The Top Investment Growth Region for 2009

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

With two weeks left in 2009, China will end the year as the top major investment growth region for investors. When you have a market of 1.3 billion and a burgeoning middle class in the neighborhood of 300 million, you simply cannot ignore the vast opportunities to make money in the land where capitalism and communism go hand in hand. While the average income in Chinese urban areas is below US$3,000 and, in rural areas, below US$900.00, it has steadily grown and this trend is expected to continue going forward, as China becomes richer.

China’s exports in November fell 1.2%, compared to 13.8% in October. The significance is that higher Chinese exports means greater demand for Chinese-made goods and indicates global economic recovery.

One particular area of growth in China is the auto sector, which, as you know, remains on life support in the United States.

China has been providing tax breaks for those buying cars with engines below 1.6 liters. It has helped drive up sales, but, to avoid overheating, the sales tax on these small cars will be increased to 7.5% in 2010 versus the current 5.0% and 10.0% in 2008. The country is also offering subsidies on cars using alternative energy and those that are energy-efficient. The sale of cars surged 98.2% year-over-year in November to a record 1.04 million units, according to the China Association of Automobile Manufacturers.

In a much anticipated launch, Chinese automaker BYD is looking to sell its electric cars beginning in Los Angeles in 2010 before a planned strategy to spread to other markets in the U.S. The car will be powered solely by electricity via batteries, but its expected cost of over $40,000 will face competition.

Despite a 20% correction in the benchmark Shanghai Composite Index (SCI) in August, the index had managed to hold just below 3,000 and has rallied back to within 200 points or six percent of its high in 2009. If you bypassed China or sold off your investments during the correction, you would have missed out on some stellar gains. To date, in 2009, the SCI is up 79%, quite impressive given the corresponding 39% and 22% gains in the NASDAQ and S&P 500, respectively.

On the chart, the SCI is holding around its 20-day moving average of 3,260 and above its 50-day moving average of 3,113. The SCI is above a key pivot point at 3,080, but there is some resistance at 3,350 with a potential bearish double top. Be careful here. The last time this pattern surfaced in August, the SCI corrected 20%. We are not sure if this will happen, as the rise has been steady this time around, compared to the sharp rise back then.

The key with China is patience and to ride out the volatility. Also take some profits on your big gainers along the way. Yet, always have some capital working for you in China; otherwise, you will miss out on significant gains. As long as you are diversified, there should be no issue.