You’ve probably heard it 100 times already, China is now officially the 2nd biggest economy in the world after surpassing Japan earlier in the month. It was a huge milestone of course and China now moves to its next objective; passing the United States as the top world economy. It is of course very far from that goal but few argue that it will succeed even if it takes a few decades to get there. China remains contested by most Westerners for its good and its bad but one thing that is very clear is that many opportunities exist for investors ready to get involved in China either as Long or Short investors.
How could the Chinese economy be a good short? Simply because of all the hype surrounding China which has attracted loads of money into the country and hiked asset (and stock) prices. Did it go too high too fast? Some are betting that it did in particular in the real estate business. The big question of course remains what China’s economy’s fair value is, how fast all of this growth will happen and how will the Chinese economy and political system look 10 or 20 years from now.
Obviously, these are big questions and I could probably spend one year on the question but I’ll try to be brief to be able to present you the top ways to play China right now.
Why China is the next big thing
Some say that China will never rival the US in terms of capital markets even if its economy does evetually surpass America’s. Things are changing fast however and doubters should pay attention. A few days ago, McDonald’s became the first foreign company to issue debt in Hong Kong, in Chinese Yuan. This paves the way to other multinational companies that will want to issue debt and also become listed on Chinese equity markets. “This is going to be a popular trend.” Said Donald Straszheim, a head of China research at International Strategy & Investment Group.
The Chinese government is doing its best by deregulating the industry to help the companies. It will of course give greater exposure and visibility not only to China but to the Yuan.
Maybe it’s not
For all its growth and the fact that it is now the world #2 economy, it’s important to remember just how far China really is right now. It did just pass Japan in total GDP but its GPD per capita (per person) is about 10 times lower than Japan. And you can imagine how far it is from US GDP per capita. China has tons of work left to give its citizens access to basic infrastructure.
Another criticism that we often hear is China’s currency manipulation in refusing to let the Yuan rise. That helps the economy generate higher exports and as the government is gradually moving the Yuan towards a “free floated” currency, some argue that growth might decelerate as that happens.
Many of the economic and financial data points generate a lot of criticism and doubts as the Chinese government is far from transparent leading many to believe that the economic puicture and social problems are much greater than we are led to believe.
Plays on China
Wheather you are a bull or a bear on China, there are many opportunities for investors in what is quickly becomming a new major world financial hub. We decided to take a deeper look into many of the plays that can currently be made on China through ETF’s and a few individual stocks. We concentrated on US listed securities since many of the largest Chinese companies are listed as ADR’s on US exchanges anyway.
If you want to play the Chinese markets as a whole, you have a few very good options that have been around for a long time and sustained a solid track record . There are many slight different ETF’s but the biggest by far is FXI. Since the fees are roughly the same on each of them, I would stick to FXI for now.
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The Chinese Yuan is certainly one of the most interesting currencies in the world thanks to speculation about government revaluations. The only persons that actually know what will happen are part of the Chinese government but you can be part of the winners when that happens thanks to these 2 ETF’s.
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There is speculation about the explosion in economic activity but also bubbles in many different sectors of the Chinese economy. You can now make a very precise investment on a specific sector of the Chinese economy.
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Leveraged & Inverse Plays
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