A few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.
While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.
My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.
The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.
China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.
The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior to the rest of the industrial countries.
In the second quarter, China grew its GDP 7.5% on an annualized basis, which was just ahead of the 7.4% estimate. (Look at the muted U.S. GDP, or flat-line growth in Europe.) Fixed asset investments surged 17.3%, while industrial production jumped 9.2%.
These numbers do not indicate a country that is struggling for growth.
Yes, there are the risk factors, including high property values, banking risk, and trust, but the upside potential more than compensates for this. You just need to make sure you are well diversified in your portfolio and balance the risk so you are not vulnerable to one area.
There are numerous ways to play China. What I suggest you do as an alternative to investing in individual stocks is look at exchange-traded funds (ETFs) with a focus on China.
To play Chinese consumer spending, you might consider the Global X China Consumer ETF (NYSEArca/CHIQ). This ETF comprises about 63% consumer cyclical and 32% consumer defensive plays, which means the fund will rise as spending increases in China.
To play the largest Chinese blue chips, the iShares China Large-Cap (NYSEArca/FXI) ETF may be worth a look, while those with a more speculative bias could look at Chinese small-caps via the PowerShares Golden Dragon China ETF (NYSEArca/PGJ).