Opportunity and China Stocks
Credit crunch, what credit crunch? While U.S. banks squeezed tight on almost ever dollar, Chinese banks more than doubled new loans from December 2008 to January this year to 1.6 trillion yuan (US$234 billion), which is almost one-third the value of new loans in all of 2008.
Yes, China is different. The question for U.S. investors is will those differences translate into opportunity? The most likely answer is yes.
Shares in Chinese companies available on U.S. markets and in a greater variety on the Stock Exchange of Hong Kong have followed U.S. stocks into the dumps so far. The index for Chinese enterprises listed in Hong Kong plunged 51% in 2008 and sank a further 9.6% in January.
But analysts in Hong Kong assert the future looks rosier for Chinese stocks. “China definitely will outperform the U.S. economically, and also the stock market will perform better,” said Francis Lun, general manager at Fulbright Securities. The main reason, he said, is that China has not been hurt as badly by the global economic downturn. The main casualty for China has been the export sector. “Exports are 20% of the economy, so only 20% of the economy has been hurt,” Lun said.
Benny Wong, research director at BOCOM International, said there are a number of areas in which Hong Kong and China have the advantage. Number one is the health of the banking system. “U.S. and European banks face a test of survival, (but) Chinese banks (only) face the risk of negative profit growth, and their balance sheets are still healthy.”
The surge in Chinese bank lending in January partly reflects the relative strength of banks in China, but is not totally a good thing. Experts worry that some of the flood of loans will go to shaky borrowers and wasteful projects.
But Wong said another area where China and Hong Kong have the advantage is in the move to reduce debt. So-called “deleveraging” will probably last longer in the U.S., shifting money away from purchases of goods and services. This threatens to extend the U.S. recession and increase chances for a drop in prices. This deflation may sound welcome to consumers, but Wong said, “Deflation is a scary phenomenon and is difficult to get out (of); it will deter a lot of corporate and personal spending.”
As for speed of recovery from the current crisis, Wong said there is a good chance China will find a way to grow without heavy dependence on exports while the U.S. is still repairing the economic damage.
Andy Mantel, managing director at Pacific Sun Investment Management (HK) Lt., said China can spend its way out of the global economic meltdown. Indeed, looking at stimulus plans as the percentage of GDP over 2008 and 2009, China’s plan more than doubles the recently approved U.S. stimulus. “There has been a slowdown in China, but it will still show the strongest growth in the world over the next few years,” said Mantel. “Its own stimulus package is enormous….”
If China does in fact recover faster and stronger economically than the U.S., investors likely will find opportunity sooner in Chinese stocks. Wong foresees U.S. stocks continuing to go down, possibly to 6,500 for the Dow Jones Industrial Index. He added: “If the economy cannot pick up again in the next 2-3 years, the stock market cannot really advance.”
But he thinks the Hong Kong market is near the bottom, about 10,500 for the blue chip Hang Seng Index (which includes the largest of the listed Chinese enterprises). He acknowledges there is probably only limited upside in 2009 and there are no sure things. “Recovery will largely depend on the Chinese economy,” he said. “Again there is a ‘hope’ but no guarantee.”
Some stocks and sectors are more promising than others. Lun said Chinese government steps to stimulate the economy will be a boon for electrical appliance companies such as the giant Haier (Hong Kong, 1169) and TCL (Hong Kong, 2618).
Mantel prefers smaller, privately owned companies. Most big companies are still mostly owned by the government. Investors worry that when the government starts selling down its share, the increased supply in stocks will depress prices.
The sectors with the best prospects, according to Mantel, are those benefitting from the rising middle class’s increased spending: transport, food and agriculture and consumer electronics. A long-time Mantel favorite is food-maker China Green (Hong Kong, 904), which sell fresh produce to some of the Walmart stores in China . He also likes Ju Teng (Hong Kong, 3336), a company that sells notebook plastic casing to leading Chinese electronics manufacturers. Mantel thinks some Chinese companies listed in Singapore are good values after steep drops in 2008. One is ladies footwear maker and retailer Hongguo (Singaore, HGUO). End
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