6 Major Trends Will Propel China Stocks Forward in 2010

I recently read an article in Time magazine that called the first 10 years of the 21st century, “The Decade from Hell.”  For
investors who kept their money on U.S. soil, this moniker actually fits quite well. If you bought and held an S&P 500 Index fund from 2000 to
present, you lost approximately 20% of your principal.

But what if you would have put your money to work in China stocks? 

Your results would likely vary depending on the fund you chose, but it’s safe to say that if you would have bought a basic China index fund
at the beginning of the century and held it through today, you would likely have a gain somewhere north of 100%! This kind of real portfolio growth
can only be garnered by investing where the real growth is taking place — and the real growth is taking place in China.

In 2010, I see six major trends propelling China stocks forward. Let’s take a look at each one, as well as the stocks best positioned to take
advantage of these trends.

NEXT – China Trend #1

China Trend # 1 – The Growth of Small- to Medium-Sized Enterprises

Prior to the global financial crisis, China’s state-owned enterprises (SOEs) had been in decline for over a decade. But with China’s $586
billion stimulus package and Chinese banks lending out around $1.3 trillion in 2009, SOEs benefited greatly as most of the funds filtered into municipalities
and SOEs controlled by municipalities.

But I believe in 2010 the binge spending on SOEs will come to an end, and that means China’s private sector companies will once again be on
the rise. That’s because entrepreneurial small- to mid-sized companies employ more than half of China’s labor force, and Beijing knows that government
policies need to support the private sector in order to stimulate employment and economic growth going forward. So, I think these small- to mid-sized
companies will do well in 2010 as the Chinese economy continues to recover.

One such company is Duoyuan Global Water Inc. (DGW). This
firm is the leading domestic water treatment equipment supplier in China, with three business segments including circulating water treatment, water
purification and wastewater treatment.  Water treatment is essential in China, especially in the growing second-tier cities.

NEXT – China Trend #2

China Trend #2 – Expect More Growth in China’s of Second-Tier Cities

China’s next phase of economic growth will be driven by domestic demand rather than exports — and the majority of this momentum will be driven by second-, third- and fourth-tier cities. When you consider that there are 170 cities in China with population of more than one million but only four of these cities — Shanghai, Beijing, Guangzhou and Shenzhen — are considered first tier in both size and per capita GDP, it’s easy to see why China’s economic growth next year will be driven by the other 166 cities.

Many of these cities are located in central China and actually posted GDP growth of 10% or more in the first half of the year due to robust domestic demand. And we can thank China’s big stimulus package for this growth, given that one of its main goals is to better connect Chinese coastal cities and these second-tier cities with faster trains and better highways.

This infrastructure build-out is just getting under way, so you can bet that there will be a lot more growth from companies building out these second-tier cities in 2010. And one of the best bets along these lines is Xinyuan Real Estate (XIN), a national
property developer that concentrates on China’s second-tier cities with populations between two million to 10 million.

NEXT – China Trend #3

China Trend #3 – Expect the Chinese Yuan to Grow Stronger

Chinese real estate and rent prices have surged higher in 2009, as Chinese banks increased the country’s money supply by nearly 30%. As you might have guessed, this is causing inflation pressure to build up in China, and the Chinese government is likely to start tightening bank lending. As a result, we will likely see the Chinese yuan appreciate in 2010, which isn’t necessarily a bad thing for Chinese companies, as an appreciation in the yuan will boost domestic consumption since Chinese consumers will have more buying power with their currency.

This means you will want to invest in Chinese companies that cater to this strong domestic
consumer demand.

NEXT – China Trend #4

China Trend #4 – Advertising Spending Recovers

One of the main sectors hurt in the global economic slowdown was advertising. While China’s advertising industry was less hurt than other economies
around the globe, it was not completely spared from sustaining some real damage.

But advertising spending in China started to pick up in the third quarter, and I expect that trend to continue in 2010 as the global economy continues
to rebound. A Chinese company likely to benefit here is Internet search giant Baidu.com (BIDU). Their business model is advertising-dependent, and therefore stands to do well as advertising spending recovers in 2010.

NEXT – China Trend #5

China Trend #5 – The Rich Grow Richer

China’s monetary easing policy pushed asset prices sharply higher in 2009, particularly in first-tier city real estate. In addition, this also helped fuel a sharp increase in capital market activities in China, with IPOs and other forms of capital formation. Given this, the amount of wealth for Chinese millionaires and billionaires greatly increased in 2009, while at the same time “Chuppies” are also doing much better this year.

As a result, Chinese tourists are traveling and spending more money abroad than ever before. This helps companies such as travel firm Ctrip.com (CTRP),
the leading online consolidator of hotel rooms and airline tickets in China.

NEXT – China Trend #6

China Trend #6 – Expect ChineseReal Estate to Remain Strong

In China, real estate is a primary investment vehicle, and a store of value. So, property transactions and value move in direct correlation with the aggregate amount of wealth created. As a result, high-end real estate surged in 2009. But I now expect these prices to consolidate in first-tier cities like Beijing and Shanghai, while at the same time, growth shifts to second-tier cities that are home to more reasonable property prices.

Just consider that less than 3% of Chin’s total population lives in first-tier cities, while 40% of the country’s population lives in second-, third- and fourth-tier cities. So, we should see further appreciation in central Chinese cities, which will create big investment opportunities in companies in that cater to the Chinese real estate market in 2010.

And again, one of the best companies along these lines is the aforementioned Xinyuan Real Estate (XIN).