How to Profit from China’s Shift in Consumer Spending

China's Consumers Eager Spend; How  Profit from RiseChina is facing some growth issues, but so are the majority of the countries in the Western Hemisphere.

The country’s new government leader, President Xi Jinping, came on board in March 2013 and is planning to change the landscape of China vis-a-vis a new focus on domestic consumption and a reduction in its dependence on exports and foreign demand.

This new plan will take some time to undertake, but if Jinping can mobilize the country’s massive potential consumer base into a spending machine similar to the United States, then we could see a spending revolution emerge behind the Great Wall.

But while investors in Chinese stocks have faced difficult times over the past few years due to fraud, I feel it’s not enough to avoid the country as a growth buying opportunity. (Read “Chinese Stocks Promise Higher Potential Gains?”)

While it may be true that the Chinese economy is stalling and that it may find it difficult to get back to its former double-digit growth, the gross domestic product (GDP) growth of 7.7% in 2013 was good. The Organisation for Economic Co-operation and Development (OECD) predicts the Chinese economy’s GDP growth will slow to 7.4% this year, compared to an earlier estimate of 8.2% in November. The slowing is attributed to the government’s move to control the credit risk and factory capacity in order to prevent a meltdown.

The fact you cannot ignore is the massive population, especially the more than 300 million middle-class consumers looking to spend their newfound wealth.

In April, retail sales grew by 11.9%, which is pretty darn good, given the growth we are seeing here. In 2013, retail sales surged 13.1% year-over-year, according to the National Bureau of Statistics. Growth was particularly healthy in the key rural regions.

So in order to play the expected rise in consumer spending, which is rising at double digits in China, I suggest playing companies or exchange-traded funds (ETFs) that would benefit from the boom.

An interesting ETF to look at is the Global X China Consumer ETF (NYSEArca/CHIQ), which correlates with the Solactive China Consumer Index. The fund has assets of $153 million and a management expense ratio of 0.65%.

The Solactive China Consumer Index is a play on Chinese consumer spending and will likely rise as wealth levels in China continue to grow.

Global X China Consumer NYSE ChartChart courtesy of www.StockCharts.com

The sector weightings include consumer cyclical (62.9%) and consumer defensive (32.13%), which means the value will rise as consumer spending increases.

The top areas of investment for the underlying index as of March 31 are food and beverages (25.68%), retail (30.10%), automobiles (13.70%), travel and leisure (9.67%), and health care (4.49%).

In my view, the Global X China Consumer ETF is a good diversified play on the rise in Chinese consumer spending.