Is the Chinese Market Heading Towards a Bubble or Solid Fast Expansion?

Includes: CAF, FXI, PGJ
by: Mohammad Farooque

There has been a lot written about the Chinese stock market recently in the press. Despite some of the negative coverage, I believe this region has great potential to grow and if there will be a setback it will be only temporary and followed by more buying spree.

There are several factors which support above notion. First, from historical point of view, China is now catching up after long pause. In 1820 China was the richest country of world. The combined GDP of China and India were more than rest of the world at that time. At that time there were more rich people living on a Chinese street than total number of rich people in a big European city. China had a big trade surplus with western countries. For historical reasons within 80 years both countries became one of the poorest countries in the world.

However times are again changing for China. You go anywhere in world, may it be Asia, Africa, Australia, Europe, North pole or South pole, and there is one thing in abundance: “Made in China”. China is the “Wal-Mart” of manufacturing virtually wiping out all the competition. Now it is hard to find goods made in the US even in US superstores. Most of the jobs being created in Western economies are hawker jobs for Chinese goods. Compared to enormous amount of goods and services provided by China, Chinese stock market is far less appreciated due to China being known as third world country (therefore risky investment), its less known stock market and historical domination of Western World over stock market and Currency markets around the globe. China is catching up fast; the industrial development Europe and America has gone through was spanned over centuries, but China is catching up in decades.

China has lately become a strong magnet of capital flow from Western world. It is agreed that China based stocks and mutual funds have been doing extremely well lately and some analysts are talking about a China bubble, however there is a difference between a bubble and the expansion of the economy on the basis of solid fundamentals. The China bubble is being compared with the internet bubble of 2000, which is like comparing dry apples and juicy oranges. The internet bubble of 2000 burst because at that time there were minimal revenues in Internet stocks, while this is the opposite situation However, most of the Chinese companies are already flooding the global markets with their products with virtually no competition. Despite the fact that some Chinese officials are talking about the worrisome appreciation of the stock market I believe that the Chinese government in general is quiet comfortable with the current situation. Had this not been the case the Chinese government would have never invested USD$3 billion recently in the giant buy-out firm, Blackstone, unless they believed that the market will keep going north.

Therefore in my opinion there are still several innings to play in this wonderful money making game presented in our times. Personally I like the following Chinese companies: Brilliance China Automotive Holdings Ltd. (NYSE:CBA), Trina Solar Ltd. (NYSE:TSL), Huaneng Power International Inc. (NYSE:HNP), CDC Corp. (NASDAQ:CHINA).

Disclosure: Author has a long position in some of the above-mentioned securities