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Video Transcript

Investing in China: Why the Media Has it Wrong 


ED LOPEZ: Thank you for joining us this afternoon. This is Van Eck's conference call "Investing in China: Why the Media Has It Wrong." I'm Ed Lopez, Marketing Director for Market Vectors ETFs here at Van Eck. Today, we will be covering trends in market reforms, the current economic landscape, and the local fixed income market.


Why China? Why now? China is an area that Van Eck has long had an interest in and Van Eck has been a pioneer in providing investors with access to China. In 2010, under the Market Vectors ETF label we launched the first U.S.-listed ETF to provide exposure to the local A-share market, ticker symbol PEK. Last year, we introduced the SME ChiNext ETF, ticker symbol CNXT, which provides exposure to A-share equities that primarily focuses on non-state-owned or privately held companies that many consider to be part of China's new economy. Late last year we were also the first to introduce the first U.S.-listed China Bond ETF, ticker symbol CBON. It provides exposure to the large and growing onshore bond market. The fixed income area in particular is where we will concentrate our efforts today.


With that, I will turn it over to Mr. van Eck.


JAN VAN ECK: Why do we think the media has it all wrong, or why do I think the media has it all wrong? I think the subtext for a lot of media stories about China is that there is some big risk that is so big it is what I call systemic risk. And whether that is because growth is slowing, or there is too much debt, or there is a real estate bubble, or there has been overcapacity in one industry or another, there seems to be, and certainly we talk to a lot of investors who have this fear and it really was priced into the market six months ago, a major systemic risk in China and the financial system could collapse. I'm just going to talk about two reforms because the Chinese policy makers absolutely do not want the existence of a systemic risk because their dream is to have a China that does not go through a boom/bust cycle, but rather can deal with its reforms in an orderly manner and have good employment – in fact, they do have a good employment situation in the country today.


Let me just set the stage for one of the concerns, which is the big growth in shadow banking. The background for that is twofold. First, as the world economy stopped in 2009, China probably had the biggest stimulus program and threw a ton of money at projects. In short, if there was a project on a bureaucrat’s desk it got approved and funded. Second, the reformers wanted to provide credit to the private sector and the banks that existed were simply not doing that. They basically said to the market: “OK, go crazy and lend to whomever you can, lend to companies that need credit." That was what was called the "Wealth Management Products." It's basically privately placed loans raised from institutional and wealthy investors for local government projects, companies, and a whole range of different things, which increased debt levels. For the last several years, especially in the last 12 months, policy makers have been addressing it through the various reforms. I could talk about the reforms for hours, but I'm just going to address two.


The first reform to address is that of local government debt. Local governments are very subservient to the central government for funding and had to use a lot of unconventional ways to get funds. One was selling property that was in the cities, and another was getting bank loans through companies that they owned and they borrowed money from, off budget. About a year ago, the central government said, “alright, no more shadow loans. You can't raise any more money that way. I'm going to approve the creation of a municipal bond market." They basically said, "look, if you can't pay your debts, we're going to go to the companies that are owned by your local government, go after their profits, their capital, and then sell the assets or sell the company if we have to." So there was transparency in terms of the assets that they would go to if there were credit problems with this local government debt. There has been about ten major municipal issues all trading at the same or similar credit rating as the central government, but radical reforms. All of that debt has to appear on the books of the local government now. So there's transparency there, which mitigates some of the concerns over debt.


In the financial sector there are basically four legs of financial reform. Number one, the out of control gray market, the private debt, the wealth management products that have been increasingly regulated whereas a bank that's involved in that or other institution has to either very explicitly guarantee the debt or not. Either that's on the bank's books or the investor has to beware. There was a trial balloon, semi-default restructuring last year to clarify the message that the policy makers had towards that market. Secondly, they've removed restrictions on commercial bank lending. There are no restrictions on the lending rate and there are no restrictions on deposit rates beyond five years. Thirdly, there has been the emergence of a bond market that serves corporates. And fourth, they reinvigorated the equity markets. They allowed IPOs again and there were 120 IPOs in mainland China last year. They're looking at issuing preferred stock and in reforming their de-listing systems. That’s the two major reforms: local government and the whole financial sector.



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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speakers and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com or by calling 800.826.2333.


Market Vectors ChinaAMC A-Share ETF (Ticker: PEK) is subject to elevated risks associated with investments in securities of Chinese securities, including A-Shares, which include risk of the RQFII regime and Stock Connect program, adviser and sub-adviser risk, political and economic instability, inflation, confiscatory taxation, nationalization, and expropriation, market volatility, less reliable financial information, differences in accounting, auditing, and financial standards and requirements from those applicable to U.S. issuers, and uncertainty of implementation of existing Chinese law. In addition, the Fund is also subject to liquidity and valuation risks, currency risk, non-diversification risk, and other risks associated with foreign and emerging markets investments. The Fund’s assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.


CSI 300 Index and its logo are service marks of China Securities Index Co., Ltd. (“CSI”) and have been licensed for use by Van Eck Associates Corporation. The Market Vectors ChinaAMC A-Share ETF is not sponsored, endorsed, sold or promoted by CSI and CSI makes no representation regarding the advisability of investing in the Market Vectors ChinaAMC A-Share ETF.


Market Vectors ChinaAMC SME-ChiNext ETF (Ticker: CNXT) is subject to risks which include, among others, those associated with investments in Chinese securities, particularly A-Shares, adviser and sub-adviser risk, risk of the RQFII regime, political and economic instability, inflation, confiscatory taxation, nationalization, expropriation, and market volatility, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small and medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.


Market Vectors ChinaAMC China Bond ETF (Ticker CBON) may be subject to risk which include, among others, credit risk, interest rate risk, sovereign and quasi-sovereign defaults, adviser and sub-adviser risk, and risk of the RQFII regime, all of which may adversely affect the Fund. Investments in mainland China may be subject to local customs, duties and rights of ownership, which might change at any time should policy makers deem them in China's best interest. As the Fund invests in securities denominated in Chinese Renminbi, changes in currency exchange rates may negatively impact the Fund's return. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. The Fund's assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.


Through the Renminbi Qualified Foreign Institutional Investor (RQFII) program or Qualified Foreign Institutional Investor (QFII) licenses, RMB Bonds are made available to certain foreign investors. The RQFII approves a specific aggregate dollar amount in which the RQFII or QFII can invest in RMB Bonds. The size of the Fund’s direct investment in RMB Bonds will be limited by the size of the RQFII quota, and should this quota be depleted, there is no guarantee more will be granted.


China Bond China High Quality Bond Index is compiled and calculated by China Central Depository & Clearing Co., Ltd. All copyright in the China Bond China High Quality Bond Index values and constituent list vests in China Central Depository & Clearing Co., Ltd.


Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. Bonds and bond funds will decrease in value as interest rates rise. Please read the prospectus and summary prospectus carefully before investing. 


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