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Watch Out China’s Bubble is about to Burst

|Includes: Baidu, Inc. (BIDU), CHL, PTR

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 Pundits predicting China’s bubble will burst later this year may be right.  But . . .

. . . a 5-10% downturn in China could signify a healthy correction and, I believe, a pivotal buying opportunity for investors with a longer-term view.

The global center of gravity has shifted toward China as developing markets drive economic growth in our post-crisis world.  The entire world went into the economic abyss together, but China and other developing markets came out faster and healthier than everyone else.  These countries now serve as engines of growth for developed regions such as the United States.  In the post-crisis world, emerging market demand is driving global consumption for everything from oil to beef.

Many institutional investors fear China is on course for a painful reckoning to tame inflation and there’s increasing evidence something is wrong with China’s property market.

If you’re a stock trader, China’s inevitable roller coaster ride presents a real challenge right now.  As I mentioned earlier, a 5-10% downturn in China will signify a healthy correction and, I believe, a pivotal buying opportunity for investors with a longer-term view.  Whether you like China ‘blue chips’ such as Baidu (BIDU), China Mobile (CHL), ICBC Bank (IDCB.Y), PetroChina (PTR) or a multitude of players in online gaming, telecom, infrastructure or materials, my call is to wait for the inevitable correction, then dive back into selected Chinese equities.  But beware!  Chinese equities can burn you if you don’t do your research.

China replaced the U.S. the world’s largest automobile market in 2009.  China has also established itself as the world’s largest cell phone market.

China overtook Germany as the world’s third-largest economy in 2007 and is now closing fast on Japan for the No. 2 spot.  This momentum started before the economic crisis, but the downturn accelerated the inevitable.

Even the United States is now within range.  Goldman Sachs estimates that China will emerge as the world’s largest economy for 2030.  If that happens, the world will look back on the crisis of 2008 and 2009 as a transformational event that forced China to shed its export business model and step forward as a truly global player.

China is evolving from a nation of savers into a nation of spenders.  Government investment in education, health care and social security in the next two generations will ease pressure on urban Chinese workers to save for their children’s college, major illnesses and retirement.  This will free families to save less for the future and spend more today on luxury items.

The worst of the crisis is over, but the world will not return to the old world order.  Investors need to sharpen their global mindset and learn how to recognize opportunities in this brave new world – especially in China.

My money will be on the Chinese economy to keep marching forward over the next decade, irrespective of periodic set backs and ‘bubbles’.

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Disclosure: "No Positions"