A Chance To Add China

By Aaron Levitt | May 30, 2012 AAA

For many investors, emerging market nations are playing an ever-increasing role in portfolios. 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.

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To that end, funds like the iShares FTSE China 25 Index Fund (ARCA:FXI) have surged in popularity and assets. However, not everything is perfect in Asia's Roaring Dragon. China's economy has begun to slow, as efforts to cool inflation may have proved too effective. With economic data continuing to weaken in the nation, analysts expect Beijing to undergo aggressive stimulus to prop-up the economy. For investors, the time could be right to add a dose of Chinese equities to a portfolio.

Down for Seventh Straight Month
China's efforts to stimulate itself during the global slowdown has worked perfectly. Unfortunately, that blistering growth came with a nasty side effect - high inflation. Over the last three years, the Chinese government has undergone a variety of efforts to slow down that overheating growth and turn back the tide of inflation. Those policies may have finally worked - perhaps too well.

Inflation in China now runs at 3.4%. However, as inflation has cooled, so has the rest of economy. Retail sales across the nation have slowed and data has showed that China's trade surplus has widened after both imports and exports drifted lower. At the same time, industrial output has fallen for the seventh straight month, with investment bank HSBC's (NYSE:HBC) PMI report on China's industrial activity showing a downtrend. The metric fell to 48.7 in May, down from a reading of 49.3 in April. Any reading under 50 signals a contraction in output.

SEE: The Risks Of Investing In Emerging Markets

These readings, plus the huge drop-offs in electricity demand and housing transactions, now have analysts predicting that Beijing will undergo a series of aggressive stimulus measures within the next few months in order to prevent a further deterioration of growth. A package of state-directed lending for investments in infrastructure, a cut to key interest rates as well as a further reduction in bank's reserve requirement ratios, are said to be on the table. These efforts will once ignite the fuse of economic growth in the nation. Analysts estimate that China will see GDP growth between 8 and 8.5% this year- above the official state target of 7.5%.

Don't Sell the Dragon Short
With Beijing's economic focus shifting back to growth, now could finally be the time to bet on China. The broad-based SPDR S&P China ETF (ARCA:GXC) tracks 179 different Chinese firms including insurance specialist China Life (NYSE:LFC) and the nation's largest Internet provider Tencent Holdings (OTCBB:TCEHY). Overall, the fund provides a good mix of Chinese state-owned enterprises (SOEs) as well as pure-public plays in the nation. The SPDR ETF, along with the iShares MSCI China Index (ARCA:MCHI), make ideal broad ways to play the nation's return to growth.

SEE: Equity Valuation In Emerging Markets

With infrastructure spending predicted to pick-up because of new stimulus measures, investors may want to consider the theme. The EGShares China Infrastructure (ARCA:CHXX) offers a direct play on the growth of Chinese infrastructure. However, despite being around for over two years, the AUM as well as trading volume for the ETF continues to be on the low side. A better bet may be some of its constituents. Aluminum Corporation Of China (NYSE:ACH) has seen its share price dwindle with slowing global growth, but could make an interesting value buy as rising spending will drive demand for its products. Likewise, electricity producer Huaneng Power International (NYSE:HNP), should see higher demand as well.

The Bottom Line
As China's inflation worries have subsided, the threat now is slowing growth. Various economic indicators in the Asian dragon are beginning to show some signs of decay. However, low inflationary pressures gives Beijing the flexibility to, once again, begin stimulating its slowing economy. Now could be time for investors to add shares of Chinese equities. The previous picks, along with the Barings Greater China Fund (NYSE:GCH), make ideal selections to play the nation's renewed growth.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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