David White

Why You Should Keep Asian ETFs on Your Radar

I should have mentioned the effects defaltion and over supply will have on the Chinese economy. China has been pumping stimulus money into its economy to stimulate it further even though it was growing at a 7-8% rate at the time of the start of the stimulus. The reason for this is that the Chinese banking system bases many of their loans on the conditions present in high growth times. If China is faced with over production (and hence slow down and/or recession), many of those loans will start to go bad. The deflation caused by the over supply will only exacerbate this by causing values to go down. With rising unemployment and deflation, China's banking problems could soon end up being as bad or worse than the US problems. It is not hard to imagine that commercial loans especially could go bad very quickly in this kind of environment. China may well elect to have a second stimulus plan (or more). Still this may not save it. It is such a populous country there is a limit to how long it can grow at 10%+ without running into this over supply problem. This was a coming problem for China. The worldwide recession has likely made it come a lot sooner. It is unlikey China will continue its stimulus programs until the US and European markets are fully recovered. Even if it does, it may still have problems. If China grows at 12% into a shrinking export market, China will soon have big problems, even if they continue the stimulus. The US and European consumers are likley learning new, more conservative spending behavior. It may be quite some time before those markets return even to the pre-recession levels (much less to beyond those levels).

You need to pick your China stocks. I think stocks in areas that are likely to grow internally in China are likely the best best. Two stocks I have touted before are CGA and CAAS. I am sure there are many, many more. I am making any immediate buy recommendations at this time.

Why You Should Keep Asian ETFs on Your Radar

I am actually suspect of the biggest asian economies China and Japan. These two are both export dirven. However, the major export markets have dried up considerably. They will likely not come back for 2-3 years. Yet these two industrial giants are still growing their industrial production mightily (China by 12.3% y-o-y last month). With a lot of extra production, but only internal extra consumption (and shrinking external consumption), both of these countries are likely to experience deflation as prices fall due to over supply. The latest economic data from Japan indicates -2.4% deflation. This is just the beginning.

Both of these countries are also extremely likely candidates for dumping in the European and the US markets. If China and Japan do this, they will then likely face penalty tariffs, etc. This may ultimately lead to even lower exports. China has recently been hit with a tire tariff in the US and an aluminum tariff in the UK. There are more areas of contention, including China's accusations against the US for dumping. Trade skirmishes have begun. We may soon see more blood shed.