(PUB) Investing 2015

Morningstar FundInvestor

August 2015

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.

So, does that mean that soon these stocks may

resume trading? Have they communicated what the

criteria are for returning to trading?

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

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?

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.

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.

That’s right. The Chinese have deliberately limited

foreign exposure significantly. Foreigners own less

than

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.

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.

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

. The median

forward P/E in Hong Kong, however, where there is

more foreign participation or institutional participa-

tion, was only

. That’s why, before the correction,

the median forward P/E of all of Matthews Asia’s

China equities holdings was

, which coincidentally

was about the median forward P/E of the S

P at

that time.