How to Play the Growth in China

Why Investors Shouldn't Bypass ChinaFor the first time in more than three years, Chinese stocks are beginning to show some promise for growth investors looking for opportunities outside of the United States.

The benchmark Shanghai Composite Index has moved to just above its close of 2013; hence, it’s more or less in line with the S&P 500 and Dow Jones Industrial Average.

Many of you are aware of my continued bullishness for China, as I have talked about this in recent commentaries.

We saw some encouraging estimates on Tuesday. The country’s industrial output is estimated to rise 9.5% this year, which could support gross domestic product (GDP) growth of 7.5%, according to Industry and Information Technology. (Source: “China targets factory output growth of around 9.5 percent in 2014,” Reuters, February 17, 2014.) What’s interesting is that the key areas of growth for this year include telecommunications, along with a big jump in business for software and information technology (IT).


You can play the growth in these areas via Chinese IT services firms, such as iSoftStone Holdings Limited (NYSE/ISS, $5.15, Market Cap: $297 million), a provider of IT services to clients and globally. Services include consulting and solutions, IT services, and business process outsourcing. The company is growing with its headcount increasing 27% to 17,702 in the third quarter compared to the same time in 2012. Broken done, 65.1% of the company’s global sales came from the Greater China area, 21.4% were from the U.S., Europe accounted for 7.3%, and Japan made up 5.8%.

Analysts expect iSoftStone to report revenue growth of 13.6% to $432.81 million in 2013, followed by 17.8% to $510.06 million in 2014, according to Thomson Financial. I view iSoftStone as an aggressive contrarian pick that has excellent upside if it can break higher on the chart, based on my technical analysis.

ISoftStone holdings Ltd ChartChart courtesy of

China is also continuing to see a mass influx of capital into the country via about $10.76 billion in foreign direct investment in January, up 16.1% year-over-year. (Source: Yao, K., “China January foreign direct investment rises in sign of confidence,” Reuters, February 14, 2014.)

Assuming the growth estimates pan out, you need to have some capital in the areas that will benefit from the spending. Consumer spending will be a key area and you can play this via the Global X China Consumer ETF (NYSEArca/CHIQ), which is an exchange-traded fund (ETF) that focuses on consumer spending. (Read “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”)

You can also look at the growth-oriented PowerShares Golden Dragon Halter USX China (AMEX/PGJ) ETF, which focuses on strong small-cap stocks that are likely familiar to many of you, including Baidu, Inc. (NASDAQ/BIDU) and Qihoo 360 Technology Co. Ltd. (NASDA/QIHU), which has been sizzling on the chart. This is a good fund that allows you access to numerous Chinese growth stocks in the technology, healthcare, and industrial sectors.

PowerShares Golden Fragin Halter USX China Portfolio ChartChart courtesy of

Those of you who want to play the big-cap stocks should take a look at the iShares FTSE China 25 Index (NYSE/FXI), which comprises the major companies in China, including China Mobile Limited (NYSE/CHL), PetroChina Company Limited (NYSE/PTR), and China Life Insurance Company Limited (NYSE/LFC).