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The China Economic Growth Juggernaut Is Alive and Well

Economics / China Economy Mar 31, 2010 - 07:45 AM GMT

By: Tony_Sagami

Economics

Best Financial Markets Analysis ArticleIt is becoming quite popular to say that China’s bubble is about to burst. Not a chance. Like Mark Twain said, “reports of my death have been greatly exaggerated.”


Signs of China prosperity are busting out all over. In just the last week:

  • The World Trade Organization reported that China has now overtaken Germany as the exporter in the world. In 2009, China exported $1.2 trillion worth of merchandise last year while Germany sold $1.1 trillion. The WTO said China was a “light at the end of a tunnel” for the global economy. What about the U.S.? The United States was third with $1.06 trillion.
  • Two of China’s most important economists are expecting the Chinese economy to return to its 10%-plus growth days. Yu Bin, head of macroeconomic research at the State Council Development Research Center, said China’s economy will grow by 12% this quarter and Fan Jianping, a senior economist with the State Information Center, is also expecting 12%.
  • To put that in perspective, China’s GDP expanded by 10.7% in the fourth quarter of 2009 and 8.7% for the full year. As you can see, China’s economy is getting better and at an accelerating pace.
  • China’s industrial output, an accurate proxy for the export industry, jumped by 20.7% in the first two months of 2010.
  • China Construction Bank, China’s second-largest bank, just reported its Q4 results and they were fantastic — profits more than doubled from the same period a year earlier. The reasons that I mention CCB — established in 1954 to fund roads, railways, bridges and dams — is that it is the largest mortgage lender in China today and is therefore a pretty good indicator of the Chinese real estate market. If CCB is thriving, it is a very good sign that the Chinese real estate market is NOT the bubble that other China “experts” are claiming.
  • The government-run newspaper, China Daily, reported that employers are raising wages, aggressively working job fairs, and even soliciting migrant workers at train stations to fill their urgent job openings. The city of Dongguan, where most of the world’s toys are manufactured, is estimated to be one million workers short of what it needs.

The fundamentals just keep getting better and better for China, but the problem with fundamentals — whether you’re talking about a country or an individual stock — is that it can take months or even years for investors to recognize the good news and push stock prices higher.

China's decision to allow stock index futures trading on the Shanghai Composite Index could send the Chinese stock market soaring.
China’s decision to allow stock index futures trading on the Shanghai Composite Index could send the Chinese stock market soaring.

It often takes some sort of catalyst to get things moving and one giant catalyst is about to happen and potentially send the Chinese stock market to the moon. The catalyst I’m talking about is the Chinese government’s decision to allow stock index futures trading on the Shanghai Composite Index.

Investors will be permitted to trade futures contracts on the Shanghai Composite 300 beginning on April 16. The first contracts to trade will be for May, June, September and December.

The reason I expect this to be such a positive for Chinese stocks is that investors only have to put up a cash deposit of 15% for the May and June contracts and 18% for the longer contracts. That 6-to-1 leverage represents a mountain of potential buying pressure.

Of course, that leverage can work in the opposite direction too but what I expect to happen is for these new futures contracts to exaggerate the moves in both directions. Rallies will be more powerful and profitable while corrections will be deeper and shorter-lived than in the past.

And since the fundamentals of the Chinese economy are so positive, I expect the next major move to be upward and for these futures contracts to add some accelerant to what could be a melt-up.

What I’m telling you is to get on board the Chinese rocket before it takes off — and you only have a short time to do so.

You could buy some ETFs as I explained in my March 17th and March 24th articles, but I believe you’ll do much better by targeting some of China’s most successful companies. I’m talking about companies like:

  • New Oriental Education (EDU), the largest college admission prep course and English language school in China.
  • Mindray Medical (MR), one of the world’s fastest growing medical equipment companies that specializes in monitors.
  • Duoyuan Global Water (DGW), a Chinese manufacturer of valves, filters, aerators, monitors, compressors, and everything else you need to deliver clean drinking water.
  • China Housing & Land (CHLN), a developer of moderately priced condominiums Xian, China; the home of the terra cotta warriors.
  • General Steel (GSI), the largest Chinese manufacturer of one of the most important basic building blocks of every road, bridge, dam, and high rise: Rebar.
Some of China’s most successful companies are focused on manufacturing basic materials.
Some of China’s most successful companies are focused on manufacturing basic materials.

There are lots of other great Chinese stocks, but those are a few of my favorites and to be fair, I need to tell you that my Asia Stock Alert subscribers already own all of them.

I expect all of them to keep going up even without the catalyst of the new futures contract trading, but they could all enjoy a very nice boost in a couple of weeks. If that happens, you’ll be very glad to have added a big dose of Chinese spice to your portfolio.

Best wishes,

Tony

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