Thu, May 01, 2003 - Page 11 News List

Is Warren Buffett betting on China?

INVESTMENT The billionaire is not known as a fan of emerging markets, yet he has increased his stake in PetroChina. Will more institutional investors follow?

By William Pesek  /  BLOOMBERG NEWS , TOKYO

Warren Buffett's search for cheap stocks has brought him to a surprising place -- China.

A month after telling Berkshire Hathaway Inc. shareholders US shares were too expensive, Buf-fett's company upped its stake in PetroChina Co.

It's an intriguing move for a man not known for risky foreign investments. You would think China's dodgy corporate governance, fragile financial system and questions about social stability would keep value investors like Buffett away. China's crisis with the deadly virus causing severe acute respiratory syndrome (SARS) could be another cause for concern.

That hasn't stopped Berkshire Hathaway from boosting its stake in China's largest oil producer to 13.35 percent, making it the No. 3 investor in the company's traded stock.

While Buffett is always reticent to explain his investments, we can surmise two things from the move.

One, some of China's biggest companies are trading cheap. Two, Buffett is gaining confidence in China as a long-term investment.

The 72-year-old billionaire isn't a big fan of emerging-market investments -- unless he's getting a real bargain. One could argue PetroChina is such a stock; as of last week it was trading at 6.3 times its estimated earnings this year. Exxon Mobil Corp. and BP Plc were both trading at 17 times estimated earnings.

The biggest question is whether Buffett is right to view Chinese companies, or China in general, as a good long-term investment.

While the answer is many years away, the significance of Buffett's PetroChina stake shouldn't be lost. It will sway other investors to follow suit.

That could be a huge plus for China's economy, and investors in it.

Buffett's buying and selling decisions often attract a piggyback dynamic, whereby peers do what he does. That may not have been the case in the late 1990s, when Buffett was dismissed as a dinosaur for not riding the dot-com boom. Now that he's been vindicated by the subsequent meltdown in technology shares, China could see other big investors come its way.

Buffett has a huge following in Asia. Here, he is to stock punters what Hong Kong billionaire Li Ka-shing (李嘉誠) is to entrepreneurs: a role model. Buffett's interest in China already is garnering lots of attention. PetroChina's shares on Monday enjoyed their biggest one-day gain since July 3.

China may be the world's hottest destination for foreign direct investors, but institutional ones have kept clear. Last December, China opened its US$500 billion stock market to overseas institutional investors. They haven't exactly broken down the doors to get in amid worries about corporate governance and regulatory issues.

By endorsing the Beijing-based PetroChina, which produces two-thirds of the country's oil and sells 80 percent of its natural gas, Buffett may spur interest in rivals such as CNOOC Ltd and China Petroleum & Chemical Corp as well as other China stocks.

Investors like Brook McConnell, president of South Ocean Management Ltd, which manages about US$10 million, mainly in Hong Kong-listed companies, have taken note.

He says he's now "scrambling to do more research" on PetroChina and other Chinese companies.

Could Buffett be signaling a turning point in sentiment toward China? Perhaps.

While foreign investors are wary of China in the best of times, its efforts to hide its SARS epidemic caused a global backlash and spooked markets.

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