Investors seek China exposure, from afar

By Muralikumar Anantharaman

NEW YORK (Reuters) - China's local stock markets are booming but many fund mangers prefer to invest in them by way of U.S. and Hong Kong markets due to concerns about the integrity of mainland-listed firms' financial statements.

Peter Siris, managing director of hedge fund group Guerrilla Capital Management, said he gets his China exposure by buying the rising number of small Chinese firms that are going public in the United States.

"Investors say 'I can participate in China and buy U.S. listed stocks that are GAAP reporting'," Siris told the Reuters Investment Outlook 2007 Summit in New York this week.

About 700 such small Chinese firms are currently listed in the United States and about 10 new firms arrive every week seeking to list, said Siris, who bought China Security & Surveillance Technology Inc. CSCT.OB, a provider of security and surveillance systems, in the second half of 2006 and has already seen its value triple.

"You would have looked at a company growing triple digits, selling at that point for three times earnings," he said.

Guerrilla is launching a China-focused hedge fund in January to tap such opportunities and has already lined up 15 more Chinese companies for investments.

China's main Shanghai Composite Index .SSEC hit an all-time high of 2,249.11 points on Thursday, bringing its rise this year to 94 percent. It trades at 24.4 times trailing earnings, among the most expensive in the world.

The rallying share prices have brought firms knocking on China's doors. UK fund manager Schroders (SDR.L: Quote, Profile, Research, Stock Buzz) said this week it was keen to access programs allowing it to invest in China's domestic markets and allowing Chinese investors to put money to work abroad.

China's Qualified Foreign Institutional Investor (QFII) program allows international investors to buy into its domestic equity and debt markets. Beijing has granted QFII quotas totaling $8.65 billion to more than 40 foreign companies since it launched the scheme in 2003.

But for Reiner Triltsch, head of international investments at the United States Trust Co., China's markets are "wild and woolly" and the best route to the mainland's shares is through their listings in Hong Kong, which trades at just 13.8 times trailing earnings.

Triltsch said many of the firms listed in the mainland faced issues of questionable accounting and there were also issues of oversight of these firms. "I'm not willing to lock myself up in that market," he said.