|AlphaShares Indexes||December 2010||2010||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||-0.91%||8.62%||8.62%||-4.04%|
|AlphaShares China Small-Cap Index (NYSE HAO)||-2.14%||16.23%||16.23%||2.28%|
|AlphaShares China Real Estate Index (NYSE: TAO)||2.33%||10.68%||10.68%||-4.23%|
|FTSE/Xinhua China 25 Index||-0.59%||1.96%||1.96%||-7.30%|
|CSI 300 (A-Shares)||-1.25%||-10.76%||-10.76%||-13.84%|
Robust November macroeconomic indicators continue to imply the Chinese economy's solid upturn is gaining momentum. November CPI inflation also accelerated and surprised to the upside with a 28-month high of 5.1%. On the monetary front, the People's Bank of China (PBoC) hiked rates 25 bps to 2.75% on December 25th and increased bank reserve requirement ratios (RRR) on December 10th in an attempt to manage inflation expectations and prevent overheating risks. The central government has raised the RRR for banks six consecutive times and increased its interest rate twice this year, as it shifts from a "moderately loose" to a "prudent" monetary policy in order to absorb the excess liquidity in the market and to help support healthy economic development.
The AlphaShares Chinese Volatility Index (CHIX), closed 2010 at 19.69, down -18.70% on the year, while experiencing a tremendously bumpy ride - trading as high as 38.19 on May 25th and as low as 18.70 on September 6th. One of the reasons the CHIX was able to finish the year below the 20 level is the marketplace's newfound confidence in how China has matured into a financial system that understands how to work its levers in a thoughtful and market-sensitive way that carefully seeks to smooth its growth as opposed to letting it run amuck unsupervised.
In addition, the government remains dedicated to rebalance its economy from being one dependent on exports to one that can also depend on internal domestic consumer demand. In June, the central bank reinstated its "loose peg" policy of the Yuan, which appreciated 0.91% in December and is up 3.33% against the US dollar this year. An appreciating currency can help the government stave off inflationary pressures, as well as boost the buying power of the Chinese consumer. It may also serve as a token of goodwill ahead of the Premier Wen Jiabao's scheduled visit to the White House on January 19th, as the US continues to clamor for further appreciation as its trade deficit with China has risen by 20% in the first 10 months in 2010.
The AlphaShares China All-Cap Index (ACNACTR) slipped -0.91% in December to end the 2010 calendar year up 8.62%. Small cap stocks underperformed their larger sized counterparts in during the month as the AlphaShares Small-Cap index (ACNSC) decreased -2.14% versus the FTSE China 25 Index -0.59%. On the year however, smaller capitalized stocks outgained their larger peers climbing 16.23% versus 1.96% in 2010. Also, the rumored Chinese "real estate bubble" continued its defiance, increasing 2.33% in December and gained 10.68% on the year.
CNOOC (883 HK) was the largest positive contributor to December returns, up 8.13% this month to bring its YTD return to 50.77%. At the end of the year, China's largest offshore oil and gas producer withdrew a plan to bid for a stake in Brazil's OGX Petroleo SA in order to avoid competition with Petrochemical Corp (857 HK) - whose shares added 4.23% in December.
Brilliance China Automotive Holdings (1114 HK) was the best performing Chinese stock in 2010, gaining over 170%. The company has a joint venture with German luxury automaker BMW AG and expanded from 150 to 200 dealerships in 2010. The venture plans to add 50 more in 2011 that will mostly be set up in Chinese 2nd and 3rd-tier cities. The China Banking Regulatory Commission also approved the formation of BMW Automotive Finance (China) Company to begin a vehicle-leasing program to help boost its presence in the world's largest auto market.
Shares of Baidu (BIDU US), operator of China's largest Internet search engine, dropped -8.23% in December, but still finished as China's second largest gainer in 2010 - climbing 134.73% for the year. The company's shares soared after its main competitor, Google, said it would shut its China search page after a serious hacking episode and on censorship concerns. The "Google Effect" - an increase in traffic resulting from disruption in the US Company's Chinese operations earlier this year - boosted business and allowed Baidu to capture over 72% of the local search engine market. Meanwhile, Google has slipped to third place with less than 25% market share as it shut down its mainland search service and directed local users to its Hong Kong site in order to avoid regulations for websites to self-censor content.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|