the London Stock Exchange, Tate & Lyle PLC loss 0.67% to £644.65 (TATE has a 52 week trading range of £608 to £683 a share), putting it out of reach of most investors but on the OTC, TATYY rose 5.35% to $41.35 (TATYY has a 52 week trading range of $31.16 to $43.25 a share).

What is Stevia Corp. (OTC: STEV)?

Stevia Corp. is a Farm Management company focused on Stevia agronomics that ranges from Stevia plant breeding to agricultural practices to post harvest techniques. Stevia Corp’s headquarters is in the USA while its R&D operations are in the USA, Singapore, Vietnam and Indonesia. Stevia Corp’s farm operations are located in Vietnam and Indonesia while farming operations in the USA are still in the planning stages.

Stevia Corp is the only company that delivers a full spectrum of agricultural consulting and related solutions for Stevia growers. Specifically, Stevia Corp. invests heavily in R&D and IP acquisition as well as manages its own propagation, nursery and plantations plus the company provides services to contract Stevia growers and other industry growers.

For now, Stevia Corp. has a supply contract in place with PureCircle, the Stevia industry’s leading refiner, to purchase Stevia at a fixed price. This contract greatly enhances Stevia Corp’s ability to plan for the long-term.

Moreover and once Stevia Corp. is able to produce enough Stevia to support an extraction facility, it may begin negotiations with PureCircle or another major refiner to form a joint venture to build and operate an extraction facility near where Stevia is grown. Stevia Corp. is also considering private labeling its own Stevia products in order to build up its own brand.

On Friday, Stevia Corp. rose 3.09% to $1 and has a 52 week trading range of $0.01 to $1.60 a share.

The Bottom Line About Stevia Corp.

Of course, there is always a risk that scientists will find some type of health risk associated with Stevia. Nevertheless and with Americans eating and drinking an average of 22.2 teaspoons of sugar a day, sugar and sweetener stocks Stevia Corp. (OTC: STEV), Imperial Sugar Company (NASDAQ: IPSU), GLG Life Tech (NASDAQ: GLGL), Sunwin International Neutraceuticals (OTC: SUWN) and Tate & Lyle PLC (LON: TATE; TATYY) will probably never run out of customers for their products.

China Stocks Cheapest ‘I’ve Ever Seen’: Index Pioneer

Chinese stocks are extremely undervalued and U.S. investors should heavily increase their exposure to benefit from the emerging market’s long-term growth, says Burton Malkiel, author of the financial classic “A Random Walk Down Wall Street.”

The economist was referring to a slide showing several valuation metrics—from the price-to-earnings and price-to-book ratio—for the AlphaShares family of China indexes he created.“These are the most attractive multiples I’ve ever seen,” said Malkiel, 79, who pioneered the indexing investment philosophy, at a speech Wednesday for Guggenheim Funds at the New York Stock Exchange.

Malkiel helped forward the efficient market hypothesis—that prices of stocks immediately reflect all public information—with his 1974 classic now in its 10th edition. The professor of economics at Princeton argues that this hypothesis means investors are better off buying and holding a large basket of stocks through indexing, rather than relying on active fund management. He turned his sights to China about eight years ago.

As one would expect, Malkiel made clear that he wasn’t making a market timing call to buy China immediately, but rather saying that investors will be forced to increase their exposure to the world’s most populous nation over time as its economy transitions to more domestically focused and its currency begins to rival the dollar.

Right now, a typical institution holds just a 1.7 percent exposure to China, according to Malkiel, based on an average 10 percent exposure to emerging markets and China’s 17 percent chunk of the emerging markets pie.

Their overall exposure “should be at least 9 percent to better match China’s contribution to global GDP,” said Malkiel. “And that’s conservative. It really should be 12 percent.”

The economist, who is also chief investment officer at indexing firm AlphaShares, said the best way to capitalize on his China investment thesis is through Renminbi bonds or Chinese equities.

China’s stocks exploded higher this week after the government signaled there may be an end to monetary tightening. A European bailout plan on the table also soothed fears of slowing exports.

“These buildings may not be standing in five or 10 years,” said Jim Chanos, president of Kynikos Associates, in September. “You’re talking about an economic system where profits are not maximized for the largest economic actors. You’re talking about a history of horrible lending. You’re talking about a system in which the export-driven model hasn’t been changed by Western demand.”To be sure, not everyone is as enthusiastic as Malkiel. Detractors point to a build out in infrastructure to the center and West of the country that is taking place before a migration in the population. Not to mention rampant corruption and accounting practices.

But Malkiel, who remarked, “Chanos is just talking his book” at the speech, believes China is fostering faster growth by building the infrastructure ahead of the population migration and business growth. Behind his bullish thesis is the belief that domestic consumption will one day account for as much as 50 percent of the country’s GDP.

Sticking to his broad exposure roots, Malkiel has developed several indexes at AlphaShares that hold many more stocks than other Chinese indexes, which tend to be heavily weighted toward a few companies in the energy and finance sector.

Guggenheim, which sponsored his talk, offers exchange-traded funds that track the Malkiel indexes.

They include the Guggenheim China All-Cap [YAO  24.3699    -0.1701  (-0.69%)   ]China Small Cap [HAO  22.42    0.08  (+0.36%)   ] and the China Technology[CQQQ  24.69    -0.289  (-1.16%)   ].

What’s more, the firm has ETFs that give the regular investor direct exposure to Chinese bonds via the Yuan Bond [RMB  24.86  —  UNCH    ] and a direct hit on Malkiel’s currency appreciation thesis through the Chinese Renminbi Trust[FXCH  79.15  —  UNCH    ].

“Some people think the Yuan [CNY=X  6.357    -0.002  (-0.03%)   ] is as much as 20 percent undervalued,” said Jeff Kilburg, a trader with Treasury Curve who attended the speech. “If Malkiel is right and China continues to allow it to appreciate at least 5 percent a year, that will attract more and more investors. And the country’s bond market is in its infancy right now.”

Given the U.S. budget deficit and growing debt load, Malkiel believes that China’s currency could eventual rival the dollar. They desperately want the benefits that the U.S. has with being the world’s reserve currency and being able to print your way out of most problems.

“They dislike that immensely,” said Malkiel. “They call it ‘the exorbitant privilege.’”

By: John Melloy
Executive Producer, Fast Money & Strategy Session

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team. Click here to see his full bio.

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