Why You Don’t Want to Miss Out on Chinese Stocks

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

China is becoming hot once again. The economy is turning and is expected to show strong growth in 2010 and beyond. I have held our positive view towards China throughout and so far it is paying off, as Chinese stocks have rallied and provided some excellent returns.

Just take a look at the country’s growth estimates. The Department of Industry at the National Development and Reform Commission (NDRC) 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 by a whopping 9.1%, up from 6.1% in the first quarter. The Chinese Academy of Social Sciences (CASS), a Chinese government think tank, estimates that China will grow its GDP 8.3% this year and to nine percent in 2010. Of course, the growth has been aided by the government stimulus spending. Moody’s Investor Services just raised its outlook on the country to positive from stable.

If you are not in China, it may be time for you to begin to look. Yes, the stock market is faring well in the U.S. The NASDAQ is up 37% this year, but did you have any capital in Chinese stocks?

The benchmark Shanghai Composite Index (SCI) is holding above the psychological level of 3,000. This is important, as it could signal further gains. The index had been up about 75% this year, and is rebounding after a 20% correction. That is double the return of the NASDAQ. In fact, some of the small-cap Chinese American Depositary Receipts (ADRs) on U.S. exchanges have doubled this year.

A sector that I continue to like in China is the country’s burgeoning auto sector. The auto industry continues to look strong in China, as evidenced by the sales there and the influx of U.S., European and Japanese automakers. China is the world’s top auto market with 9.66 million vehicles sold in the January to September period, up 34% year-over-year. Ford Motor Company (NYSE/F) reported that its sales surged 79% in the third quarter in China to a record 119,338 vehicles. General Motors Corp. (NYSE/GM) predicts that it will sell over 1.6 million vehicles in China this year.

In October, sales of passenger cars in China surged 75.8% year-over-year to about 946,400 cars sold, up from 538,500 cars in October 2008, but down from 1.02 million cars sold in September, according to the China Association of Automobile Manufacturers.

Some small Chinese auto plays listed on U.S. exchanges include Brilliance China Automotive Holdings (Pink Sheets/BCAHY.PK), China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), and SORL Auto Parts, Inc. (NASDAQ/SORL).

Looking ahead, I continue to favor China for growth investors who have a long-term view. I continue to like the longer-term situation in China 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.

Other areas that I like longer-term are infrastructure, industrial, retail, and services such as insurance, banking, technology, and advertising.

The key to investing in China is to be diversified. Invest only a portion of your capital in China. Besides small-cap stocks, you can also buy large-cap Chinese stocks or major U.S. companies with an expanding presence in China.