China’s Economy: Why The Golden Dragon Will Rise Again (FXP, YXI, FXI, PGJ, GXC)

Tony Sagami: “Goin’ places that I’ve never been. Seein’ things that I may never see again And I can’t wait to get on the road again.”

No, I’m not singing an old Willie Nelson song. But I am off on another great Asian treasure hunt — this time taking a close look at what’s really happening in China from inside the heart of Beijing.

I love my research trips because I get to see new, fascinating parts of the world, meet interesting people and, most importantly, discover incredible investment opportunities that the Wall Street crowd has never heard of.

One of my favorite things to do is visit college campuses. That’s because you don’t have to be a student to pick up information that can enhance your earnings potential.

A Learning Experience Like No Other

I have visited probably 80 or 90 college campuses over the years. A few stick out as some of the most-beautiful places on Earth. Colleges like the University of Richmond, LSU in Baton Rouge, and my alma mater, the University of Washington.

During this trip, I visited a college whose campus is one of the most-beautiful I have ever seen in my life. The architecture of the campus buildings was stunning and the landscaping was inspiringly beautiful.

Despite the welcoming beauty, this university is widely regarded as the most-difficult college in the world to gain admission. Harder than Stanford. Harder than Harvard. Harder than Oxford. Or any of other prestigious universities that you can think.

The college I am talking about is Peking University in Beijing.

Hey, when you’re the No. 1 college in China, you become the top choice of the offspring of 1.4 BILLION people. That’s some serious demand.

In fact, U.S. colleges like Stanford and Harvard are the backup plan (third or fourth or even fifth choice) for China’s top high school graduates.

It was founded as Imperial University of Peking in 1898, was the first national university in China, and has been a leading institution of higher education in China since its establishment.

However, something was very different about Peking University when I visited its campus.

The College Experience, Peking Style

Thanks to the fresh rain that washed away the smog, it was a gorgeous summer day. The lakeside benches were inviting … the soccer fields, perfectly manicured … the parks, beautifully maintained.

But the grounds were deserted. No students. No professors. No Frisbees. Nobody sleeping off the previous night’s party. It was almost as if the college were closed.

Nobody was enjoying any fun in the sun. What the heck kind of college is this?

Despite the idyllic setting and perfect weather, it felt like a ghost town.

Then the main campus clock chimed in a new hour and suddenly, THOUSANDS of students filled the walkways.

These cream-of-the-crop college students were solely focused on academics and weren’t about to waste away their study time on things as unproductive as having fun.

It’s all about the concept of chiku nailao. Essentially, it means endurance or relentlessness. The students I talked to told me they would never waste precious educational time on recreational pursuits.

Why the China Slowdown Is Only Temporary

I have a couple kids in college, one at Texas A&M and the other at the University of Montana, and I can tell you that a lot of American college students seem to major in “fun.”

Maybe that is one of the reasons that China produces more engineers than any other country in the world.

Get this: China produced 600,000 graduates with engineering degrees last year. The U.S.? Only 70,000.

It is that emphasis on academic achievement — as well as the relentless Asian work ethic — that is the unappreciated backbone of China’s economic rise.

In fact, The Economist magazine and the International Monetary Fund have forecast that China will overtake the U.S. as the largest economy in the world within the next decade.

Furthermore, China has been fairly immune from the rest of the world’s economic woes.

For example, the world economy was still suffering from a severe downturn from the devastating 2008 financial crisis. That’s when China Premier Wen Jiabao boldly announced to the world that China would grow its economy by 8.5% in 2009.

Most observers thought he was nuts. But that Chinese economy did thrive and even surpassed Jiabao’s forecast.

And this is a country that I believe has even more positive surprises up its sleeve.

How China Is Weathering the Euro-zone Debt Crisis

No question that China has felt some of the effects of the euro-zone debacle. Though its economy grew 7.6% in the second quarter, this is the slowest since the 6.6% growth rate experienced during the depths of the global financial crisis.

Compared to the U.S., 7.6% sounds pretty darn good and I think it is going to get better.

As Jiabao has said, “As we face the problems, difficulties and risks, especially the pressures brought on by a slowing economy, we must also recognize that the basis for economic growth is good … and there is still a lot of dynamism and momentum for economic growth.”

Unlike our U.S. politicians, who spend more time arguing than fixing our economy, the Chinese government is taking aggressive, positive action to goose its economy.

  • China has cut interest rates twice since June. The People’s Bank of China just lowered the benchmark deposit rates by 25 basis points and cut lending rates by 31 basis points, freeing an estimated 1.2 trillion yuan (US$190 billion) for new lending.
  • On top of all the rate cuts, PBOC also made its biggest injection of funds into the money market in nearly six months. It injected a net US$34.5 billion through the reverse-repurchase operations (repo) following an injection of another US$40 billion in the previous four weeks.
  • It reduced the bank reserve requirements in December, February, and again in May by another 50 basis points to 19%. In response, new bank lending increased by 16% year-on-year to US$144.3 billion in June.
  • The National Development and Reform Commission has accelerated the approval process for major infrastructure projects, including new airports and subway networks.
  • The State Council has announced a US$5.7 billion subsidy program to encourage the consumption of energy-efficient household electronic appliances, automobiles and power generators.
  • The Ministry of Railways obtained large credit lines from banks in 2011, which will allow it to execute a planned investment of US$63 billion.
  • The government also unveiled a series of new export tax rebate measures in June, effective on July 1, to support small and medium businesses.
  • Lastly, it dropped government-controlled gasoline and diesel prices.

Are those steps working? It sure looks like it to me.

In June, retail sales growth increased by 12.1%, industrial production growth increased by 9.5% and China’s home prices in key cities broke eight straight months of decline.

If you’d like to add some China exposure to your portfolio, it is very easy with ETFs. If you are near- or long-term bullish on China, here are three ETFs that can help you get positioned for an upswing.

  • iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) seeks to track the performance of the FTSE/Xinhua China 25 index. This index consists of the 25 largest Chinese companies listed on the Hong Kong Stock Exchange.
  • PowerShares Golden Dragon Halter USX China (NYSEARCA:PGJ) seeks results that correspond to the returns of the Halter USX China index. This index consists of 103 Chinese companies whose common stock is publicly traded in the United States. The index uses a formula that prevents the largest market-cap companies from becoming too large a component of the index.
  • SPDR S&P China (NYSEARCA:GXC) seeks to replicate the total return performance of the S&P/Citigroup BMI China index. This index consists of the largest 342 companies that are publicly traded and domiciled in China.

Just a quick note about ETFs. While they are an easy way to play a country or an industry within that country, many of the component companies may be state-owned enterprises.

There are also a number of small, nimble companies founded and run by China’s best entrepreneurs that may or may not be included in these ETFs, so be sure to do your own due diligence before investing in any fund or stock.

On the other hand, maybe you think I’m nuts and that China is headed for the toilet. In that case, there are two inverse ETFs that are designed to go “up” when Chinese stock prices go down: The ProShares Short FTSE/Xinhua China 25 (NYSEARCA:YXI) and the ProShares UltraShort FTSE/Xinhua China 25 (NYSEARCA:FXP).

That doesn’t mean that you should rush out and buy any of the above ETFs tomorrow morning. As always, timing is everything, so I suggest that you wait for my new buy signal in Asia Stock Alert before you commit any new money.

While the short-term may be a little bumpy, there is no doubt in my mind that investing in China will be the single best place to trust your money over the next 10 to 20 years.

Best wishes,

Written By Tony Sagami From Uncommon Wisdom Daily

Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inUWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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