China Stocks Attractive After Stock Market Crash
Stock-Markets / Chinese Stock Market Oct 10, 2008 - 04:49 AM GMT
Larry Edelson writes: Other than cash, gold, and a few select natural resource stocks, the only other investments I'd make in these wild and crazy times are in Chinese companies, buying them hand over fist for the long haul.
Yes, that's right. Even bearing in mind the recent milk/melamine scandal, which is outrageous.
You see, China is about the only economy on the planet with both short- and long-term growth potential. Just take a look at the latest economic stats …
China's August retail sales exploded 23.2% higher to their fastest growth rate in nine years.
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Jewelry sales soared a whopping 44.3%, making China the world's second-largest consumer of gold jewelry. Even more impressive when you consider that only one out of every ten Chinese consumers can currently afford gold.
The booming retail sales growth is not confined to just the major east coast cities like Shanghai, either. That 23.2% figure is for ALL of China, proving that the expansion is now blanketing even the rural areas.
Think August might be just a freak month? Well consider the eight month, year-to-date retail sales growth of 21.9% — up from 16.8% for all of 2007. That's almost one-third higher!
No wonder Gome Electrical Appliances Holdings Ltd., China's No. 2 electronics retailer, reported that first-half profits almost tripled.
Have any doubt about domestic consumption supporting China's economy? Well these stats prove otherwise, that domestic demand is soaring.
It would not be good if all that spending occurred by going into debt. But that's not the case in China. Indeed …
Disposable income in China is soaring.
Urban income jumped 14.4% for the first six months of this year. And even after accounting for inflation, the real net gains in urban incomes gained a huge 6.3%.
But it's not just the urban areas of China that are doing well.
Rural incomes are also soaring — exploding 19.8% higher in the first six months of 2008, from a year earlier. Net of inflation, rural incomes are up 10.3%!
Compare these figures to U.S. net income — adjusted for inflation it's MINUS .9%.
China's seasonally-adjusted Purchasing Managers' Index, jumped to 51.2 in September.
The index — which tracks changes in output, new orders, employment, inventories, and prices — is showing explosive manufacturing growth and indicates China's economy is weathering the global slowdown.
The output side of the index rose to 54.6 in September from 48.7 percent in August, while the index of new orders climbed to 51.3 from 46.
And in case you think China's exports are slowing, the index of export orders increased as well, to 48.8 from 48.4. Total overseas sales of Chinese goods are up 22.4% for the first eight months of the year.
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Capital investment also continues to surge in China.
Fixed-asset investment growth rose a whopping 29.2% in July, while urban fixed-asset investment for the first half of the year increased 27%.
Property investment jumped 31%. Investment in farming, fishing and forestry sectors exploded higher by 61.9%. Total fixed asset investment in central provinces surged an amazing 35.3%!
I could keep going, but I think you get the picture. China's economy, despite what the naysayers are telling you, continues to crank ahead, firing away on eight cylinders.
So while the rest of the world is in the midst of a severe credit contraction, China's first-half GDP gained 10.1%, including outstanding rural growth of as much as 13% across six central provinces!
What about China's banks? Are they facing severe losses from what I call the “first world credit crisis?”
Hardly! At most, China's banks have about 3.7% of their total net worth invested outside of China. So even if all of that went up in smoke, it would hardly make a dent in China's banking capital.
Indeed, and ironically …
China's banks are now some of the strongest in the world, with capital ratios far healthier than banks in the U.S. or Europe.
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Many have banking reserves of as much as 14%, compared to as little as 4% in the U.S. and Europe.
Plus, Chinese banks are making money hand over fist:
— Industrial & Commercial Bank of China (ICBC), China's biggest bank by assets, grew its net profit 57.25% in the first half of this year. That makes it the most profitable bank in the world.
— China Construction Bank saw its first-half net profit jump 71.4%.
— China Citic Bank, the country's seventh-largest bank reported a 162% jump in net profits!
— Bank of China's first-half net profits grew 42.78%
The average net profit growth for the 14 listed banks for the first half of 2008 was an amazing 99.15%.
If you think those results are just the big, urban-based Chinese banks, think again: Smaller banks have been reporting even faster growth. China Merchants Bank increased profits 116% while Shanghai Pudong Development Bank reported a first-half net profit gain of 150%!
And get this: Most of these huge profit gains were seen while Beijing was still clamping down on interest rates and monetary growth to try and quell inflation.
They do not include the impact of last month's interest rate cut, the first in six years, nor the recent cut in the reserve-requirement ratio for smaller banks to 16.5% from 17.5%.
As these pro-growth initiatives bite, you can expect even higher growth levels at China's banks, more rapid growth in China's economy … especially the rural areas … and …
An explosion higher in China's stock markets.
Yes, China's stock market is down this year. Big time. It's fallen a whopping 63% from its record high of 6,124 last year in the Shanghai Composite Index, including a 56% year-to-date loss.
But the Shanghai stock market now reminds me of 2002, when the world was fixated on potential horror stories in China's economy, and clueless about the reality in China.
Back then, I told my subscribers to buy with both hands. And I was right as can be, with the Chinese stock market soaring more than 300% in the ensuing five years.
Today, I am going to tell you this same thing. What you're hearing about China … tales of the rural areas going through an uprising, derailing growth, protests in the countryside, banking problems, bad loans, a slowing economy, etc. — are as far from the truth and reality as they were back in 2002.
My view: The Shanghai Composite is going to TRIPLE in the next few years, three years max.
Bottom line: If you haven't already gotten a stake in this economic juggernaut, consider doing so now!
Two of my favorite China plays are the iShares FTSE Index (FXI) , which tracks China's Shanghai stock market, and the U.S. Global Investors China Regional Opportunities Fund (USCOX) .
Both offer incredible profit potential, are easy to buy, and are great ways to play China without having to open a foreign brokerage account or buy stocks overseas.
Two more things to be on the lookout for with China …
First, China will continue to buy up oil and lend underlying support to the oil market for years to come. It's the chief reason oil prices have remained above the $90 level, and China will be the chief reason we will eventually see $200-a-barrel oil.
Second, I have strong reason to believe that Beijing is soon going to substantially increase its gold reserves, which at 600 metric tons, are among the lowest in the world as a percent of the country's foreign exchange reserves.
Why? Beijing now has almost $2 TRILLION in reserves in its piggy bank. I have no doubt that central bankers at the People's Bank of China have held high level discussions with Treasury Secretary Henry Paulson.
And Chinese central bankers are prepared to buy oodles of the U.S. Treasury securities that Paulson is going to have to auction off to raise funds for the $700 billion plus U.S. bank bailout.
Put simply, China is going to use a large portion of its $2 trillion in reserves to help bail out the U.S.
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But the authorities in Beijing are no dummies. They also know that the U.S. dollar is in a long-term downtrend. So, they don't want to see any of the investment they are about to make in the U.S. go down the tubes because of a falling dollar.
They have only one choice: Bolster the country's gold reserves while they're investing in U.S. Treasuries.
Bottom line: In addition to driving oil prices higher, soon you will be hearing that China is a big, big gold buyer.
So hold those core gold holdings I've recommended!
Best wishes,
Larry
P.S. For more insight on China, oil, gold, and the entire natural resource sector, be sure to subscribe to Real Wealth Report . It's on the leading edge of all these trends.
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