Chinese stocks moved like they were shot out of a cannon for most of 2015, but since mid-June, they’ve cratered, falling some 25% in a month.
While there’s plenty of wreckage, at least one Chinese company — China Biologic Products (CBPO) — has walked away relatively unscathed.
Don’t Fear China
When things like the current Chinese crash happen, investors get nervous and talking heads have a field day talking about global meltdowns, stock market crashes, “Lehman moments,” the end of the U.S. bull market and other general doomsday scenarios.
Fear sells.
But the fact is, the real players know that what’s happening to China — and its Shanghai exchange in particular — is a localized problem more than it is a global crisis.
Here are a few things to bear in mind:
China’s investor class is new and pretty small. There is foreign money in the markets but it’s not tied up small, speculative companies. Individual investors still see the stock market much like betting on horses, not somewhere you invest money for your retirement.
The government wants to encourage more individual investors to get involved, so until recently, it had a very generous margin requirement for investors. Margin means you can leverage your stock position by putting up a fraction of the money to control a given amount of stock.
For example, say you can get 50% margin on your $100,000 stock account (hardly the size stock account most Chinese have, but it’s just an example). That would mean you could control $150,000 worth of stock on that account.
The problem is, when stocks go down significantly, you have to start to cover that margin. That’s when things get ugly.
When the market started to roll over, Chinese market officials announced tougher margin rules that fueled the selloff … but also calmed bigger, longer-term investors.
Finally, the Shanghai Composite was up 150% in about a year — so even factoring in the 25% haircut, we’re looking at nearly 90% gains in the past 52 weeks.
Is that really a problem?
No, the real problem is volatility. But again, this is a developing market, so these kinds of things are part of the journey.
Don’t be panicked. Just look for winners.
China Biologic Products (CBPO)
The recent chart of China Biologic Products tells the story.
While CBPO is up 63% in 2015 alone, the recent Chinese scare has shares off some 10% from recent highs. This spells opportunity for smart long-term investors. It’s a chance to get into one of the biggest trends in China at a small discount.
One of the sectors China has to modernize to be considered a developed nation is its healthcare system. And with 1.3 billion people, it’s a huge job.
But China is moving quickly and effectively on this front. In the first stage, the country allowed Western companies to serve the growing market. But in the newest stage, China is committed to developing its own pharmaceutical, biotech and equipment companies.
It’s also focused on building its generic drug manufacturing expertise, since providing branded drugs to so many people just isn’t economical for a private or public healthcare system.
China Biologic’s products treat what are generally considered “rare” diseases like hemophilia. But it’s a local company and it has a real advantage to foreign competitors at this point.
It’s also has been buying other biotechs and acquiring other equity stakes to expand its market share and reduce its internal competition.
CBPO is well positioned for the massive healthcare growth in China, and it has good visibility (and accessibility) to Western investors and institutions.
This is a great time to take advantage of all the Cassandras and turn crisis into opportunity.
