Should I Buy Chinese Stocks?

Over the last few decades China converted itself from an isolated state run economy into an economic powerhouse. Along the way many who were able to invest in Chinese companies did well. But the question for new investors is should I buy Chinese stocks today? A glance at an article in Bloomberg Markets indicates that this might not be the time while Chinese stocks fall their most in three weeks as traders bet on a weakening Yuan.

Chinese stocks dropped the most in three weeks, led by industrial companies and small-cap shares, amid concern that a weaker yuan will limit prospects for further stimulus and state-backed funds will sell shares.

The Shanghai Composite Index declined 0.8 percent at the close. Beijing Originwater Technology Co. posted its biggest loss since February. Hong Kong’s Hang Seng Index rose 0.3 percent, reversing a loss of as much as 0.6 percent. The ChiNext gauge of small-cap companies slid the most since July 27.

“To stabilize the yuan, the People’s Bank of China may have to reduce liquidity in the domestic market,” said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “The market will be consolidating in the short term.”

The Chinese economic miracle seems to have come to an end. There a several reasons for this. First of all the effects of the Great Recession are still being felt across the globe so Chinese exporters are dealing with fewer orders. The country is importing fewer raw materials which hurts emerging market nations dependent on commodity sales which in turn further reduces buyers of Chinese products. And China is following the same path as Taiwan, Japan and South Korea in that its workers are getting older and demanding higher pay. China has become less competitive at a bad time. And there is the matter of Chinese debt.

Dangerous Chinese Debt Burden

When you ask yourself should I buy Chinese stocks consider the debt burden that China has taken on. While its economy was growing at ten percent a year or better it was a functional business model to take on debt to fuel growth and subsequent profits. But the debt taken on since the Great Recession has not resulted in the same level of growth as before. Barron’s looks at China’s debt problem.

The Chinese economic profile shows stark contrasts. Its legacy of rapid and sustained growth for three decades is unsurpassed. At the same time, however, China has accumulated debt at an extraordinary scale for a developing economy. This could weigh heavily on Chinese and global economic performance in the years ahead.

The day of reckoning is not here yet. But history suggests that a debt build up has consequences. In general, China’s economy and financial system are vulnerable and susceptible to shocks when there is a significant accumulation of debt.

In the 1990s, Thailand and Mexico buckled under the burden of heavy debt. These are relatively small economies, and they had external debt issues. China is a large economy and faces domestic debt problems. The Japanese experience after the 1980s debt boom and the recent U.S. financial crisis following a credit surge are closer to the Chinese situation.

The smart betting says that China will follow the Japanese example with much slower growth and deflation. Should you buy Chinese stocks? Strong companies a large offshore market might be good bets as the Yuan weakens and makes Chinese products more attractive but beware of high debt loads in the land of managed capitalism.

Should I Buy Chinese Stocks? PPT

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