Barron's Hates China

Includes: CHIE, CHL, SNP
by: Roger Nusbaum

The Barron's cover story was a generally bearish piece on China which included the following quote from Edward Chancellor from GMO:

All I know is that China has all the earmarks of a classic mania that will end badly.

Barron's also explored an argument that the favoritism shown toward state owned enterprises like Sinopec (NYSE:SNP) and China Mobil (NYSE:CHL) crowds out smaller start ups which it was said will lead to a Japan-like stagnation. The article also goes after demographics, consumption, infrastructure and manufacturing efficiency.

There is much to be skeptical and wary of when it comes to investing in China, most notably the banks and the real estate companies. And although it doesn't get a lot of attention these days a lot of fingers got burned buying Chinese companies whose primary listings were in the US (commonly referred to as reverse mergers).

Ok but look at the chart. From the peak of the US market in late 2007, the Shanghai Composite is down 61% and the Hang Seng is down almost 40%. Shanghai recovered a little in 2009 and has been drifting down since. The Hang Seng recovered a little more and its drift has been more sideways than downward.

The performance of both markets has discounted some portion of the bearishness expressed in the article. The question is whether it has discounted the entire bear case not enough or too much. If you really draw the Japan conclusion then you definitely would want to avoid China.

On a relative basis I continue to believe that energy is one way to own China while avoiding what will be ground zero if there is a serious problem there similar to how consumer staples avoided ground zero in the US in 2008. Later today I should have an article out at that explores this a little further along with a look at the Global X China Energy ETF (NYSEARCA:CHIE).

Ultimately the decision to own China will have to be made by you. Every country has pros and cons to sort through and then decide upon. The approach I try to take is to minimize the consequence if I am wrong. I generally have a favorable outlook for the long term excluding the banks and real estate companies but we do have a very small weighting for now via ETF exposure.

(The testing for RRGR continues although it seems like most of it is about getting us oriented on how to use the Bank of New York systems and how to interact with their various departments. For now things are still on track for July 11th.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.