How My Positive View on China’s Paying Off

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

The benchmark Shanghai Composite Index (SCI) is holding above the psychological level of 3,000. This is important, as it could signal further gains if this proves to be good support. On the chart, the SCI has rallied back above its 20-day moving average at 2,927 and above its 50-day moving average of 2,060. The chart is showing a potential bullish double bottom. The SCI just broke above a key pivot point at 3,068 and the index looks to move higher if it can hold.

The index had been up over 80% this year, but suffered a 20% correction, something U.S. markets have yet to see. The SCI remains up about 70% in 2009, well above the returns in the U.S. markets, but there is still some concern about a potential downside move.

I have a positive view towards China and so far it is paying off, as Chinese stocks have rallied and provided some excellent returns. The Department of Industry at the National Development and Reform Commission (NDRC) just came out and said that China’s GDP expanded by between seven percent and eight percent in the first nine months of 2009. Economists are becoming increasingly positive towards China and predict that China will grow its third-quarter GDP a whopping 9.1%, up from 6.1% in the first quarter. A Chinese government think tank, Chinese Academy of Social Sciences (CASS), estimates that China will grow its GDP 8.3% this year and rise to nine percent in 2010. Of course, the growth has been aided by the government stimulus spending. The Chinese inflation rate is estimated to rise three percent in 2010, which may result in higher interest rates.

An area that is generating strong growth metrics in China is the airline sector. With over 1.3 billion people and a middle class of about 250 million to 300 million consumers, there is a growing capital base that will likely spend more and increase travel over the next decades. China’s aerospace sector looks bullish. The country’s domestic air traffic is predicted to grow at 8.2% annually over the next two decades, according to the Aviation Industry Corporation of China (AVIC), a maker of planes in China. AVIC predicts that the country will need 3,798 new aircrafts over the next 20 years. The major foreign player will likely be The Boeing Company (NYSE/BA), in spite of its current struggles with the delay of its new “Dreamliner 787” plane.

Valuations in Chinese stocks remain attractive despite the price appreciation. Based on the market action of the SCI, we appear to be seeing some calm return. I hoped you did not go out and dump Chinese stocks during the period of uncertainty and correction; otherwise, you would have missed out on some excellent gains. The key with Chinese stocks is patience and careful monitoring.

Chinese stocks are pausing. I continue to believe there are good buying opportunities in Chinese stocks, specifically of the small-cap variety. But you should be cautious and take a look at buying value at the current price levels. 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 continue to favor China for growth investors who have a long-term view and believe you should have some capital invested in China, whether it is with large-cap blue-chip Chinese companies or with small, emerging, higher-risk stocks. Areas that we like longer-term are infrastructure, industrial, retail, and services such as insurance, banking, technology, and advertising.