Asian Economic Development Model–China

Socialism with Chinese characteristics–i.e., capitalism

Sometime in the late Seventies, the Politburo of the People’s Republic of China, led by Deng Xiaoping, decided that central planning had to be abandoned as the tool shaping the economic progress of their country.  Deng concluded that it should be replaced by the Asian Economic Development Model.  Why?

The Politburo felt it had no other economic choice.  Despite the negative effects of the Great Leap Forward and the subsequent Cultural Revolution, China had become too big and complex for central planning to be effective (if it ever was, even in a small and simple economy).  The Politburo also saw the gradual deterioration of the Soviet Union and didn’t want to follow in its footsteps.  In contrast, the examples of Japan, Korea, Singapore and Hong Kong all showed that the Development Model worked. Continue reading

Convertibles

What they are…

Convertibles are in a lot of ways vintage Wall Street.  They are securities that can be converted into, or exchanged for, something else.  Anything more than that is a function of the imagination of the issuers and the willingness to buy of potential holders.

Convertibles can be debt or preferred equity.  They usually convert into common stock of the issuer, but there have been instances where they convert into common shares of another company, or into something else..  To keep things simple, I’m going to assume in what follows that the convertible is exchangeable into common stock of the issuer.  I’ll say something about the unusual case of other kinds of conversion at the end. Continue reading

Preferred Stock

What it is…

Preferred stock, sometimes called preference stock, is a type of equity (ownership interest) in a company.  Holders of preferred stock have at least one extra feature, sometimes called a “preference,” that holders of common stock don’t have.  As a practical matter, however, unless the preferreds are convertible into common, US investors regard preferred stock as fixed income (debt), not equity.  (This ignores the fact that preferreds are perpetual securities (they have no ending date), unlike virtually all fixed income, where the borrower is required to return the principal to the lender after a specified period of time.) Continue reading

Do stock splits mean anything?

The short answer:  in the US, no; elsewhere, probably.

What a stock split is

In a stock split, a company issues new shares to existing shareholders, in proportion to their pre-split holdings.  In a two-for-one split, for example, each holder of one share receives one new share, so that he then holds two.  His ownership interest in the company is unchanged, however.  The value of his share total remains unchanged, as well.  In the case we are talking about, on the day the stock begins trading ex the split, it typically opens at roughly half the price of the pre-split stock.  (A stock dividend is basically the same as a split, although the terminology and the bookkeeping may be a little different.) Continue reading

ETFs vs Mutual Funds (II) index funds

Two starting comments

Why are there so many different index products, under the S&P, FT, Dow Jones, MSCI…brands, that do basically the same thing?  Index-tracking is a commodity product.  Given a certain level of technical competence in design, to make sure that the returns are in line with the appropriate index, one product is basically the same as another.  Having slightly different benchmarks with slightly different constituents, requiring slightly different holdings in the ETF/mutual fund, raises the costs for an institutional investor to switch from one provider to another.  So it takes the edge off what would otherwise be brutal price competition.

Does an S&P 500 index product have 500 stocks in it?  Maybe, maybe not.  The ETF/fund prospectus will say for sure, but all that’s usually required is that the product have a basket of stocks in it that tracks the appropriate index with a high degree of accuracy.  It’s much easier to handle inflows and outflows if you don’t have to deal with the most illiquid stocks in the index.

The ETF/fund websites should have charts or other information about “tracking error.” i.e. how closely the index product mimics its index. Continue reading

Asian Economic Development Model–Hong Kong

What’s unusual about Hong Kong’s decision to peg its currency to the US dollar in 1983 is that this was a political decision, rather than an economic one.  So Hong Kong’s subsequent development is both economically and politically influenced.

Background

In 1839 and again in 1856, Great Britain invaded China to force Beijing not to ban the trade in opium,  which Britain supplied from India and which was a key factor in its economic health.

At the end of the First Opium War, Britain also compelled China to give up Hong Kong Island; at the end of the Second Opium War, China was forced to give up Kowloon, a narrow strip of the mainland directly opposite Hong Kong Island, as well.  In 1898, Britain obtained a 99-year lease on the New Territories, a tract about 10x the size of Hong Kong Island, consisting of land surrounding Kowloon and a number of adjacent islands, including Lantau Island (where today’s Hong Kong airport and Disneyland stand).  These three areas comprised the Crown Colony of Hong Kong. Continue reading