China is one of the final great economic frontiers. Its
oxymoronic mixture of communism and state-sanctionedcapitalism has
created a colossal economic engine that had been, until recently,
on a sharp upward trajectory. But I don't think the growth story is
over. In fact, thanks to recent reform, I think things are about to
pick up and provide investors with a second opportunity toprofit
from Chinese equities.
It was 34 years ago when Deng Xiapong started opening China to
the world. Since then, the Chineseeconomy has grown an average of
10% per year, becoming the second-largest on Earth in 2009, only
behind the United States.
Today, China is the world's largest exporter and the second
largest importer with the most substantial foreign exchange
reserves. So it's not hard to understand why investors everywhere
watch that economy attentively. Problem is, this dramatic growth
has recently slowed.
Fearful of an out-of-control economy, the Chinese government
exercised its heavy-handed powers with a series of steps designed
to squelch that rapid growth. This resulted in an economic slowdown
during the last seven quarters.
But now that China has a new Communist Party leader -- Xi
Jinling, whowill be the face of the country for the next 10 years
-- the tide is likely to change for the Chinese economy. Jinling
has already stated that China will stick to policies designed to
sustain long-term economic development and double its gross
domestic product in the next decade.
Even the old leadership has realized the economic slowdown has
gone too far. During the past year, the country has been working on
the right mix of policy and free-market dynamics to stop the drift
lower. Indeed, slashing interest rates twice in 2012, lowering bank
reserve ratios three times since 2011 and applyingmultiple
liquidity injections appear to be turning the tide.
The Chinese Purchasing ManagersIndex just moved above 50 for the
first time since October 2011. Readings above 50 on this
closely-followed index indicate economic expansion and below 50 are
reflective of contraction. In addition, year-over-year industrial
company profits surged more than 20% in October. This is a huge
increase when compared to September's 7.8% gain.
What's truly a sure sign of pending explosive Chinese growth is
that country's effort to formalize private lending, which would put
money into themarket in a more controlled manner. The country is
already taking action to implement a set of financial reforms to
end the underground lending and shady financial transactions that
happen throughout the main Chinese cities.
All of these recent events have caused overall valuations of
Chinese equities to bounce from all-time lows, creating the perfect
time to enter the market. About $3 billion worth of cash flowed
into Chinese exchange-traded funds (
ETFs
) during the month of October alone, one of the highest inflows in
three-years.
If you want to get a piece of this burgeoning market, then here
are two ETFs that fit the bill...
1. iShares MSCI Hong Kong IndexETF (
EWH
)
This is a cap-weighted ETF that is primarily invested in banks,
utilities and property companies. The ETF's price has been climbing
steadily higher since mid June with resistance hit in the $19 area.
Looking at the daily chart, a clear double top has formed in the
$19 range, creating substantial technical resistance.
My trading strategy for this ETF would be to wait for a breakout
close above $20 prior to entering long. I would not be surprised to
see this ETF at $27 before the end of 2013.
2. Matthews Dragon Century China Fund (
MCHFX
)
Boasting what may be the coolest moniker ever for an ETF, this
greater China ETF has a 40% exposure to Hong Kong firms, an
8%investment in Taiwanese companies and the remainder in Hong
Kong-listed Chinese companies. The underlying assets lean toward
mid-cap firms, with financial and state-owned companies
underrepresented in the mix. The ETF's price has been climbing
higher since the end of July but has just started a pullback,
creating a value-zone buying opportunity. I like this ETF at the
current level with stops at $22.25 and a $28 18-month target
level.
Risks to Consider:
Despite the appearance of aturnaround in China's economy, the
nation still faces substantial headwinds. The slowdown in Europe
and the looming U.S. fiscal cliff can have a profound effect on
China due to the interconnectivity of the economies. In addition,
it's critical to keep in mind that the economic numbers from the
Chinese government may not always be accurate and rather released
for public relation/political purposes. Always be sure to use stops
and position size properly when investing.
Action to Take -->
After many years of outstanding growth, China's recent economic
slip made many investors scared. But the country is about to begin
another phase of incredible expansion, thanks to its new leadership
and market-friendly financial reform. As such, I like both of these
ETFs as long-term holdings. The EWH is best purchased on a break
out close above $20. The MCHFX is presently in the value "buy"
zone.