For many investors, the thought of investing in China right now is pretty daunting.
Year to date, the Shanghai index has plunged 58%, while Hong Kong’s Hang Seng index has dropped 25%. Plus, the Beijing Olympics are over, and growth in the Chinese economy has slowed this year.
With statistics like that, it’s no wonder that most people are shying away from China. But if you look beyond the surface, then you’ll see exactly what most investors are missing.
Many thought that the Beijing Olympics were going to boost the Chinese markets and economy this year. In all actuality, though, the Games created a temporary pause in growth in the Chinese economy.
Sure, this is hard to believe considering that during the past seven years China spent $40 billion on infrastructure, businesses, pollution controls and security in preparation for the Olympics. And all that spending helped boost China’s economy and stock markets during this time (see, “Chinese Stocks Ready for an “Olympics Rally“).
So why weren’t China’s economy and stock markets lifted by the Olympics this year?
Drastic controls were placed on Chinese businesses in preparation for the Games. For example, hundreds of factories throughout northern China were temporarily shut down to reduce air pollution. And foreign tour groups not associated with the Olympics were banned from China during June, July and August. In addition, many stores and restaurants near the Olympic Green were closed.
As you might have guessed, this put a damper on many of Beijing’s local businesses. And only a select few advertisers, high-end Beijing hotels, security technology companies and well-connected international travel agencies were in business, and in turn, the event was a huge commercial success for all of them.
That’s why the Beijing Olympics did not have a major impact on the Chinese economy this year—the wealth was not evenly distributed. And since many businesses were closed, the Games actually slowed down the country’s economy during the last three months.
But this is all about to change.
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Post-Olympic Prosperity
With the Beijing Olympics now over, business is back to normal.
Most of the factories—many of them state-owned enterprises—are set to reopen by year end. And the majority of the restaurants and businesses near the Olympic Green have already reopened for business.
Also, inflation in China is finally under control.
China’s inflation rate dropped from 8.5% in April to 7.7% in May to 7.1% in June to 6.3% in July. And according to China’s National Bureau of Statistics, China’s inflation rate should continue to ease even more in the upcoming months, and the country is projecting an average 4.8% for 2008.
What’s helping to ease inflation in China is the fact that commodity prices have pulled back 20% to 40% in the past three months.
That alone is relieving pressure on China’s tight monetary policy—in August, the Chinese government eased lending restrictions and halted the appreciation of the yuan.
And with inflation under control, the Chinese government can focus on stimulating economic and financial market growth again (see also, “China’s Marshall Plan to Save U.S. Investors“).
In fact, the government is considering a stimulus plan of as much as 400 billion yuan ($58 billion) that may go into effect later this year. Government officials also hope that future fiscal stimuli and tax cuts will help the country avoid a sharp economic slowdown.
These are the main reasons that I’m expecting Chinese stocks to resume their uptrend this year. Actually, I’m expecting Chinese stocks to do a lot better by year-end and completely turn around in six to nine months.
The time to start preparing for this turnaround is now.
What to Do Now
The best way to profit is to establish a strong position in the Chinese stocks leading the upcoming turnaround. And if you don’t act now and buy in before this move gets under way, you could miss out on substantial profits.
To find out how I’m instructing my readers to prepare for the next leg higher, join China Strategy risk-free today.
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