Jim O'Neill, Chairman of Goldman Sachs Asset Management and the
legend behind the BRIC acronym (Brazil, Russia, India and
China), made headlines this week proclaiming the time to get
back into China investments is now.
[caption id="attachment_74207" align="alignright" width="300"
caption="Nanjing Pedestrian Mall at People's Sqaure, Shanghai"]
If you haven't gotten out of your China investments yet you may
not want to, but if you did, hopefully you're holding cash which
you can deploy.
Some of O'Neill's optimism stems from recent reports. He
referred to the following statistics and observations to justify
- M2 money supply growth accelerated to 14.8% in September
which resulted in the Chinese Financial Conditions Index (FCI)
easing, a positive sign for future growth.
- The trade balance came in at a high $27.7 billion, with
stronger than expected exports at 9.9%.
- In the nine months to September, the trade surplus came in at
about $150 billion, or about 2.5% of GDP. This is a quarter of
its levels pre-2008.
- CPI inflation rose by 1.9% year-on-year in September,
significantly less than the People's Bank Of China's 4% target
- A 3.6% decline in PPI "suggests that near-term future
inflation is not a risk. Inflation will probably ease further
which, amongst other things, will continue to boost real Chinese
- GDP for Q3 rose 7.4% year-on-year in line with expectations.
O'Neill noted some statisticians identified quarterly momentum
higher than expected at 2.2%. For the first nine months of 2012
Chinese GDP has risen 7.7%. According to O'Neill "Premier Wen
said it looks as though China will easily meet their 7.5%
'target' for 2012. In fact, they will probably exceed it
slightly. Not bad, eh?"
- Industrial production rose from 8.9% to a better than
- Retail sales also rose more than expected by 14.2%.
O'Neill commented that Chinese GDP growth for 2012 will probably
come in at either 7.7% or 7.8%. He says his team assumes 7.1%
growth for the full decade. O'Neill cites "a trade surplus a
quarter below its peak, stabilized housing prices, consumption
rising as a share of GDP, and inflation below target" to conclude
that "the situation looks good".
From a technical perspective, and assuming he is correct, this
may be a good time for China investments. Let's look at two ETFs.
First is FXI, the iShares FTSE/Xinhua China 25 Index (
The above chart contrasts FXI (the green channel) with the SPDR
S&P 500 Index Fund (
). It doesn't require a technical analyst to recognize the great
disparity between the performance of Chinese stocks with US stocks
the past few years. If our friend O'Neill is correct then we should
see FXI play a little more catch-up, if not reverse the disparity
in the favor of Chinese stocks.
The next chart is of the Claymore/AlphaShares China Small Cap
The charts are quite similar upon first glance until the numbers
are considered. HAO is still down more than 30% from its 2010 peak.
FXI, is down less than 20% over the same time period.
If O'Neill is right, today is a great time for China
investments. If he's wrong, it is still likely to be a wise choice
to get back into China. The path back to above-average growth can
be debated, but the inevitability of China's growing influence
economically is less easily disputed. Long term investors should
get long China. There may be some more big bumps ahead, but the
pay-off will come sooner or later.