Has the China Bear Left the Room?

Chinese stocks engaged in a furious run-up earlier this year but recently plunged more than 20%, prompting some observers to note that China is now in a bear market.

We are seeing signs of a resurgence.

In Thursday night's TrendBusters list, we saw 9 Chinese stocks and ETFs generate BUY signals. This means that they moved up above a previously downward sloping trend line and are now showing signs of an upside breakout.

Here's the list:

Symbol	Name
CEA	CHINA EASTERN AIRLINES
EWH	ISHARES MSCI HONG KONG INDEX
FXI	ISHARES FTSE/XINHUA CHINA
GCH	GREATER CHINA FUND
GXC	SPDR S&P CHINA ETF
HAO	CLAYMORE EXCHANGE- TRADED FUND/ALPHASHARES CHINA SMALL CAP ETF
PGJ	POWERSHARES GOLDEN DRAGON HALTER USX CHINA PORTFOLIO
XPP	PROSHARES ULTRA FTSE/XINHUA CHINA 25
ZNH	CHINA SOUTHERN AIRLINES COMPANY LIMITED

Is it justified?

Some numbers were just released. Last month, output at China's factories gained 12.3% from a year earlier. Retail sales climbed 15.4% in August from a year before. The government contends the country is on track for economic growth of 8% this year.

Much of this is the beneficial result of stimulus efforts by the Chinese government. Premier Wen Jiabao has been quoted in today's Wall Street Journal as saying that the government will continue stimulus efforts because, despite the better than expected growth numbers mentioned above, the recovery in China remains "unstable."

It can be argued that China, with it's top-down command structure and deep pockets, has seen the best effects from its stimulus efforts. Certainly, the U.S. has not been able to register the kind of growth China is showing despite pouring billions into banks, auto makers and other areas of the economy.

So it might make sense to assume that Chinese stocks got over-heated, plunged and, now that economic growth is truly visible, are heading back to somewhere around fair value. The list above is a good place to look for a few candidates for your watch list or your portfolio.

Note: Chinese symbol at the top of this post means "strength"

Disclosure: no positions

Comments

[Alphameister:]

The "China Bear" was never more than a figment of some overly active imaginations, on SA and elsewhere. The 20% criterion has little validity for developed markets; it is completely ludicrous for an historically volatile emerging market.

Sep 11 05:17 PM

[richjoy403:]

I invest in China (and other emerging markets) knowing they are volatile. I have about 20% of my portfolio in a variety of these traditionally more risky investments.

I do so because I am convinced the emerging markets are where the growth will take place for the next 20 or so years; both because they have growing populations who want our middle class life, and because many of these countries possess minerals that are in growing demand by the rest of the world.

I also have investments in the (generally no-growth) markets of the USA and Europe, but mainly to (a) take advantage of a cyclical recovery now taking place in their markets; and (b) to counter the (generally, but not most recently) more volatile emerging markets.

So, yes, China had a 20% correction, and as Alphmeister pointed out, the 20% criterion has less applicability to emerging markets. Thus it did not alter my conviction.

Sep 12 08:28 AM

[waterlily57:]

The China Bear has been politely asked to leave the room until after October 1, the anniversary of the founding of the PRC.

Sep 12 11:57 AM

[Rick S.:]

I'm with you, Richjoy403. Emerging markets, especially China's, are where the action will be for at least the next 20 years. One dark side of such investing is that it's much harder to do due dilligence on companies in emerging markets. Then again, it's our mature market that harbored con artists like Madoff and the CDO packagers in major banks. So I guess even that dark side is no worse than investing in our own market.

Sep 12 02:48 PM

[richjoy403:]

Rick S. -- I buy individual equities in the USA market. However, I find there is little hope the individual investor can adequately pick individual issues in emerging markets. Furthermore, because of the expected increased volatility in those markets, I reduce my risk by buying ETFs. In the case of China, I own both the FXI and HAO (baskets of legitimate large and small companies). I sleep pretty good.

Sep 13 07:02 AM