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Global investors are starting to take a hard look and are starting to return to Chinese equities. This is something that I have been saying would be inevitable, with the stagnant prospects for economic growth in the U.S. and Europe coupled with looming global inflation.

There is no question that there have been transparency, disclosure, accounting and in some cases fraud allegations that have impacted many Chinese companies whose shares trade in Singapore, Hong Kong, Germany, Canada and the United States.

Auditors, securities attorneys and company management have been put on notice ever since the allegations first surfaced a couple of years ago. While today there is not a 100% guarantee that investing in Chinese companies is riskless, investors now have a higher level of confidence regarding disclosure and transparency in taking the leap to get involved in Chinese stocks.

There are of course bigger issues that are of concern to investors who want to get involved in this world's most populous nation of 1.34 billion. At the top of the list of concerns is the change in the country's leadership, which hopefully will take place in the near future, although no official date has been set.

Another concern is China's continuing labor strife. There have been hundreds of illegal labor strikes over the past year. A most recent incidence was at one of Foxconn's (OTCPK:FXCNF) major facilities in Taiyuan in Shanxi province, which employs 79,000.

Yesterday, here at Seeking Alpha I talked about two Chinese companies, Asia Carbon Industries (OTCPK:ACRB) and China Carbon Graphite (OTCQB:CHGI). Both of these are smaller capitalization companies, are profitable and growing. In that article I compared them to two established and larger cap U.S. companies that are also in the specialized chemical sector, Valhi, Inc. (NYSE:VHI) and Minerals Technologies Inc. (NYSE:MTX).

Today, Asia Carbon Industries is trading at a P/E of around 1.7, and the P/E of China Carbon Graphite is approximately 4.43. Both of these P/Es reflect the reduced interest in Chinese listed companies by global investors. But, when you just compare these P/Es to the P/Es of Valhi, which is around 15.62 and Minerals Technologies which is around 17.32, is an important comparison. While Valhi and Minerals Technologies, I believe, are trading at P/Es deserving of companies with a growth story, as I indicated yesterday, they're not exactly growth stories. These P/Es as metrics by themselves are sufficient reason for investors to consider growing Chinese companies as an option to "mature" companies in "mature" economies that are likely to have stagnant growth in revenue and net income.

In today's Wall Street Journal Lingling Wei in an article, "As Chinese Stocks Slip, Funds Move In." stated, "…some foreign fund managers to tiptoe into the market, betting on the country's long-term growth potential at a time when Chinese officials also have stepped up efforts to attract international capital to bolster financial markets."

This article confirms something what I have been saying for quite some time. Global investors, specifically those in the United States and Europe, can't avoid Chinese equities for long.

Chinese equities merit attention:

  • Problems with the ongoing running of the monetary printing presses by the European Central Bank (ECB) and the U.S. Federal Reserve. Eventually the huge increase in the U.S. and ECT money supply has to lead to a period of high inflation, once growth returns to the "real economy." This will happen when real economic growth returns, somewhere. The "somewhere" will more than likely be China.
  • China will likely finish this year with GDP growth of between 6.5% and 7%, down substantially from the GDP growth of prior years. But China's GDP growth, compared to what will be flat to negative GDP growth for the Eurozone, and minimal GDP growth in the U.S., by itself makes China very attractive.
  • When, not if, inflation really hits globally, which can happen very quickly, it will result in investors holding debt securities, including both sovereign debt (including US Treasuries), as well as low interest rate corporate debt will find that their effective yield is negative after factoring in inflation. (This may already be the case now.) investors will start taking a look at both commodities and equities as a way of staying ahead of inflation, which is a factor behind the conclusion of today's WSJ article.)

Conclusion

With looming inflation and stagnant economic growth in the U.S. and Europe, investors need to look at China.

While some investors will look at equities in the US or Europe, economies that more than likely will continue to have minimal or negative GDP growth, many will look at emerging markets.

And, when investors end up looking at emerging markets, they'll end up looking at China.

To me the answer is clear. Chinese equities will be a beneficiary. This will include not only Asia Carbon Industries and China Carbon Graphite, but hundreds of other growing Chinese companies listed on highly regulated and transparent markets in Europe, Hong Kong, Singapore and the United States.

The beneficiaries will not, I believe, be companies with stagnant growth of revenues and income, including not only Valhi and Minerals Technologies, but thousands of other American and European companies as well.

Caution

There is no question that investing in smaller-capitalization companies, as well as investing in companies in emerging markets, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.

In the case of both China Carbon Graphite and Asia Carbon Industries, while definitely both smaller-capitalization companies with operations based in emerging markets, and specifically in China, they are both U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Disclosure: I am long OTCPK:ACRB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a postion in CHGI.OB and FXCNF.PK in the next 72 hours.

Source: U.S. And Eurozone Low Economic Growth, Looming Inflation Forcing Investors To Return To Chinese Equities