TAIPEI - While the prospect of a
trade war between China and Japan over the
latter's move to buy the disputed Senkaku/Diaoyu
Islands excited analysts - without being quite
sure who the winner would be - holders of Chinese
shares with even the remotest connection to
China's People's Liberation Army (PLA) are
laughing up their sleeves.
Chinese
shipbuilding and defense share jumped on September
11, the day Japan decided to purchase the islands
from its private owners.
China-defense-mashup, a blog run by
military-enthusiasts, is one outfit that keeps a
firm eye on the Shanghai and Shenzhen A shares. On
September 11 the overall index tumbled 0.67%, but
the bloggers, evaluating the category of shares of
companies that
produce about anything
that keeps the PLA going, took note of a
relatively impressive 1.78% rise.
While
China's policymakers face sleepless nights from
the prospect of conflict, the myriad Chinese
enterprises that supply the PLA are enjoying
handsome gains.
"Conflict is good for the
defense sector," said Ronald A Edwards, an expert
on China's political economy and professor at
Tamkang University in Taipei. "For such companies,
as in many countries, there are no 'bad foreign
engagements'." These companies make money when
their sales go up, and the motivation behind their
products' use is "irrelevant from an accountant's
point of view".
It is arguably true for
all countries with a developed military-industrial
complex that defense-related stocks offer distinct
and attractive characteristics to investors. An
important one of which is counter-cyclicality,
meaning that while the fortunes of most economic
sectors rise and fall with the commercial business
cycle, defense stocks do particularly well in
times external negative factors, such as
diplomatic tensions, make all others suffer.
There also is the weighty plus of
political protection, as sales by and large depend
on the state, which, to make matters even more
promising, tends to make them relatively
insensitive to price increases. China's defense
stocks are also benefiting from the PLA's
spectacular recent modernization, helped by a
budget that will officially top US$100 billion
this year but is believed to actually be much
higher
There is also the country's
somewhat precarious strategic position: China is
embroiled in a handful of unresolved territorial
maritime and land issues, and whenever tensions
flare up because one of them, related developments
are set to leave their a mark on Shanghai and
Shenzhen A shares.
For example,
shipbuilding and defense stocks rose in June 2011,
when Vietnam held live-fire exercises in the South
China Sea. The received a similar boost around the
same time when news broke on China's construction
of aircraft carriers that could possibly be
intended for patrolling disputed waters, and also
earlier this year, during a high-profile stand-off
with the Philippines around the Scarborough Shoal.
Earlier, in October 2010, the launch of
China's unmanned lunar probe Chang'e 2, which came
along with weighty military implications, was
accompanied by sharp rises of defense stocks at a
time when all other indexes turned downward.
Similar gains were made on the death of North
Korean leader Kim Jong-il.
But while
China's geopolitical troubles can make timely
investing in the country's defense shares a
comfortable activity, there are significant
obstacles to making easy money from the PLA. The
most obvious is that the A shares on the Shanghai
and Shenzhen exchanges are denominated in yuan and
are closed to foreign investors with the exception
of a very few select foreign institutions.
Professor Edwards holds that those
restrictions alone are hardly an overwhelming
turn-off to the determined foreign investor.
"Everything in China is in the grey area until the
spotlight gets turned on, which is rare," he said.
"As long as someone does not draw undue attention
to themselves, there is likely a way around it."
The bigger issue could be the relevant
shares' identification. Many of the recent
Senkaku/Diaoyu dispute winners at Shanghai and
Shenzhen are plainly obvious, such as China
Shipbuilding Industry Corporation (CSIC), which is
among the country's two largest shipbuilding
conglomerates and whose shares rose more than 6%
on September 11. China Aerospace Science and
Technology Corporation (CASC), the main contractor
for the Chinese space program, Zhongyuan Special
Steel and Fushun Special Steel are also readily
identified - shares in the last two rose by their
daily limit of 10% that day.
Spotting
others takes more imagination. Changchun Yidong
Clutch Co, which is listed as a manufacturer of
automobile clutches for cars, buses and farm
vehicles, rose on September 11, also bucking the
general downward trend, as did Zhongbing
photoelectric, which officially deals in computer
embroidery machines. Yaxing Anchor Chain, the
proud maker of, well, anchor chains, was among
those that reached its daily limit that day.
According to Professor Edwards, given
China's increased military spending and the
prominent role of military leaders in policy,
there is a tighter link between the defense sector
and the state than in Western countries as well as
Japan and Korea. This can make the who-is-who
somewhat blurry.
"I doubt anyone really is
that clear how many private and other state
companies are linked up with the PLA, since many
of these relationships and transactions are not
made in a fully transparent way," he said.
Jens Kastner is a Taipei-based
journalist.
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