For many investors, emerging market nations are playing an ever-increasing role in portfolios. With analysts predicting slow growth in the developed world for the foreseeable future, these faster-moving and stronger economies are seen as a key way to realize portfolio growth. With that said, perhaps the king of them all could be China. The nation's huge population, growing middle class and blistering growth are hallmarks of the emerging-markets thesis. However, between dealing with a serious inflation problem and keeping growth alive, investors in China have seen its stocks slide further than the broad U.S. market. It is in this slide that long-term investors could pick up some China exposure on the cheap.
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Asia's Super Power
With the Hang Seng and Shanghai Composite down this year about 15% and 8%, respectively, investors in China have had little to smile about. Overall, the massive credit expansion used to prevent recession during 2008 has left the Chinese economy with a potentially precarious overabundance of liquidity. Inflation in the nation is high, and the Chinese property market is red hot. Worries about its economy realizing a hard landing are cropping up.
However, many of these fears for the long term are overblown. In response to rising inflation, Beijing has continued to raise bank reserve requirements and interest rates. These efforts have finally begun to take shape. The official 6.5% inflation numbers, while high, are far below the inflation rates seen in the 1990s. China still has plenty of wiggle room left. In response to the nation's hot property market, Beijing has instituted tighter policies and restrictions on mortgages. Again, those efforts are beginning to cool that market. According to government data, homes in only 39 of 70 mid-size to large Chinese property markets saw price increases in July. This compares to 44 cities in June.
China is also working on releasing itself from the binds of an export-driven economy. Chinese domestic consumption has already expanded at an average rate of 15% between 2001 and 2010. With plans for closing the nation's income gap, increasing low-income housing and reducing tax burdens, Beijing is serious about making domestic consumption possible for its 1.3 billion citizens. This aggressive stance also includes a five-year plan to double imports by 2015 and reduce its trade surplus to zero.
Time to Bet on Beijing
With China's GDP growth coming in at 9.5% during the second quarter, the nation continues to impress. Even if that number was cut in half, developed markets would kill to see that sort of growth. Using the recent sell-off in Chinese and global equities, investors can tap into what will be long-term outperformance. The SOE-heavy iShares FTSE China 25 Index Fund (NYSE:FXI) is down about 12% so far this year, and the iShares MSCI China Index (Nasdaq:MCHI) is near its 52-week low. Both can be used as starting points for Chinese investment. However, there are other ways to add exposure.
With Beijing making domestic consumerism a major focus of its efforts, both the Global X China Technology ETF (NYSE:CHIB) and Guggenheim China Small Cap (NYSE:HAO) represent plays on China's growing consumer economy. The Guggenheim fund has nearly 25% of its assets in consumer-related firms, while the Global X fund includes consumer-focused internet firms like Baidu (Nasdaq:BIDU) and Sohu.com (Nasdaq:SOHU).
Buying at a Discount
For investors still wanting more value from their China exposure, several closed-end funds trade at discounts to their net asset values. This provides even more cushion for investors. The China Fund (NYSE:CHN), Morgan Stanley China A Share (NYSE:CAF) and the JF China Region (NYSE:JFC) all trade for discounts to NAV larger than 9%.
The Bottom Line
With concerns about inflation and its growth slowing, Chinese equities have fallen hard over the last few weeks. However, the long-term picture for the emerging giant is still good. For investors taking that long-term approach, now could be a good buying opportunity to add or increase exposure. The preceding ETFs, along with funds like the PowerShares Golden Dragon Halter USX China (NYSE:PGJ), make interesting choices. (For additional reading, check out Investing In China.)
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