The recent -21% tumble in the Chinese markets had investors around the world bailing out of China as fast as they could. But, this sell-off actually created one of the biggest buying opportunities of a lifetime. Here’s why China is poised to take off — and how to cash in as China leads the global economic recovery.
August 2009 was one of the worst months ever for the Chinese stock market, with stocks dipping -21%. But the major sell-off wasn’t based on any fundamental news — it was a case of frightened investors worried that China is the next bubble.
The truth is, China’s fundamentals are sound. Chinese consumers are accelerating their purchases, exports are growing and Chinese GDP is on track to grow +7.9% by year-end. This is no bubble — Chinese stocks don’t have anywhere to go but up.
Don’t let western bias fool you. It is not the U.S. that will lead the global recovery — it is China and other emerging economies.
China’s markets are for real — and so are the returns. Over the last five years, China’s markets have returned over +100% — even after the massive sell-off caused by the global financial meltdown. Over the same time period the S&P has actually lost money.
This is just the beginning. This report will show you seven reasons the Chinese economy has nowhere to go but up — and how to profit.
1. Incredible GPD Growth Driving Returns
On July 15, 2009, China’s National Statistics Bureau affirmed what we’ve expected all along. China’s 2nd quarter GDP came in at an impressive 7.9%. Recently, HSBC China economist Qu Hongbin went a step further, forecasting that the Chinese economy will grow +8.1% this year and expand to 9.5% in 2010. The increasing GDP numbers reflect that China’s recovery is much broader and more robust than most western analysts originally gave the red dragon credit for. This impressive growth comes not only from China’s massive $586 billion fiscal stimulus package, but from strong growth in consumer demand.
2. China Can Stimulate Its Economy Without Going into Debt
While the U.S. has had to print trillions of dollars to attempt to stimulate its economy, China’s story is much different. With $2.3 trillion dollars in reserves, China has been able to strategically stimulate their economy — without having to deficit-spend to do it. Even though the $586 billion Chinese stimulus package passed in November 2008 represents a whopping 16% of the country’s GDP, China hasn’t had to go into debt or print money like the U.S. did. This gives China an incredible opportunity to shore up the economy without damaging its future economic prospects.
3. China is Funding Global Growth
When the International Monetary Fund (IMF) announced they were considering issuing $50 billion in bonds to better finance aid to countries struck by the global financial crisis, they turned to China to purchase them. How times have changed. Two decades ago, the IMF would have been calling the U.S. to help fund the recovery. But with the U.S. economy crippled, China is the only industrial economy in the world that has enough reserves to actually do anything. Of course, China’s willingness to assist the IMF is both humanitarian and shrewd. As IMF Managing Director Dominique Strauss-Kahn said, “The crisis is certainly an opportunity to reshuffle the IMF’s governance, to see the new balance of powers in the world.” Clearly, China’s extensive reserves give the country the opportunity to exert its power over the entire new world economy.
4. China is Moving the World Away from the U.S. Dollar
Not only is China taking advantage of its economic strength to gain leverage in the IMF, it is also pushing for a move away from the U.S. Dollar as the world reserve currency. As the largest holder of U.S. dollar reserves in the world, China has a lot of reasons to be concerned with the value of the U.S. dollar. Chinese officials are watching very closely as Washington desperately spends to resuscitate the U.S. economy. In an effort to diversify away from the U.S. dollar, China has been buying gold, oil, and other dollar denominated commodities necessary for its growth. If the value of the U.S. dollar declines, the value of China’s new assets will increase. In one easy step, China has not only helped its strategic growth, but it also created a hedge against Washington’s shenanigans.
5. China is Creating a Marketplace for its Currency
Since December 2008, China’s central bank has signed bilateral currency swap agreements with six different countries – including Argentina, South Korea and Indonesia — worth $95 billion dollars. The countries that participate in these swap agreements can use Chinese yuan to buy goods and services in China. With these agreements, China has created a market for its currency without ever having to put it into the open market. China will likely continue to extend these swap agreements with as many countries as it can, until one day the world wakes up and realizes China has created a global marketplace for its currency without playing by the rules.
6. China Has Room to Grow
While we in the West grapple to keep up our inflated standard of living, China still has plenty of room to grow. Annual per-capita income in China is only $6,000 — compared with $47,000 in the U.S. The sheer size of China (1.3 billion people) and its increasing prosperity is an enormous force that can’t be ignored. Remember, China is not some backward third world economy. It is currently the third largest economy in the world. China’s economy will surpass that of the United States by 2035 and be twice its size by mid-century, according to the Carnegie Endowment for International Peace.
7. Global GDP Growth is Shifting East
As the global markets begin to mend themselves we will see global GDP share move from the west to Asia — led by China. The U.S., Canada, and Europe will only account for 49.4% of global economic output in ‘09, according to the Center for Economics and Business Research. Not only that, Western economies will decline to just 45% of global economic activity by 2012 — far ahead of the original estimates that predicted the West wouldn’t fall below 50% until 2015.
As China’s share of global GDP rises, so does its share of the global markets. From the end of 2003 to the end of July 2009, the NYSE’s share of global market cap shrunk -29%, according to the World Federation of Stock Exchanges. Over the same time, the Shanghai Stock Exchange increased its share of global market cap by +636%. In addition, by 2020 — just 11 years from now — China’s share of global consumption will be equal to that of the United States. That’s what happens when you introduce a prosperous economy to a population of 1.3 billion people.
How to Invest in China:
Not all Chinese companies are created equal, so we prefer using ETF’s to play the entire trend instead of choosing any individual companies. Remember, the ride won’t be straight up — China will have hiccups. But, we are staring at the leading edge of the investing opportunity of a lifetime and you don’t want to be left on the sidelines.
One of the most popular ways to invest in China is through iShares FTSE/Xinhua China 25 Index (NYSE: FXI), but I prefer PowerShares Golden Dragon Halter USX China (NYSE: PGJ). PGJ has a more broadly diversified portfolio of companies and sectors, with no more than 28% of the entire holdings in any one sector, and no more than 5.46% of the entire holdings to any one company. FXI on the other hand, has concentrated 51% of their entire holdings in the financial sector, and as much as 9.3% of the entire holdings in one company (China Construction Bank Corporation). That may prove be to genius over time, but as a measure of the entire Chinese market, we feel PGJ offers better diversification.
If you like income, take a look at Templeton Dragon Fund Inc. (NYSE: TDF) which is yielding 6.8%. Managed by legendary emerging markets fund manager Mark Mobias, TDF is a closed end fund focusing mainly on China (58.4% of holdings), but also on neighboring Hong Kong and Taiwan (29.9% and 11.4% of holding respectively).
If you have the stomach for more a little more risk, look at Claymore/AlphaShares China Small Cap (NYSE: HAO). The name “small cap” may be a little misleading. This fund is more of a blend between mid-cap and small-cap stocks. The fund is very well diversified between the different critical sectors in China and no single company represents more than 2.6% of the entire funds holdings.
— Sid Riggs
Contributing Editor
Money Morning