October 3, 2014
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If you’re like a growing number of Americans, you probably don’t have a positive regard for China.

In the past couple years, it has become more popular to criticize China for human rights violations or fret over their economic competiveness with us.

So when we find an opportunity to bash on their economy, we stick to it like flies on honey.

Indeed, you’ve probably seen the headlines from the Western media these past couple weeks:

“Wall Street Retreats, as China’s Weakening Growth Pulls Shares and Oil Lower” — The New York Times

“U.S. Stocks Weighed Down by China” — The Wall Street Journal

“China Slowdown Worries Hit World Stocks, Commodities” — Reuters

Clearly these stories are designed to lead you to believe China is the sour spot in the world today, but that couldn’t be farther from the truth .

It’s one thing to listen to a Western economist tell you about how China is or isn’t doing. It’s an entirely different matter to hear from the Chinese locals themselves.

And sure, you probably shouldn’t expect the average Chinaman walking the streets of Beijing to be able to accurately forecast the economic conditions of his country, but when 80% of the population believes their economy is heading in the right direction, that’s a number you want to pay attention to.

That’s the conclusion a recent poll by Pew Research Center came to, when they asked the populations of 44 different nations how they thought their own economies were doing. Of those 44 populations, Chinese citizens were the most upbeat about their economy. (To put it in perspective, only about one-third of Americans expect the U.S. economy to improve.)

That’s where the real story is — with the sentiment from the local Chinese themselves, not what the Western media has to say about them. And it’s that sentiment that gives us an opportunity to profit from these ill-guided reactions from major media outlets to dash out of Chinese stocks.

Chinas Economy: See It for Yourself

See, large investment firms like Goldman Sachs have recently come out with projections for a slower Chinese GDP growth rate this year — coming in around 7.3%, compared to the current 7.5% expectations.

There are also many Western economists who expect China to lower its growth forecast for 2015 and 2016 — albeit, not by a tremendous margin, given that the country is still expected to grow by more than 7% a year until 2017, and consolidate right around 7% the years after.

But the story with China isn’t about what some Wall Street analyst sees on paper at his cushy desk job. Or what some overpaid economist predicts about a country he has never actually set foot in.

To understand China’s story, you have to live there or see it first-hand. And since you can’t honestly or accurately make predictions about a country you haven’t physically seen, that’s why our Investment Director Jeff Opdyke actually goes to these places. He has been to China several times in the last couple of years   and each time it amazes him to see the amount of growth taking place right in front of him. Seeing that growth is inescapable when you visit the country.

But thanks to the Western media berating China, Chinese stocks have taken a hit lately. But for those of us who understand the long-term growth that is taking place in the East, this is a great opportunity to grab Chinese stocks on the cheap.

The Locals Tell the Real Story

Moving forward, you have two choices. You can trust the desk jockeys spouting their guidance or you can trust the people who are finding jobs left and right at higher rates of pay.

To me it’s a no brainer … follow the locals.

Look at the Asian Development Bank’s (ADB) growth expectations; they haven’t budged from their original forecast of 7.5% for this year and 7.4% for 2015. The projected growth for the rest of Asia, on the other hand, lies somewhere between 4.6% and 6.4%.

Turns out, China’s actually the sweet spot in Asia.

And the local Chinese share the same sentiment as ADB. The Chinese have sent shares of the Shanghai mainland stock exchange — one that is currently off limits to foreign investors — rallying 15% in the last three months.

If that wasn’t impressive enough, shares on that exchange closed up 0.26% going into its seven-day holiday period from October 1 through 7, which is a pretty good indicator of economic well-being. Typically you would lower exposure on a stock exchange heading into a full week of no trading, especially if you think your economy is going downhill.

Instead, these local Chinese bid up shares on increased volume.

This tells me that the locals are not worried about all the fears in the world today. Ukraine doesn’t bother them. Hong Kong protests don’t phase them. And a supposedly slower Chinese economy is not an issue.

But local sentiment, powerful though it may be, isn’t readily apparent to the Western eye. Investors punished Chinese stocks through September following talk of China’s economy declining.

This has caused the iShares China Large-Cap Index (NYSEARCA: FXI) to drop 6% in September, while the Shanghai Index, China’s mainland stock index, rallied 4.5%.

For the most part, these two indexes tend to shadow each other, with the China Large-Cap Index being more volatile since it is exposed to a wider audience. But this wide divergence tells me that the Chinese know something the West does not, which is that their economy is growing more powerful.

And that signals a buying opportunity for me.

The China Large-Cap Index pays out a current yield of 2.4% — an added bonus to the share price appreciation I expect we will see relatively soon as the index rebounds to catch up from its recent underperformance.

And, as the locals already expect, this index will continue to climb higher in the coming years — this is not a short-term play, but a valuable opportunity to grab Chinese stocks at a discount.

Western investors will ultimately come to the conclusion that a 7% consistent growth rate in China for the medium-to-long-term is far better than anything the U.S. will be putting out — and the China Large-Cap Index will be a major beneficiary when the U.S. figures that out.

For now, listen to the locals.

Regards,

Chad Shoop

Editor, Pure Income

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