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China Tames Its Dragons
Besides watching the situation in Europe, global investors have been cautiously watching China. As one of most important drivers of future global growth, any hiccups to the Chinese economy could be seen as detrimental. So, it's no wonder why investors dumped Chinese funds like the iShares FTSE China 25 Index Fund (ARCA: FXI) in the wake of skyrocketing inflation in the nation. However, monetary and fiscal policy moves by the Beijing government, may have finally begun to take hold. For investors, this could be the signal to finally add Chinese stocks to a portfolio. (To know more about Chinese inflation, read: Why You Should Care About Chinese Inflation.)
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Continued Lower Numbers
China's efforts to stimulate itself during the credit crisis, and global slowdown, worked perfectly. Unfortunately, that blistering growth came with a nasty side effect; high inflation. Overall, Chinese inflation peaked in July at 6.5%. Since then, the Chinese government began a variety of efforts to slow down its overheating growth. The central bank of China raised interest rates a total of five times in 2010, and continued to do so through July of 2011. Bank reserve requirements were raised to 21.5%, and a credit "clamp down" was imposed to help cool the nation's red hot property market.
These efforts seem to finally be paying off for the nation. Inflation is now on the decline for the third consecutive month. According to the latest government figures, consumer inflation dropped to 5.5% from September's 6.1%. Analysts cite Chinese inflation to be driven by higher food prices. Strong demand and summer flooding, that damaged crops, contributed to food prices rising nearly 11.9% in October. Analysts expect inflation to continue to abate, as the autumn harvest rolls in. Without food, China's consumer price index (CPI) rose 2.7%, during the month. While the current rate is still above Beijing's target rate of 4%, it's still well below the 20% inflation rate reached in the 1990's.
International Monetary Fund's (IMF) managing director, Christine Lagarde, recently said during a trip to the nation, that "Inflation is clearly abating and monetary tightening can ease off a little bit." For the Chinese government, these lower inflation rates give it more flexibility to grow its slowing economy. As growth in Europe and the United State stalls, Beijing can begin the process of easing and stimulating domestic consumption again. Analysts predict that China will undergo selective policies to grow small business, while continuing to curb its property markets. (To know more about IMF, read: An Introduction To The International Monetary Fund.)
Time to Add the Dragon
With inflation numbers in the nation beginning to subside, now could be a great time to add China to a portfolio. Despite stocks within the nation popping on the news, the previously mentioned FXI, is still about 22% below its 52-week high. That fund, or the SPDR S&P China (ARCA:GXC), which holds large-cap mainstays such as China Unicom (NYSE:CHU) and China Petroleum & Chemical (NYSE:SNP), make ideal ways to play the easing.
With Beijing focusing its attention toward substantially boosting domestic consumption, battered small caps in the nation warrant attention. These smaller firms offer direct exposure to the domestic Chinese economy, and could be great bets on its growing middle class. The Guggenheim China Small Cap (ARCA:HAO) is the grand daddy of small cap Chinese ETFs, but the cheaper iShares MSCI China Small Cap Index (ARCA:ECNS) might make a better choice. The iShares fund also features a wider range of holdings, with about 30% in the consumer sectors. For a direct consumer play, the Global X China Consumer ETF (ARCA:CHIQ) fits the bill.
The Bottom Line
As China's inflation worries continue to subside, investors may want to revisit the nation once more. The continued drop in its consumer price index, gives Beijing the flexibility to, once again, begin stimulating its slowing economy. The previous exchange traded funds, along with the iShares MSCI China Index (ARCA:MCHI), offer the best broad approaches to playing the revival in Chinese equities.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
Continued Lower Numbers
China's efforts to stimulate itself during the credit crisis, and global slowdown, worked perfectly. Unfortunately, that blistering growth came with a nasty side effect; high inflation. Overall, Chinese inflation peaked in July at 6.5%. Since then, the Chinese government began a variety of efforts to slow down its overheating growth. The central bank of China raised interest rates a total of five times in 2010, and continued to do so through July of 2011. Bank reserve requirements were raised to 21.5%, and a credit "clamp down" was imposed to help cool the nation's red hot property market.
These efforts seem to finally be paying off for the nation. Inflation is now on the decline for the third consecutive month. According to the latest government figures, consumer inflation dropped to 5.5% from September's 6.1%. Analysts cite Chinese inflation to be driven by higher food prices. Strong demand and summer flooding, that damaged crops, contributed to food prices rising nearly 11.9% in October. Analysts expect inflation to continue to abate, as the autumn harvest rolls in. Without food, China's consumer price index (CPI) rose 2.7%, during the month. While the current rate is still above Beijing's target rate of 4%, it's still well below the 20% inflation rate reached in the 1990's.
International Monetary Fund's (IMF) managing director, Christine Lagarde, recently said during a trip to the nation, that "Inflation is clearly abating and monetary tightening can ease off a little bit." For the Chinese government, these lower inflation rates give it more flexibility to grow its slowing economy. As growth in Europe and the United State stalls, Beijing can begin the process of easing and stimulating domestic consumption again. Analysts predict that China will undergo selective policies to grow small business, while continuing to curb its property markets. (To know more about IMF, read: An Introduction To The International Monetary Fund.)
With inflation numbers in the nation beginning to subside, now could be a great time to add China to a portfolio. Despite stocks within the nation popping on the news, the previously mentioned FXI, is still about 22% below its 52-week high. That fund, or the SPDR S&P China (ARCA:GXC), which holds large-cap mainstays such as China Unicom (NYSE:CHU) and China Petroleum & Chemical (NYSE:SNP), make ideal ways to play the easing.
With Beijing focusing its attention toward substantially boosting domestic consumption, battered small caps in the nation warrant attention. These smaller firms offer direct exposure to the domestic Chinese economy, and could be great bets on its growing middle class. The Guggenheim China Small Cap (ARCA:HAO) is the grand daddy of small cap Chinese ETFs, but the cheaper iShares MSCI China Small Cap Index (ARCA:ECNS) might make a better choice. The iShares fund also features a wider range of holdings, with about 30% in the consumer sectors. For a direct consumer play, the Global X China Consumer ETF (ARCA:CHIQ) fits the bill.
The Bottom Line
As China's inflation worries continue to subside, investors may want to revisit the nation once more. The continued drop in its consumer price index, gives Beijing the flexibility to, once again, begin stimulating its slowing economy. The previous exchange traded funds, along with the iShares MSCI China Index (ARCA:MCHI), offer the best broad approaches to playing the revival in Chinese equities.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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