Buy Chinese Stocks After The Bubble

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Includes: CNHS, CNY, FXCH, FXI, FXP, GXC, PGJ, YINN
by: Speeder

Summary

S&P, DJIA, NASDAQ and other US market indexes fell by more than 10% during last 7 days.

The main reason is not the Fed but China's determination to become the world's leading country.

The real GDP growth rates are still high, and the increase in productivity will cause GDP per capita to rise quickly.

I recommend buying Chinese stocks when the current bubble-based price decline is over.

In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again. --John Maynard Keynes

This week was terrible for both the US market and other world indexes. S&P 500 fell below the 2000 level, while DJIA is testing its 9-month lows. NASDAQ is reaching 4500 (see Diagram 1). Nearly all large cap stocks continued to show "red flags": Google is down by more than 5%, Apple is down by more than 15%, Chevron and Exxon Mobil fell by 13-20%, and financial stocks like Wells Fargo, JP Morgan, Citigroup, GS, etc. are all down 11-13% on average (Diagrams 2,3).

Diagram 1

Source: Yahoo Finance

Diagram 2

Source: Yahoo Finance

Diagram 3

Source: Yahoo Finance

Most analysts say that the potential interest rate hike is the main reason for the decline. Many analysts name the Chinese factor: the so called "risks of the slowing economy" and the yuan devaluation, which was initiated by the Chinese government last week. Few analysts think about economic cycles and very few forecast a recession in the next year. In my opinion, these analysts are actually right. However, as always, they are too late.

Nowadays, USA is not the only country that produces high-quality goods. The Chinese factor has made the lives of US-based companies more complicated. In my opinion, the prosperity of the US economy during the previous 7 years was mostly an illusion created by multitrillion quantitative easing programs. If no structural changes take place in the States, the Chinese "miracle" may become the start of a new era.

Some key statistics

Since 2005, China's real GDP has increased by more than 130%, whereas the real accumulated growth of US GDP is only 13%. Moreover, China has become the world's largest economy by the end of 2014: its purchasing-power adjusted GDP left the USA in the dust by more than $200B. (IMF data; source - Business Insider article).

According to the IMF, the share of real GDP of "emerging markets and developing economies" will have reached a 60% level by 2020. Consequently, the advanced economies' share will decrease to 40% (see Diagrams 4 and 5). However, the GDP per capita in the developing countries is nearly 5 times less than in the advanced economies (Diagram 6) and, according to the IMF's forecasts, will increase much more slowly in years to come.

Diagram 4

Source: data - WorldBank, infographics by author

Diagram 5

Source: IMF

Diagram 6

Source: IMF

Now let me say something about GDP per capita. I agree that the Chinese population of 2B+ people has been the main factor of the country's growth during the previous years. However, I see that China is becoming a technology-based economy, whose main focus in the future is not on importing technologies, but on creating them and exporting high-quality goods to other countries. Xiaomi, Lenovo, Huawei, Alibaba - are all examples of the future of China.

Frankly speaking, I am absolutely sure that this "work force - technology" mix will make this country a new "superstate" in the nearest future. Moreover, the wealth per capita will also rise as China begins to rely on domestic demand. This will increase the consumption part of the real GDP.

In my opinion, the main reason for the declining US stock market today is not the potential Fed rate hike but the sunrise of China as an advanced economy. A decreasing GDP growth will not make the giant become less powerful. The recognition of yuan as the global reserve currency will make Chinese stock indexes rise in the same manner as DJIA did in the last century. This is why I suggest that you buy Chinese stocks after current bubble-based decline is over.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.