Chinese Stocks Set To Soar In 2012?

| December 2, 2011 | 0 Comments

The year of the Rabbit was more like the year of the Tortoise as far as Chinese stocks are concerned.  Of course, I say that tongue in cheek as there is no Tortoise in the Chinese Zodiac.

But the analogy holds true.

There’s no question Chinese stocks have struggled in 2011.  As I write, the Shanghai Composite Index is down about 16% for the year.  That follows a lackluster 2010 in which Chinese stocks dropped more than 14%.

Next year is looking much better, and I’ll tell you why in a moment. But first, let’s take a closer look at what happened this year.

First off, China’s seemingly impervious economic growth machine began showing signs of breaking down.

GDP growth slowed from 9.7% in the first quarter to 9.5% in the second and recently dropped to 9.1% in the third.  To make matters worse, some overly bearish analysts are now predicting GDP growth will eventually fall below the critical 8% level.

A drop below 8% is considered a doomsday scenario for the country.

Most experts believe China must maintain 8%-plus growth to ensure there are enough jobs for the millions of poor, rural Chinese flooding China’s cities in search of jobs.  Growth of less than 8% could lead to widespread unemployment and potentially devastating social unrest.

That’s a key reason why, as I’ll explain below, the Chinese government is not about to let GDP growth slip any further.

Another big problem for Chinese stocks this year was the government’s effort to get out in front of rising inflation.  Since October 2010, China has raised interest rates five times.  And bank reserve ratio requirements were increased several times as well.

These policy actions led to a steep drop in borrowing by businesses.  And less borrowing meant less investment and slower growth.

A third obstacle for Chinese stocks in 2011 was the onslaught of attacks by greedy, unscrupulous short-sellers.  Several previously unknown, and in some cases anonymous, “research” firms produced reports this year claiming to expose fraud at dozens of Chinese companies.

You know the drill by now.

The firm places a short position on a small Chinese company.  Then they release a report accusing the company of fraud.  The stock plunges and the firm makes a huge profit on their short position.

It sure looks like good ole fashioned stock manipulation to me.  I guess we’ll find out the truth after the SEC concludes their investigation into the situation.

Whatever the case may be, the result is the same.  Chinese stocks have had a rough go of it in 2011.

But the tide is turning…

The Year of the Dragon should be a much better year for Chinese stocks.

You see, Chinese monetary policy is shifting focus from tightening to easing.  This week, the People’s Bank of China reduced bank reserve requirement ratios for the first time since 2008.  The first step in what many believe is the beginning of a new cycle of looser monetary policy.

This morning both Goldman Sachs and HSBC said they believe China will cut interest rates in 2012.  It makes sense to me.  With inflation now under control, the Chinese government must shift their focus to fostering economic growth.

And the quickest and most direct way to foster growth of course is to cut interest rates.

Lower rates will spur new borrowing by Chinese businesses to fund expansion.  As the cycle gathers steam, GDP rates ought to stabilize and start moving higher.  And stronger growth will translate into robust revenue and earnings growth for many Chinese companies.

Of course, nothing drives stock prices higher like higher sales and profits.

With China on track to begin a new economic growth cycle, the time is now to jump back into Chinese stocks.  You can easily gain exposure to Chinese stocks through an exchange traded fund like the iShares FTSE China 25 Index (FXI).

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Category: Foreign Markets

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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