While the mainstream non-financial media choose to focus their attention to all the problems in Greece and its debts, an even bigger problem was brewing over in China. It seems that bubble in China’s overheated market may have finally burst. Panic selling in Chinese shares caused the nation’s markets to free fall causing many analysts to question whether or not China’s best days were now behind it and that this was a real crash or not.
But savvy investors know that there is big money to be made in calamity. For those portfolios with long term timelines, China is still ripe for some big time profits as its economy expands and switches to a more consumer driven one. The question now, is just whether or not to scoop up some of the values created by the crash. (For more, see: Greece or China: Which is the Bigger Worry?)
Too Much Hot Money
The problems in China stem from a classic too much capital flowing into its markets. Like the U.S., interest rates are pretty abysmal. To that end, many mom-and-pop investors have been plowing their savings into the market heavily over the last year or so. That fact has been exacerbated by the recent ease of restrictions allowing regular retail investors access to brokerage accounts in China. In the end, Chinese stocks became a classic bubble. Think of the dotcom crash. It was all over when your grandmother was talking about business to business (B2B) stocks.
Then the Bubble Burst
Lower gross domestic product (GDP) numbers, earnings and extremely overvalued shares caused the selling to begin. Since the middle of June, China’s two main markets are down by considerable amounts. The Shanghai Composite has lost nearly 30% of its value, while the tech-heavy Shenzhen has plunged by over 40%. Adding to the panic selling is the ability of Chinese firms to halt/pull their shares to prevent further declines. At one point, nearly 60% of the stocks listed on the Shenzhen were halted. (For more, see: How China's GDP Is Calculated.)
But all the panic could be overblown and for longer-term investors, it could be a huge opportunity. To start with, Beijing has pulled out all the stops when it comes to rescuing its faltering markets. The nation’s central bank has cut interest rates to make it easier for investors to borrow and buy stocks. Additionally, brokerage firms - via cheap loans courtesy of China's Securities Finance Corporation - have steeped in as buyers of last resort. That’s put price floors on many shares. Finally, regulators have suspended all new initial public offering (IPO) activity. All in all, China has unveiled ten major actions to help prop up the stock market. (For more, see: China's GDP Examined: A Service-Sector Surge.)
Those efforts seem to be working as both the Shenzhen and Shanghai indexes have reversed their free falls. Longer term, much of China’s growth story remains intact. It’s vast consumer potential, relatively high GDP growth rates and financial prowess still makes it worthy of a portfolio. And investors can gain access at much cheaper prices. The broad-based exchange traded fund (ETF) iShares China Large-Cap ETF (FXI) can be had for a dirt cheap price-earning-ratio (P/E) of just 11.
Taking the Chinese Stock Plunge
With 30% and 40% plunges in the books already, the worst may be over for Chinese stocks. And it be a prime buying opportunity for investors. The previously mentioned FXI is the top Chinese ETF when it comes to asset size and trading volume, but a better pick could be iShares MSCI China ETF (MCHI). (For more, see: China ETFs: GXC vs. FXI.)
MCHI’s underlying index tracks both large and mid-cap stocks within China. FXI only focuses on the largest of the large. The broader mandated ETF holds 145 stalwarts in the nation, such as telecom China Mobile (CHL) and oil major PetroChina (PTR). These aren’t fly-by-night stocks and actually represent some of the largest firms in the world, let alone China. They’ll be here long after the crash plays itself out. Overall, MCHI provides a good mix of Chinese state-owned enterprises (SOEs) as well as pure-public plays in the nation. Expenses for the $2 billion ETF are relatively cheap as well at only 0.62%.
For those with iron stomachs and who can handle the volatility the Chinese A-share market, which is only available to Chinese citizens or qualified investors, could be the biggest value. There are several ETFs that allow you to directly tap into the Shenzhen and Shanghai markets. The two that matter are the Market Vectors ChinaAMC SME-ChiNext (CNXT) and Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (ASHR). (For more, see: What's the Best ETF for the Shanghai Composite Index?)
Both have qualified investor status and actually own the A-shares rather than swaps replicating the performance. ASHR tracks large-cap domestically issued Chinese stocks, while CXNT focuses on the small and mid-cap space. Both have seen their share prices plunge as a result of the panic in China. However, they represent the future as China works towards opening its markets to outside investors.
Likewise, Chinese small-caps have been equally as decimated as its A-shares. The Guggenheim China Small Cap ETF (HAO) continues to be the prime way to gain access to China’s small-caps that aren’t off-limits to foreign investors. (For more, see: Three Ways to Trade Big Moves in the China Market.)
Finally, for those investors looking for China without so much risk, its bond market seems ripe for the picking. PowerShares Chinese Yuan Dim Sum Bond ETF (DSUM) tracks Chinese yuan-denominated bonds issued by Beijing and other government agencies. The fund’s duration is very short and DSUM currently yields 3.15%. That’s pretty impressive considering where it sits on the yield curve. (For more, see: The Chinese Yuan Bond ETF.)
The Bottom Line
The recent panic in China’s stock markets could be seen as a buying opportunity for longer-term investors. Much of the nation’s growth story remains intact. Those who can stomach the volatility could begin to nibble at some of the bargains in Chinese stocks at these levels. (For more, see: How to Profit from News about China.)