Investing in the Evolving China Story

Includes: CHL, CMFO, CNY, CYB, SNP
by: Roger Nusbaum

The US equity market started Monday by jumping 1%, presumably because of news about new Chinese yuan flexibility. Who can say if that is really why the market started higher but clearly the news was buzz worthy as there are implications politically and for global capital markets.

Here is one recap from Mike Shedlock if you'd like to read a little more.

As I read a couple of things about this news I had a very big picture thought about the China story that I have touched on before. All of the problems (apparent and real) pertaining to overcapacity, the housing market, the consequence of letting the yuan float, the consequence of of not letting it float and whatever else you want to add on is about properly (or not as the case may be) managing growth and modernization on the way up, so to speak.

The issues in the US, Western Europe and Japan revolve around trying to prevent economic deterioration caused be excesses born of deep-seated problems that come with maturing, chronic deficit spending and unfavorable demographics.

My thought about China has been the same for a long time, believing that China is clearly becoming more relevant in the world economic order but there will be plenty of mistakes made along the way.

It seems pretty clear that Chinese financial stocks are most at risk should there be mistakes. There are issues with lending, speculation, over indebtedness on the part of municipalities and so on that make the sector very unattractive, in my opinion. I also continue to believe that exporters are another bad way to go as they rely on consumption on the part of people in other countries with plenty of problems of their own.

Another segment I am wary of is recently IPO's Chinese companies traded in the US. I mentioned a company a few weeks ago called China Marine Foods Group (NYSEMKT:CMFO). I noted it was small and probably difficult to follow, as are many of them, and then I made a comment about Barron's writing every so often about scandal with these and that often they are a product of a reverse merger. I made the comment not realizing that CMFO was itself a reverse merger. I thought that was funny.

I would avoid the broadest China ETFs as many are very heavy in financial stocks, though obviously I would be more favorably disposed to a broad based China ETF that was light on financials. I think the China sector funds from GlobalX that focus on what the country needs for it's modernization would be worth considering; those being materials, energy or industrials.

For people inclined to pick individual stocks I would research companies that have been around for a long time. That doesn't have to be limited to large cap companies but I believe that the scandal factor is likely to be less at a well known company that has been around for a while.

In addition to the sectors above I think stocks from utilities and telecom play into owning part of the modernization theme.

For now we do not have across the board exposure for China but have owned China Mobile (NYSE:CHL) in the past and before that Sinopec (NYSE:SNP).