China hasn’t exactly lived up to its economic promise over the last few years. After more than a decade of full-throttle growth, worries about an economic slowdown and related inflation jitters, it's shares have lagged. As a result, many investors have moved on to more promising locales.

That could be about to change, though. Some recent dour news on the China front may actually turn out to be a blessing. The kind of news, in fact, that could lead to higher Chinese equity prices in the second half of the year. For investors, the time to bet on the rising economic powerhouse could be now. (For more on this topic, see: Top 6 Factors That Drive Investment In China.)

Low Inflation & More Stimulus

China's efforts to stimulate its economy during the worst of the global slowdown worked perfectly. Unfortunately, that blistering growth came with a nasty side effect — high inflation. Over the last few years, the Chinese government has made several efforts to moderate growth and hold back the tide of inflation. Those policies may have finally worked — perhaps too well. (For related reading, see: Why You Should Care About Chinese Inflation.)

China’s consumer inflation rate decreased slightly more than expected this past June and now sits at a cool 2.3%. Meanwhile, the Chinese National Bureau of Statistics also reported that the producer price index dropped 1.1% for the month. That’s now the 28th consecutive month of declines and represents tepid demand in the Chinese economy.

And as inflation has cooled, so has the rest of the Chinese economy.

China’s GDP growth during the first quarter slipped to an 18-month low, and recent trade data for June suggests a weakening position. China's exports rose 7.2% for the month compared to year earlier. While that is still a nice gain, it’s below the 10.6% predicted by a Reuter’s survey of economists. At the same time, China’s latest purchasing managers' index (PMI) reading from HSBC Holdings plc (HSBC) and Markit Ltd. (MRKT) just recently crossed the 50 reading. That’s the first time since December that manufacturing activity has been positive in the nation.

And while at first blush, all of this dour news may seem bearish for China in the near- to medium-term, it’s actually a good thing: Beijing now has a good reason to do more to stimulate the economy.

Already, Beijing has announced that it will use a mix of monetary policy tools to keep overall liquidity at an appropriate level to support the economy, as well as micro-stimulus measures. That means aggressive rate cuts or lower bank reserve requirements could be in store. That could mean big things for Chinese equities in the near future. Especially, since the Shanghai Composite is currently trading at a P/E of just 7.5. (For related reading, see: Boom or Bust: The End of China's One-Child Policy.)

Riding The Dragon

With Beijing's economic focus shifting back to growth, now could be the time to bet on China. The $4.7 billion iShares China Large-Cap (FXI) is the most popular way to play China, but it might not be the best. Investors may want to give the SPDR S&P China (GXC) a go instead.

GXC tracks a wider range of Chinese firms than the FXI. Currently, the ETF holds 285 different stocks, including Chinese stalwarts like oil giant CNOOC (CEO) and telecom China Mobile (CHL). Overall, GXC provides a good mix of Chinese state-owned enterprises (SOEs) as well as pure-public plays in the nation. FXI only focuses on the SOEs. Expenses for the fund are only 0.59%, which again beats FXI’s 0.73%. Another broad option for investors could be the iShares MSCI China (MCHI).

Those interested in broad exposure to Chinese stocks should examine the new WisdomTree China Dividend ex-Financials fund (CHXF). The WisdomTree fund bets on a basket of dividend-paying Chinese stocks and eliminates financials from its holdings. Many believe that China's biggest risk is its banking system.

Finally, as China has moved into its next phase of growth, the story has become about its domestic economy and growing consumer-base. The Guggenheim China Small Cap ETF (HAO) tracks small-caps in the nation and can be seen a play on the “real” china. For even more direct bets, the Global X China Consumer ETF (CHIQ) and EGShares China Infrastructure fund (CHXX) allow investors to focus on rising consumer and infrastructure spending.

The Bottom Line

With the specter of inflation fading, the threat now is slowing growth. Several economic indicators suggest as much. Now that China needn't worry about inflation so much it can deploy a full arsenal of stimulus tools. That means now could be time for investors to add shares of Chinese companies.

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