Ignore The Naysayers… Buy Chinese Stocks!
China’s making headlines again. And once again, it’s for all the wrong reasons.
On Friday, China’s National Bureau of Statistics reported that industrial production rose just 9.3% year over year in April. That’s down from 11.9% growth in March. And the number missed estimates for an increase of 12.2%.
The disappointing industrial production data follows the recently reported drop in GDP.
In April, the government said GDP grew at a slower pace in the first quarter than most economists were expecting. What’s more, the quarter marked the weakest period of growth in nearly three years.
Clearly, the data paint a picture of slowing growth in the world’s second largest economy.
What’s more, the data has further emboldened the China bears. They’re all pointing to the recent data as further evidence that Chinese stocks are heading lower from here.
But I disagree.
The bears are merely sensationalizing the bad news to scare investors out of Chinese stocks. It makes perfect sense. Massive selling of Chinese stocks would provide a big boost to the bears’ short positions.
What the bears aren’t telling you is the Chinese government’s ramping up efforts to boost growth.
On Saturday, the government lowered the reserve-requirement ratio (RRR) for the third time since November 2011. The RRR was cut by another 0.5 percentage points, bringing it down to 20%.
The RRR is used to determine the amount of deposits banks must hold in reserve rather than lend out. By cutting the RRR, the government is freeing up the nation’s banks to lend out a lot more money going forward.
In fact, Goldman Sachs estimates the move will release $71 billion into China’s financial system.
But here’s the key…
Cutting the RRR is not doing enough to stimulate growth in China. The government has cut the rate three times since November, but the economy is still slowing.
Clearly, more stimulus is needed.
This can mean only one thing. The Chinese government has to take their strategy for loosening monetary policy to the next level.
That’s right… interest rate cuts.
Lowering interest rates is the most direct way to stimulate China’s economy. Lower rates provide businesses with an incentive to borrow funds and invest them back into the economy.
What’s more, rate cuts lower the amount of interest paid on fixed income investments. This provides investors with a huge incentive to move money out of bonds and into assets with higher growth potential… like stocks.
And make no mistake, the Chinese government will do whatever is necessary to stimulate growth and boost the country’s flagging stock market this year. How can I be so confident China’s Communist leadership will take the necessary steps to right the economy?
Simple. The government’s preparing for a once-in-a-decade transfer of power later this year. And they definitely don’t want this delicate process threatened by social unrest over declining economic growth.
To ensure this power transfer goes off without a hitch, the government is sure to do everything in its power to get the economy back on track.
Bottom line…
This is a great time to buy Chinese stocks. With the Shanghai Composite down more than 60% from the 2007 peak, many Chinese stocks are trading at bargain basement levels.
But these low valuations won’t last forever. The government’s loose monetary policy is bound to send Chinese stocks soaring sooner rather than later.
Take a closer look at some high-quality Chinese stocks or a Chinese Stock ETF for your own portfolio today.
Category: Foreign Markets
