Bullish on China for the long-term?

January 25, 2011 by financiallyfreenow

Many investors are bullish on the prospects of China’s growth going forward. I belong to this camp too. I’m extremely bullish on China as an emerging market. There are several reasons for this.
Firstly, the Shanghai SSE 50 A-Shares Index is currently trading at a P/E of 13.33. Valuations peaked at around 70 times earnings in 2007. At current levels, the Chinese equity market is extremely undervalued, considering that China is one of the fastest growing economies in the world. Also, less than 10% of the Chinese households are invested in the stock market, according to the Edge magazine. In developed countries, the percentage is between 40-60%. As China develops, the participation in the stock market will grow as well.
Secondly, the 12th five-year plan will be revealed later this year. Investments into fixed assets should be strong in the first year or two as it will beneficial for government agencies and corporations to launch new projects to secure the respective resource allocations.
Thirdly, with the US losing steam and foreign funds flowing into China, the next phase of growth will be in China. China has shown it is capable and is able to stand up to the big boys with the concluded World Expo, Olympics and Asian Games. Consumerism will boom, tourism will rise and the service sector will certainly climb up. China cannot stay as an exporter for long. They have been working hard making cheap stuff and it will be time that they taste the fruits of their labour. China may become a nation of consumers but not so soon. Also, the Chinese government has so much cash in its coffers vs the trillions of dollars of debt US owes.
On the other hand, inflation is rising and the government is battling hard to keep inflation under control. Interest rates have risen recently to battle inflation. However, the dust will settle eventually and investors will flood back into the market once everything cools down. If you have a long-term view (i.e. >10 to 20 years), this inflation scare is very minute as compared to the growth that China will see.
To capitalise on the boom of China and invest in A-Shares that only local Chinese can, one can purchase the “United SSE 50 China ETF” listed on SGX. Extracted from shareinvestor.com: “The ETF tracks the SSE 50 Index. The SSE 50 Index is an index consisting of 50 constituent stocks which are the 50 largest stocks of good liquidity listed on the SSE. The United SSE 50 China ETF is the first China A-Share ETF to be listed on the Singapore Stock Exchange. It is also the first China A-shares ETF to be denominated and traded in Singapore Dollars.”
Disclaimer: This post does not serve as a recommendation to buy the United SSE 50 China ETF. Before investing in the ETF, it is paramount to read the prospectus carefully. Risks include tracking error, counter-party risks, among others.