Everyone who thinks that the Chinese economy is heading for a hard landing, better think again, especially after last week's GDP report which showed fourth quarter GDP growth came at 8.9 percent, ahead of analysts' expectations.
China's robust economic growth is propelled by a sharp reversal in the country's monetary policy last November, when the People's Bank of China lowered bank reserves. This means that the Chinese government is determined to reflate rather than deflate the country's asset bubble. This policy shift presents a good opportunity for investors to make hefty returns, provided that they invest in the right assets.
Here are four trades investors may want to consider:
Of these first two, which group is a better investment choice?
The obvious answer is the group of private companies. The problem, however, is that China isn't a market economy, but a cocktail of markets and central planning without clear and transparent rules; a system where "private enterprises" aren't really private. This means that investors in such enterprises assume a far higher risk in investing in private enterprises than in state-owned enterprises (as its confirmed by the higher beta).
Compounding the problem, private Chinese enterprises are at the mercy of imitation and intense competition from newcomers followed by price destruction that undermines their profitability, and ability to grow. This isn't the case, however, with state-owned enterprises that usually enjoy a monopoly or near monopoly position, and steady prices.
Third, buy commodities. A reflation of China's bubble is bullish prospect for energy and resource suppliers that have been rallied after the release of China's GDP data last week: Freeport-McMoran Copper and Gold (NYSE:FCX) up 2.25 percent, Rio Tinto (RIO) up 4.42 percent, BHP Billiton (BBL) up 3.79 percent, iShares Silver (SLV) up 2.12 percent, and Market Vectors Oil Services ETF (NYSEARCA:OIH) up 1.30%.
Fourth, buy American companies with a large presence in China. Everyone who has visited China in recent years (I just came back) cannot help but notice four American companies with a big presence in China: Yum Brands (YUM)--Pizza Hut, Kentucky Fried Chicken, etc.-close to 4000 branches in China; McDonald's (MCD)-1300 stores and another 700 underway, Coca Cola, and Starbucks (SBUX)-500 branches in China.
Disclosure: I am long SLV.