China — Why You Should Consider it in 2010

“Calling the Trend” Column, by George Leong, B.Comm.

How do you follow on the heels of an 80% market gain in the Shanghai Composite Index (SCI) in 2009? China has been one of the hottest regions for growth opportunities over the past five years and I fully expect this to continue going forward. In my recent commentary on 2010, I presented my bullish view towards this enormous country. Yes, the country’s per-capita income pales in comparison to that of the United States and Western Europe, but the massive population helps to offset this. Make no mistake about it; China will continue to be a sought-after haven for foreign companies looking for added growth. Many of the largest U.S. companies have already set up shop here, and with great results.

Wal-Mart Store Inc. (NYSE/WMT) is rapidly expanding in China. The country is now the biggest revenue generator outside of the U.S. as far as revenues go. Based on revenue growth, China far outpaces the U.S. Wal-Mart has great plans and expectations for China. The majority of its goods originate there, so it makes sense to set up shop in the country.

General Motors Corp. is struggling in the U.S. and is currently restructuring under U.S. federal control, but, in China, GM continues to see immense growth. In 2009, automobile sales in China surged 67% to a record 1.83 million units, according to the “Wall Street

In 2010, GDP growth is predicted at eight percent, but the majority of economists are expecting nine-percent growth in 2010. The World Bank predicts GDP to rise to 8.7% in 2010, with sustainable growth needing to be driven by “more emphasis on consumption and services and less on investment and industry.” In other words, the Chinese must increase consumer spending and save less.

China is predicted to expand its industrial production by 11% in 2010, according to Li Yizhong, the minister of Industry and Information Technology in China. The HSBC purchasing manager index (PMI) for China came in at an expansionary 56.1 in December, representing the highest level since April 2004.

The reality is that the numbers don’t lie. The risk, of course, with all of this growth is price appreciation and inflation. The Chinese government is already trying to curb property speculation and price increases in its major cities to try to avoid a property bubble. Interest rates may also have to rise in order to curb inflationary pressures.

Whether it is technology, manufacturing, services, infrastructure, or the many other areas of pent-up demand, you need to have capital in China. I continue to believe there will still be good buying opportunities in Chinese stocks, specifically of the small-cap variety.
Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors; yet you also need to be careful and be diversified in your portfolio, as there could be more downside risk.

I look at market corrections in Chinese stocks as an opportunity to accumulate shares.