From Exports to Consumer-driven Demand — An Economy in Transformation

by Mitchell Clark, B. Comm.

One of the best investments this year has been to own a basket of large-cap Chinese stocks. My favorite way to do this is through an ETF and I’ve written extensively about the iShares FTSE/Xinhua China 25 Index (NYSE/FXI) as being one of the best in the marketplace.

This large-cap index of the biggest 25 companies in China has outdone itself by appreciating some 87% since the March low. And it’s done so in a very consistent manner. Pull up a year-to-date chart on this security and you’ll see its straight-line growth.

In China, the latest economic data suggest that its export sector still remains quite weak. Export business is improving, but at a very slow pace. Interestingly, this country’s domestic industrial production grew just over 12% in August and retail sales increased by over 15%. All this, while consumer prices dropped 1.2% from the comparable month last year.

Advertisement

What’s interesting about these figures is that they represent a new trend in the Chinese economy. There is a transformation taking place and it’s similar to America’s economic history. While exports are always important to any country, China is beginning to increase its own domestic demand for goods and services. The wealth that was created by exports in the past has set the groundwork for a new domestic economic engine that is beginning to feed upon itself. China will always be a huge exporter in the global economy, but I believe China’s economy is beginning to slowly transform itself into a domestic, consumer-led economy, much like in the U.S. This means that China will be able to keep its economic engine running and have less reliance on the rest of the world. It also means that, as an investor, you want some exposure to the domestic Chinese marketplace. You want to own some Chinese businesses that sell directly to Chinese consumers.

The iShares FTSE/Xinhua China 25 Index recently broke through to a new 52-week high of over $43.00 a share on the New York Stock Exchange. This index set an all-time high of around $70.00 a share (on a split adjusted basis) in October 2007, and I think this basket of stocks is just going to keep ticking higher over the coming quarters. I certainly wouldn’t bet against it.

We’re getting to the point now that, if China isn’t doing well economically, neither will the rest of the world. Already, the Chinese equity market is helping to set the tone on the daily trading action on Wall Street. We’re going to see a lot more Chinese companies list on U.S. stock exchanges over the coming quarters and this will be really good for domestic investors. Going forward, I wouldn’t create a new equity portfolio without some exposure to this burgeoning economic engine that just doesn’t seem to quit.

From Exports to Consumer-driven Demand —
An Economy in Transformation
by Mitchell Clark, B. Comm.

One of the best investments this year has been to own a basket of large-cap Chinese stocks. My favorite way to do this is through an ETF and I’ve written extensively about the iShares FTSE/Xinhua China 25 Index (NYSE/FXI) as being one of the best in the marketplace.

 

This large-cap index of the biggest 25 companies in China has outdone itself by appreciating some 87% since the March low. And it’s done so in a very consistent manner. Pull up a year-to-date chart on this security and you’ll see its straight-line growth.

In China, the latest economic data suggest that its export sector still remains quite weak. Export business is improving, but at a very slow pace. Interestingly, this country’s domestic industrial production grew just over 12% in August and retail sales increased by over 15%. All this, while consumer prices dropped 1.2% from the comparable month last year.

What’s interesting about these figures is that they represent a new trend in the Chinese economy. There is a transformation taking place and it’s similar to America’s economic history. While exports are always important to any country, China is beginning to increase its own domestic demand for goods and services. The wealth that was created by exports in the past has set the groundwork for a new domestic economic engine that is beginning to feed upon itself. China will always be a huge exporter in the global economy, but I believe China’s economy is beginning to slowly transform itself into a domestic, consumer-led economy, much like in the U.S. This means that China will be able to keep its economic engine running and have less reliance on the rest of the world. It also means that, as an investor, you want some exposure to the domestic Chinese marketplace. You want to own some Chinese businesses that sell directly to Chinese consumers.

The iShares FTSE/Xinhua China 25 Index recently broke through to a new 52-week high of over $43.00 a share on the New York Stock Exchange. This index set an all-time high of around $70.00 a share (on a split adjusted basis) in October 2007, and I think this basket of stocks is just going to keep ticking higher over the coming quarters. I certainly wouldn’t bet against it.

We’re getting to the point now that, if China isn’t doing well economically, neither will the rest of the world. Already, the Chinese equity market is helping to set the tone on the daily trading action on Wall Street. We’re going to see a lot more Chinese companies list on U.S. stock exchanges over the coming quarters and this will be really good for domestic investors. Going forward, I wouldn’t create a new equity portfolio without some exposure to this burgeoning economic engine that just doesn’t seem to quit.