Investment Opportunities in Depressed Chinese Stocks

Where to Find New Investment Opportunities in the Emerging MarketsThe Securities and Exchange Commission (SEC) is currently shutting down numerous Chinese shell companies trading on U.S. exchanges, such as the over-the-counter market and the highly speculative Pink Sheets stock exchange.

This is good and is something the SEC needs to continue to pursue and enforce, so domestic investors can regain some lost confidence towards Chinese stocks.

The American appetite for Chinese stocks has been picking up; albeit, it’s nowhere near where it was a few years ago when Chinese stocks were all the rage.

Yet if you think there’s little interest in Chinese stocks, take a look at some of the sizzling debuts of the few Chinese initial public offerings (IPOs) that listed in the U.S. last year.

There are now worries China may be set for a downside slide. I have been hearing how the Chinese economy was set to burst, especially regarding the real estate and financial sectors in China. So far this has yet to happen, but we are continuing to hear continued bearish comments towards China.

It’s true the Chinese economy is stalling and may find it difficult to get back to its former double-digit growth, but with gross domestic product (GDP) growth at 7.7% in 2013 and estimated to rise 8.2% this year, according to the Organisation for Economic Co-operation and Development (OECD), these are not bad numbers. By comparison, the U.S. economy is predicted to grow 2.9% in 2014, according to the OECD. (Read “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”)

A recent showing of contraction in Chinese manufacturing in January was used by the Chinese bears as a reason to sell. But I say so what? It’s only one month and not a trend.

China’s economy will have its hiccups this year and going forward for as long as the global economy also continues to struggle. This is why the new Chinese leadership is pushing a new direction to grow its domestic consumption and reduce its reliance on foreign investment and export demand. In my view, this new strategy makes a whole lot of sense, especially when you consider that there are more than 1.3 billion people in the country, including a massive 300 million or so in the quickly emerging middle class.

Just take a look at the country’s consumer spending statistics, and you’ll get a sense of the amazing growth that’s occurring in China. In 2013, retail sales surged 13.1% year-over-year, according to the National Bureau of Statistics. Retail sales in the urban markets jumped 12.9% in 2013 and accounted for 86.39% of total sales. Sales in rural areas increased 14.6%, and that number holds promise, as the rural areas become wealthier. (Source: Jiabao, L., “China’s retail sales up 13.1% in 2013,” China Daily, January 20, 2014.)

To play the rise in consumer spending in China, investors may want to take a look at an exchange-traded fund (ETF) like Global X China Consumer ETF (NYSEArca/CHIQ), which correlates with the Solactive China Consumer Index.

When it comes to investing in Chinese stocks, the key is to be patient and avoid the small companies or those with minimal financial history, as they carry greater risk. At the end of the day, there are and always will be exceptional opportunities in China.