More thoughts on China – How Will Its World Role Evolve?

By: ispeculatornew
Date posted: 06.14.2011 (5:00 am) | Write a Comment  (0 Comments)

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After expressing serious doubts about investing in China in yesterday’s post, today we look at more general thoughts about the country. Although the U.S. has the largest economy in the world it is starting to lose its impact on the global stage. According to the International Monetary Fund (IMF), emerging markets account for more than 60% of global growth.

That is a lot of buying power and one group that we have our eye on is the BRIC nations. Recently we wrote about the investment opportunities in Brazil. The ETF, EWZ, continues to remain volatile but we recommend keeping an eye on it and wait for buying opportunities.

This week we want to talk about the giant of the group, China. Despite the global economic crisis, the Chinese economy has remained extremely strong.  In 2010 the country’s GDP grew by 10.3% (compare that to the U.S. growth of a measly 2.8%). The IMG is expecting China’s economy to grow by 9.6% this year and 9.5% in 2012– those are some very impressive numbers.

The stronger China gets the more influence they will have over the global economy. China is the number one customer of U.S. debt. According to the U.S. Treasury Department as of March 2011 China owned $1.14 trillion dollars. Japan came in second place owning $907 billion in U.S. debt and in third place is Great Britain, which owns $325 billion.

Although China keeps buying U.S. debt the government has said on a number of occasions that they are planning to diversify their holdings, which is a good sign that investors should be looking at doing the same. The one bright side to China owning so much U.S. debt is that the U.S. is almost too fail. China probably can’t afford the U.S. to default on its debt, if the U.S. fails then who will buy all the products made in China?

Investing in China can be a little difficult. Foreign investors are not able to access Chinese markets; however investors can access stocks through the Hong Kong Stock Exchange. Some of the larger Chinese companies are also traded in the U.S.

Baidu Inc is probably one of the most famous Chinese companies in the U.S. at the moment and it’s also a tech company that we follow and have traded a few times. The company is traded on the NASDAQ under BIDU. We can see the price is under some modest pressure but volume is starting to drop and it looks like $120 could hold as a good support area. A break below that could lead to test support at $115.

What makes BIDU so attractive is the fact that is the Chinese Google (literally it is the largest search engine in the country). China also has the largest population in the world so BIDU’s customer base is almost unlimited, which is why it attracts a lot of attention from long-term investors.

Investors can also jump into the Chinese market through ETF. Two of the most popular Chinese ETFs are iShares FTSE/Xinhua China 25 Index Fund (FXI) and the iShares MSCI Hong Kong Index Fund (EWH).

Similar to BIDU, both of these ETFs are under some selling pressure. For FXI, volume is also strong on the selling pressure so we could see another drop. There appears to be some initial support at $41.50.

Although EWH has dropped sharply in the last few days, we have not seen the strong volume spike similar to FXI. If volume picks up the price could drop to $18.

Investors should also be careful and fully investigate any potential investment in a Chinese company. There are a lot of Chinese penny stocks in the market that sound better than they are. The IMF also warns that although emerging markets are leading world growth, there is a risk that if the countries don’t get their monetary policies under control, it could lead to a boom/bust scenario.

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