Why You Should Ride the Red Bull

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

I’m a China Bull, as many of you know. I do not see any major country having better growth opportunities than China. In addition, you can play the Asia Pacific region by playing Chinese stocks, as many Chinese companies are beginning to scout for trading opportunities outside the Great Wall of China. The Wall may have been initially built to keep out the “foreign devils,” but things have changed in the approximately 2,700 years since its construction. Capitalism is now highly welcomed, albeit there remains the risk of higher and unexpected governmental interference from the Communist regime. Yet, ignoring this, the economic machine in China continues to burn on all cylinders. If the U.S. were a Dodge Caravan, China would be a Ferrari.

The benchmark Shanghai Composite Index (SCI) has managed to hold at the psychological level of 3,000, and it rallied to just six percent from its 2009 high. 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, versus the sharp rise back then.

In the small-cap area, the Chinese stock regulators launched ChiNext, a Shenzhen-based small board that is in the midst of adding a second round of eight companies. When ChiNext initially opened in late October, there were 28 companies. In the month since the creation, speculation of the listed stocks has been frenzied.

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As we move forward, the country wants its citizens to spend more in order to drive domestic consumption and GDP and reduce its reliance on foreign countries. China’s GDP growth at this time is only driven about 20% by consumer spending, versus a whopping 70% in the United States.

But this may be changing. China, which has historically been known as a country of savers, is beginning to look more like other industrialized countries as far as debt. Financial institutions in China have been pushing credit cards and, according to the South China Morning Post, debt in credit cards surged 126.5% year-over-year in 2009. There are estimated to be about 175 million credit cards in China.

I continue to believe there are good buying opportunities in Chinese stocks, specifically of the small-cap variety. However, be cautious and take a look at buying value at the current price levels. Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors, but you also need to be careful and be diversified in your portfolio, as there could be more downside risk.

Ride the Red Bull.