Not in China Yet? It Might Be Time to Look

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

China remains the top growth market in the world. That is why the top technology and industrial companies are expanding aggressively in China. Many technology companies are beginning to move more of their research and development to China. Why? Just take a look at the highly educated work force and the abundance of smart and inexpensive labor.

The country’s GDP is estimated to grow in the 9.0% to 10.0% range this year. So, if you are not in China, it may be time for you to begin to look. Yes, the stock market is faring better in the U.S. compared to China this year, but you need to think long-term and have some investment capital in China.

The benchmark Shanghai Composite Index (SCI) is holding above the psychological level of 3,000 and just broke 3,100 on Tuesday. This is important, as it could signal further gains. The index remains down about seven percent this year, but we feel that, if it all pans out, there will be excellent growth going forward, especially if the country can control inflation. The current strategy to rein in some easy lending by the banks makes sense, as long as it does not continue.

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, evidenced by the sales there and the influx of U.S., European, and Japanese automakers. China is the world’s top auto market, yet we are seeing some slower growth there, as some of the government’s incentives to buy small cars are ending. However, despite this, the auto market in China continues to fire on all cylinders, growing at 46.3% year-over-year in February, with about 1.2 million units sold. The number is down from January, but the week-long Chinese New Year likely impacted sales. Estimates peg the sales of autos to slow to 10% to 15% this year, but we feel that this is somewhat

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 the country. Besides small-cap stocks, you can also buy large-cap Chinese stocks or major U.S. companies with an expanding presence in China.