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Problems with scientific research

Great article.



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Sinking of the Lexington – Battle of the Coral Sea

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Solar jobs

This is reported by CNBC, with data provided by The Solar Foundation.  So obviously an interested party making this claim.  However, it’s great news:

Solar jobs in America increased at an “historic” pace in 2016 on “unprecedented” consumer demand as the cost of solar panels declined, according to The Solar Foundation’s National Solar Jobs Census 2016.

The report – now in its seventh edition – found that the solar industry accounted for two percent of all jobs created in the U.S. over the past year, with solar jobs increasing in 44 of the 50 states.

As of November 2016, 260,077 solar workers were employed by the industry, “representing a growth rate of 24.5 percent since November 2015.” Over the 12 month period, the solar industry was responsible for more than one in every 50 new jobs created in the U.S.

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Investing in China

Any emerging markets or global markets investment strategy must, by definition, include an allocation to China.  Investing in China is not simple or straightforward. Here are some facts to help you determine how much exposure is appropriate, what kind of investments are available in indexed products, and other ways to find the investments you want.

Difficulties begin in understanding the availability of Chinese equity.  Here’s a snapshot of share classes available, where they trade, and in what currency:

Share Type Where traded Currency Notes Market Cap (USD, 12/31/17)
A-shares Mainland China (Shanghai and Shenzhen) Renminbi (Chinese Yuan) Ownership by foreigners still somewhat limited 5,089,631.28 (Shanghai)

3,621,635.94 (Schenzhen)

B-shares Mainland China (Shanghai and Shenzhen) US Dollars or HK Dollars   Included in data for A-shares
H-shares Hong Kong Exchange HK Dollars Often correspond directly to A Shares 865,144.86***
Red Chips Hong Kong Exchange HK Dollars State owned companies 732,986.54***
P-chips Hong Kong Exchange HK Dollars Non-state owned companies Included with H-shares and Red chips
S-chips Singapore Singapore Dollars   *
N-shares USA US Dollars    
ADRs USA US Dollars ADRs of H-shares and red chips are often called N-shares **
  Taiwan Taiwan Dollars   10,717.81

*Total Singapore exchange market cap was 787,255 as of 12/31/17 per WFE. 153 of 707 listings on the Singapore Exchange are Chinese companies, S-chips.,

**There are currently 93 Chinese ADRs trading on US exchanges and 202 Chinese ADRs trading OTC in the US, according to

***According to the Hong Kong Stock Exchange, approximately 30% of the total market cap in the exchange is comprised of Chinese companies via H-shares, red chips, and P-chips:{3A4BB661-6EB1-469E-AFBA-1E5664DDCE8D}

A, B, and H Shares consist of companies that are primarily Chinese and are incorporated in China. The other share types are incorporated in foreign countries, although the businesses exist within mainland China. Another complication is that many companies are traded using more than one of the share classes listed above. Additionally, Taiwan is in some respects considered a part of China, but economically, it is a separate state, and is a developed market.

What kind of indexed products are available? A variety of funds and ETFs follow indices tracking China. They are very different from one another based on the share types they hold. Here are a few examples, using some of the largest ETFs:

Symbol Benchmark Share types held Top Sector
FXI FTSE China 50 Index H-shares, Red Chips, P-chips Financial Services
MCHI MSCI China H-shares and B-shares Technology
GXC S&P China BMI All shares except A-shares and B-shares Technology

FTSE provides a guide on their website showing exactly what share types each index includes. MSCI also includes some of this information on their website regarding share types. S&P Dow Jones Indices details the geography and markets included rather than share types. All of the index providers have a variety of indices holding a variety of combinations of the above share types.

Active mutual funds are also an option. An advantage of active funds in this space is their ability to select the best available share type(s) for each company, instead of investing in each share type by market cap.

How do you know how much Chinese equity exposure you really have? The major indexing companies all assign a stock to a domicile based on factors other than the home exchange it is traded in. From S&P Indices:

A large number of companies based in China are incorporated and/or listed and traded in other places such as Hong Kong, Singapore, Bermuda (incorporation) or the U.S. (listings) because the Chinese equity markets are not completely open to global investors. These companies have been, and will continue to be, considered Chinese.

FTSE reclassified N-shares and S-chips to China as of September 2017.

Morningstar reports also correctly classify these companies as being Chinese and EM, not the country where traded and/or DM. This means that whether your equity is an ADR purchased in the US or an A-share purchased in China or a Red Chip purchased in Hong Kong, your Morningstar report will correctly show you that it is a Chinese equity.

How much Chinese equity should you own? The table above shows us that A-shares traded inside China were valued at roughly $8.7T at the end of 2017, with over $2T more traded in other markets. Compare that to total global market cap of $85.3T, and you might assume that a weighting of approximately 13% for a global cap weighted portfolio might be appropriate. If you include GDP or PPP weightings as a factor, you would end up with an even larger share allocated to China.

However, global indices do not reflect this allocation. MSCI ACWI All Cap Index includes over 14,000 individual constituents. It shows a 6% allocation to Asia Emerging via Morningstar, which includes not only China but also other Asian emerging markets. S&P Dow Jones publishes their Global BMI Index, which includes over 11,000 stocks and allocates 3.7% to China. The FTSE Global All-Cap Index, with 7,400 stocks, includes just over 3% exposure to China.

Part of the reason for this lower-than-justified allocation is difficulties investing inside China. A-shares have gradually become more available to investors who are not Chinese. S&P Indices reviews possible inclusion of A-shares in their indices annually. Thus far, they have declined to add them at full market cap. In June 2018, MSCI will begin to include a portion of A-shares in its indices.

Related to the MSCI change, another reason for the low allocation to China in EM and all-world indices is that making changes to indices is problematic for everyone who uses them, even though changes are certainly required at times.

Investors and investment professionals who use an index as a benchmark will see any sudden changes in constituents of the index reflected in sudden changes to risk and return. MSCI estimated last year that if they included A-shares proportionally in their Emerging Markets index, the country weight for China would go from 28% to 40%. Their current plan only moves the needle a little – from 28% to 29.3%.

Changes to an index will result in market impacts, as funds that replicate the index buy and sell to match the changes. As an example, go look up what happened when Pakistan, UAE, and Qatar were moved from Frontier Market classification to Emerging Market by MSCI over the last few years. Their markets immediately jumped to new, higher levels, and stayed there, due to the additional buying by EM funds.

In addition, there’s a lot of debate about whether A-shares are a “good investment.” The arguments against investing in A-shares include the fact that many of the newly available equities are state owned enterprises and the apparent mis-pricing of stocks sold in more than one exchange. Maybe you aren’t ready to make this change.

What’s the bottom line?

  • To match actual China market cap, additional exposure to Chinese equity is likely required in any index-based portfolio. Many available indices simply do not reflect current markets.
  • Because the index providers are slowly playing catch-up, it’s vital to monitor and adjust exposure periodically.
  • Look beyond the Morningstar report – understand the share classes represented in any indices and funds chosen and verify that they match your intent.


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China tidbits

From the New York Times.

This article is discussing goings-on at Davos, January 2018.


At one end of town, President Michel Temer of Brazil welcomed an unexpected offer from Beijing for Latin American nations to work closely with a Chinese initiative, known as the Belt and Road, intended to spread its economic and diplomatic influence abroad.

At the other end of town, a senior Chinese diplomat helped introduce the prime minister of Pakistan at a breakfast meeting. Prime Minister Shahid Khaqan Abbasi used his talk to praise the rapidly expanding Chinese investments in his country, including to build power stations and a large port.

“The China One Belt, One Road is going to be the new W.T.O. — like it or not,” said Joe Kaeser, chief executive of Siemens, the German industrial giant, referring to the World Trade Organization.

On Friday, the Chinese government used a policy document issued in Beijing to call for a “Polar Silk Road” that would link China to Europe and the Atlantic via a shipping route past the melting Arctic ice cap.

These are very important developments internationally.

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Global Financial Assets

IIF reported on 1/4/18 that global debt (total financial FI assets) reached $230T.  Of that, according to The Economist, about $58T is government debt.

According to World Federation of Exchanges, global equity market cap for the end of December was $80T.

According to Yardeni Research, major central bank balance sheets are around $20T.

We know that the central banks own government debt, other debt, and equities.  This means that central banks now own approximately 6.5% of outstanding financial assets.

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Cullen Roche

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