The economic news coming out of China has shifted direction over the last couple of months. Earlier this year, slowing Chinese growth and a big bursting bubble there were favorite themes of the perma-bears. You know the ones; the talking heads who have been telling us since 2010 that disaster is just around the corner, that we should all have been buying gold at $1700 and Treasuries at a 1.75% yield on the 10 year. The message never changes, only the reason. It makes you wonder what dark secrets they have that cause such a negative outlook on the world.
Anyway, the point here is not to complain about pundits; I am one after all. The fact is that, following a slight wobble, it would appear that the remarkable story of China’s embrace of capitalism (or, more accurately, some aspects of it) is back on track. An article in today’s China Daily quotes a leading economist as maintaining that the economy there will reach the 7.5% target growth rate, while keeping inflation under 3% and avoiding a sudden collapse or “hard landing”. Of course, having pooh-poohed the views of the perma-bears here it would be naïve of me to place too much faith in the outpourings of a Government paid economist in a country where divergence from the official line can be dangerous to one’s career.
There is, however, other evidence on which to base a belief that growth is back on track in China. June PMI ticked back up again, registering a reading over 50 for the 10th straight month and the stock market seems to have found a bottom after a wobbly year. Next week’s CPI number will give some indication of whether renewed growth is translating into inflation, but it looks like the dab of the breaks and renewed control of the shadow banking sector have served their purpose and slowed things just enough. If you believe that the Chinese economy is not going to collapse, nor be the victim of runaway inflation, then assets that will benefit from continued growth there look pretty cheap. The question remains, how do you play it?
The most obvious, and in many ways safest option is to buy an established ETF that tracks the Chinese stock market, such as the iShares China Large Cap ETF (FXI). The chart for this demonstrates just how much value there could be in Chinese stocks at the moment.
A move back up to annual highs around $42 would represent a 20% gain, and with a solid bottom having been formed just below $32, the downside risk looks manageable. One thing that makes China a better option than many emerging markets for stock investors is that there is little or no currency risk. Whatever you think of China’s manipulation of their exchange rate, it does negate one potentially worrisome risk for overseas investors.
For those who prefer a more focused investment CTrip.Com International (ADR Symbol: CTRP) may still have further to go over time, despite a spectacular pop in the price yesterday following better than expected Q2 results. The online travel company reported earnings of $0.24 per share and significantly beat estimates on both top and bottom lines.
It is tempting to look at this chart and say that you missed the opportunity, but a well managed company, with solid execution of an aggressive growth strategy in a growing economy is rarely a bad buy. There may be some correction over the next couple of days, but any pull backs are buying opportunities. It may not pay to wait too long for a drop, though; in fact I would be more inclined to just buy now.
A more sideways, and in some ways less risky investment in Chinese growth can be achieved through purchasing Yum! Brands (YUM). To those that follow these things, this will hardly be news. YUM has been touted as a play on China for years due to their large presence and extensive real estate holdings in the country. The reason I include it here is that, because of the multi-national nature of the firm, the exposure to the Chinese economy is hedged to some extent. A combination of FXI and Yum may suit the more conservative investor who is still looking to hold something with potential to benefit if the growth story does resume.
I hate to sound like the Financial Advisor I once was, but you should bear in mind that investing in China contains some unique risks. Great strides have been made, but the country is still a long way from transparency in economic data and policy. The same can be said for many of the companies operating in the space. The political risk is also significant; there is no guarantee that the adoption of a quasi-capitalist model will continue indefinitely. I suspect that, having been given a taste of economic success, the emerging middle class won’t allow too much regression, but one can never be sure that the leaders won’t try.
There is, though, as I have said many times, no reward without risk. The last stop in my Foreign Exchange career was in Poland and many of the ex-pats we knew there are now in China. These were some of the brightest minds at major US companies, sent to Warsaw to take advantage of explosive growth there. The fact that these same people are now in China tells me that corporate America believes there is still plenty of growth to come. Do you? I would be interested to hear your views, good or bad, via the comments section below.