Chinese Stocks: This Market Has Big Upside Potential For 2012!
Back in early December 2011, I wrote an article about Chinese stocks. The article, Chinese Stocks Set To Soar In 2012?, explained why these stocks are poised for big gains this year.
The main reason for my bullish outlook was simply a key shift in Chinese monetary policy. You see, in late November, the Chinese government signaled inflation had been defeated and it was time to refocus on growth.
The signal was delivered by the People’s Bank of China.
In a surprise move, the PBOC lowered bank reserve ratio requirements for the first time since 2008. The move effectively increases the amount of cash banks can lend to individuals and businesses.
Lowering reserve ratio requirements can only boost growth so much. For the Chinese economy to keep growing at 8% or 9% annually, the government will have to take further steps to foster growth.
Of course, the next logical step is for the government to start lowering interest rates. Lower interest rates provide businesses with an incentive to borrow money needed to fund their growth. And as businesses spend these funds, it provides a big boost for the economy.
Here’s the upshot…
Investors know the lowering of bank reserve ratio requirements is just the first step in the government’s new easy monetary policy. They also know easy monetary policy can drive stocks higher and higher for years to come. Armed with this knowledge, investors are sure to begin pouring money into beaten down Chinese stocks.
Still not convinced?
Here are a three new reasons why investors are poised to move into Chinese stocks.
Last week, the PBOC injected an eye-popping $56 billion into the monetary system through reverse-repurchase agreements.
It’s the most since Bloomberg began keeping track in early 2008. And it drove the seven-day repurchase rate, a gauge of funding ability in the financial system, to the highest level in almost seven months.
I know this sounds complicated. Here’s what you need to know.
Last week’s reverse repo was an amount close to one reserve-ratio cut. In other words, the PBOC effectively lowered reserve ratio requirements for Chinese banks once again. Just one more clue the Chinese government is intent on loosening monetary policy and driving stronger economic growth.
Also last week, China’s State Council announced they’re considering a landmark change.
The agency is reviewing a proposal to allow local pension funds to invest 10% to 20% of their assets into stocks. This could be another huge source of inflows into Chinese stocks. According to Reuters, the new policy could prompt pension funds to invest a whopping $28 billion into the stock market.
You don’t have to be Warren Buffett to understand that inflows of this kind can drive stock prices higher in a hurry.
A third reason why Chinese stocks are headed higher is solid earnings growth at Chinese companies. 35 companies in the Shanghai Composite have reported fourth quarter earnings so far. And the numbers show an average gain of 19%.
Solid earnings during a period of tighter monetary policy and slowing GDP growth is sure to attract more investors to Chinese stocks.
If you don’t have any exposure to Chinese stocks, now’s your chance to get in at bargain prices. The Shanghai Composite is trading at just 9.5x estimated earnings. That’s very close to the record low P/E of 8.9x hit on January 6th.
No question about it, Chinese stocks are poised for big gains in 2012. Take a look at some of the larger Chinese companies with ADRs trading on US exchanges for your own portfolio. Or if you want to lower your risk, consider investing in a quality Chinese equity ETF like the iShares FTSE China 25 Index (FXI).
Category: Foreign Markets
