After spending three days visiting the restive eastern province of Zhejiang, Premier Wen Jiabao argued for maintaining the loose economic policies implemented under the stimulus program, saying it’s too soon to be “blindly optimistic,” according to a statement by the State Council.

His remarks are likely to fuel an ongoing debate between government officials over whether it’s time to rein in bank lending.

After the government called on Chinese banks to provide increased liquidity to the economy, they lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year – almost 50% over the government’s target of $732 billion (5 trillion yuan), and nearly double the total loans extended throughout all of 2008.

Most analysts credit the stimulus program for China’s economic rebound, as GDP expanded by 7.9% in the second quarter, up from 6.1% in the first quarter. But now some officials have voiced concerns that asset bubbles and non-performing loans could threaten a long-term economic recovery.

Last week, Chinese Legislator Yin Zhongqing called for limiting new loans to 10 trillion yuan for the full year, according to the Wall Street Journal.

The benchmark Shanghai Composite Index (SSE) is down 15% this month, amid fears that the government will move to tighten bank lending in the second half of the year to throw a wet blanket on the economy. The SSE, Chinas’ benchmark index, zoomed 91% from Jan. 1 to Aug. 4, hitting a high of 3,478.01.

China’s cabinet yesterday (Wednesday) said it’s watching for signs of overcapacity in industries including steel and cement and will increase “guidance” in the coal, glass and power sectors.  It will also place new restrictions on stocks and bonds sold by companies in those industries.

And continuing another trend, the People’s Bank of China last week in an internal memorandum notified its branches to curtail lending for the remainder of the year.  Other Chinese banks, including the Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CBC), have also curbed lending in recent months, Reuters reported, citing anonymous sources.

The Chinese bi-monthly Caijing reported that with the new ceilings in place, ICBC has already lent 83% of its full-year new lending total, while CCB has lent 79%.

Other bankers reported that liquidity appears to be drying up and that loan approvals are taking longer than normal.

“It takes more time to process credit approval from Beijing headquarters now, and the pricing for onshore deals has been heading north in recent months, particularly for U.S. dollar deals,”a banker familiar with the process told Reuters.

And while the going rate for loans to top-tier multinational companies in the first half of the year were made at a margin of 150 basis points above the London Interbank Offered Rate (LIBOR), margins have now soared to over 200 basis points, according to the same banker.

Still, Beijing is unlikely to pull back from the massive stimulus program and the resulting liquidity that has bolstered the world’s third-biggest economy.  Even with the slowdown, analysts still expect total lending to exceed $1.5 trillion ($10 trillion yuan) this year.

And Premier Wen has called on policymakers to maintain “moderately loose” monetary policy and “active” fiscal policy.

That means the Chinese economy will remain flush with liquidity for the foreseeable future. And just to be on the safe side, the China’s State Council has issued a directive to banks to provide more loans to smaller firms.

“We will give appropriate subsidies to financial institutions to support them in extending loans to small companies,” the council said following a regular weekly meeting.

It also will extend measures to reduce the social security contributions paid by smaller firms that are facing difficulties and will increase tax support and direct government funding for them.

“This is tightening but it’s not a total shutdown,” Ken Peng, an economist with Citigroup Inc. (NYSE: C) in Beijing told Bloomberg News. “Policy hasn’t reversed but they are contemplating moves that have a lesser impact on the broader economy.”

Source: China Curbs Bank Lending but Vows to Keep Liquidity High

The fresh numbers reinforce our position that investors should look elsewhere in Asia for longer term profit opportunities.

Beijing said that approximately 20 million migrant workers have lost their jobs in China due to the economic downturn. The loss of jobs has prompted 15.3% of workforce in China’s new cities to return home – abandoning the modern urban centers that have come to represent China’s ballyhooed economic miracle.

This new survey was conducted before the Lunar New Year holiday which was celebrated in the last week of January, a holiday during which people returned home. The exodus was caused by a wave of factory closures as exports plunged in the wake of the current global recession.

Beijing admitted that 2009 could be the “toughest year” since the turn of the century for development of the countryside, which has fallen behind as Chinese economic reforms focus on cities.

Despite the gloomy news, the benchmark Shanghai Composite Index gained 9.3% in January 2009 as investors responded favorably to China’s massive economic stimulus package. Still, investors would be wise to consider other regions in Asia for faster gains than mainland China.

Liu Jiwei, an analyst from Pacific Securities, forecast that the growth rate of corporate earnings in China will decline to minus 10% in 2009 from a growth rate of 3% in 2008.”

Overall, 2009 is shaping up as a terrible year for investors with holdings in China.

We recently recommended that investors explore other regions in Asia that have investment potential. The key is to find countries that have cheaper factory labor than China.

We cited South Asia, which includes India, Pakistan and Bangladesh. In addition, parts of Southeast Asia (Cambodia, Laos, Myanmar, Thailand, Vietnam and Malaysia).

The rise of workers rights, coupled with last year’s dramatic inflation, has tarnished China’s reputation as the low-cost provider of manufactured goods. In turn, companies from Asia and industrialized nations are moving to cheaper alternatives such as South and Southeast Asia. In this case, investors would be prudent to follow the money.

Now that the dust has cleared, it appears that the China plan is not entirely as big as advertised — further diminishing the halo effect on the global economy.

When originally unveiled, China’s $600-billion plan proposed a massive infrastructure build-out through 2010 to help create jobs and shift the country away from it’s over-reliance on exports, which have suffered from the global recession.

The announcement was framed as a brand-new initiative. The blueprint China laid out before the world included projects for low-cost housing, airports, roads, highways and aid to farmers. Pundits saw the investment by China as an overnight boom for raw materials, although we took a wait-and-see approach.

Asian stock markets surged on news. Japan’s Nikkei index jumped 5.8% while Hong Kong’s Hang Seng index gained 3.5%. In China, the Shanghai Composite index jumped 7.3%.

So much for the herd…

Because it now seems that many of the projects China had included as part of the $600 stimulus were already in the works prior to the big announcement. So what had initially appeared as a grand stimulus turned out to be a staged PR event.

Reuters recently characterized the stimulus package as comprised of “old budget commitments, double-counting and empty promises. It was thus mainly propaganda, to convince China’s own people and the outside world that the government was serious about stimulating demand at home.”

Reuters quoted Shanghai Citigroup Ken Peng as saying, “The stimulus package is big, but it’s actually a combination of a lot of things that have already been announced.”

A glaring example of China’s PR machine in action is that the $600-billion package included nearly $3 billion that Beijing had already earmarked for rebuilding in Sichuan province and other regions devastated by the earthquake earlier this year.

The stimulus plan also called for some $292 billion on the railway system. But Ting Lu, a Merrill Lynch analyst, reported that most of it had been previously allocated. He pegged the real number at $58 billion of new funds — still a sizeable number but far short of what China led the world to believe.

Given China’s lack of transparency, the ultimate net number of new funding will be almost impossible to ferret out. But in the end, it becomes increasingly apparent that Beijing is playing a shell game with investors. You can try to figure out where the pea is, or put your money someplace else.

It’s this focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – that will keep China’s economy on the fast track economically, while also helping boost the Red Dragon’s ailing stock market.

China’s governmental policies famously (or infamously) favor specific state-sponsored companies – especially the infrastructure companies Beijing deems integral to the nation’s physical renaissance. And a large portion of the stimulus money is expected to go right into the coffers of these companies.

Stocks have responded accordingly, advancing an additional 11% last week. The Shanghai index extended those gains yesterday (Monday), climbing 3.6%, or 72.11 points, to close at 2090.77, as investors held out hope that additional stimulus plans would be unveiled following another high-level government meeting in China this week, The Associated Press reported.

Further fueling investor ardor was Beijing’s declaration that it would not be investing in troubled Western financial firms any time in the near future.

China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), has lost roughly $6 billion of the $8 billion invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. Lou Jiwei, the company’s chairman, last week rejected the notion of putting any more of the government’s money into banks outside of its homeland. And he did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou said last week at a conference in Hong Kong, Bloomberg News reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

China has a long history of doing things on its own terms, says Keith Fitz-Gerald, Money Morning’s investment director and editor of The New China Trader. But before you label China’s back-patting and trash talk as propaganda, step back and consider which of the two you’d rather invest in: A disheveled U.S. market, or infrastructure development in China, the fastest-growing economy on the planet?

Investors have chosen the latter.

“In such uproar, it’s not clear how much is bottom fishing versus bottom building,” Fitz-Gerald said of the Shanghai index’s recent run up. “However, the fact that many Chinese companies have superb numbers is undeniable.”

Following China’s State Investment Cycle

Unlike in the United States, and many other Western economies, consumerism isn’t the main engine of China’s economy.

Rather, it’s the government – a running tally Fitz-Gerald has labeled as “China’s state investment cycle.”

About 70% of China’s economy is driven by state investments, with consumers filling in the other 30%. For the United States, those ratios are reversed, Fitz-Gerald says.

The recent $585 billion stimulus plan is just one of several gigantic investments the Chinese government has made (See chart: New Material Product). Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, tourist attractions and more.

There are three things to consider here.

First, China is in the midst of one of its largest state investment cycles ever – generating streams of profit never before seen.

Second, when China spends big money, it feeds the companies big enough and capable enough to handle the job. It will be those companies on Beijing’s short list that rise to the surface in the next few months, Fitz-Gerald said.

And third, despite consumers driving only 30% of its economy, China has the largest middle class in the world at 300 million people. What’s staggering about this is that they are only starting to spend their growing wealth. So when these state investments give consumers more income to spend, the only problem the government will have is keeping economic growth from getting out of control.

‘Aimed at Growth …Adding to GDP’

But before getting too far ahead of the current reality here, let’s return to the Shanghai index’s rally. Much of it has been driven by clear signals that state investments will continue.

As of now, the index is nearly 67% off its October 2007 high. And that proves two things:

• First, China’s biggest companies have been severely affected by the global economic crisis.
• And second, they remain some of the cheapest stocks in the world.

The bottom line is this: The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman Sachs Group Inc. (GS) predicts.

On the other hand, analysts predict China’s GDP will grow anywhere from 5.0% to 10.0%, easily making it the world’s fastest-growing economy, no matter where it lands in that range.

Fitz-Gerald believes the direction of China’s GDP is evident in the direction its government thinks, at least economically. And if there’s one thing that pares down each country’s economic thinking, it’s a look at each their recent economic stimulus packages.

“The U.S. government is running around rewarding bad behavior,” Fitz-Gerald said. “China’s package is aimed at growth, creating jobs and adding to its GDP.”

Source: China Stocks Advancing as Beijing Boosts Investments

Yesterday, China’s benchmark Shanghai Composite Index dropped 5.2 percent after economic data revealed wholesale price inflation jumped to its highest level in 12 years in July.

However, Taipan Daily editor Justice Litle says China’s long-term outlook remains strong – and some China plays look more favorable than they have in years. Here are Justice’s six reasons why the China bears are wrong…

Reason to Buy China #1: The Silly Season Is Over

Chinese investors went through a mania phase last year. There were tales of lines half a mile long snaking out from the doors of the local stock brokers. In April 2007 alone, nearly 4.8 million new trading accounts were opened in China — more than the prior two years combined.

All these new buyers led to a silly season for Chinese stocks. You could see it in the difference between Shanghai A-shares and Hong Kong H-shares…

At one point, companies with dual listings in Shanghai and Hong Kong were getting as much as an 80% premium on the A-shares price. This was a reflection of Chinese capital controls — it’s still tough for mainland Chinese to get their money out — and naive buyers who wanted to play at any price.

Now that the frenzy has subsided, real values are starting to show up again. The hot money has burned itself out, providing opportunities for those who see longer-term value and aren’t out to just flip a quick buck.

You see this pattern play out over and over again when a new opportunity comes to a place. Investors get excited and lose their heads, they push things way too far, and then the market comes crashing back to earth. That’s when the patient players get interested.

Reason to Buy China #2: Oil Is Coming Down

As of this writing, crude oil is more than 20% off its near-term highs. It looks like oil could be heading for the $100 mark — a possibility we pondered in “What If the Price of Oil Implodes.”

One of Asia’s greatest challenges has been keeping a lid on inflation pressures. It’s not easy to grow like crazy without seeing the price of basic goods and services rise too quickly.

Oil closing in on $150 a barrel threatened to swamp Asia with inflation on a local level — as the price of transport, food, and fuel went up — and also to cut into export profits as shipping costs rose.

With oil backing off, China and India can breathe a little easier. The fear that high-priced oil might kill the Asian miracle is lifting. That gives them more time to tap alternative energy solutions and build economic strength at home.

Reason to Buy China #3: The Locals Are Optimistic

The news reports mostly focus on the bad things — civil unrest, government crackdown, pollution and so on. That’s the nature of the beast mostly… for the most part, good news isn’t as interesting as bad.

But a recent survey from the Pew Research Center shows that most Chinese feel positive about where their country is headed. According to the survey, 86% are “content with the country’s direction.” (That’s up from just 25% six years ago.)

Perhaps even more surprisingly, six in 10 Chinese reported being satisfied with their jobs. And 70% were in favor of China’s shift toward a free-market economy.

The biggest concern in the Pew Survey? Rising prices. But that concern is addressed by the fact that oil is headed down these days — not marching higher as it had been for most of the year.

Reason to Buy China #4: The Growth Is Still There

China has had an amazing run, growing its economy at a near double-digit pace since the early 1980s. But the dragon isn’t done yet — not by a long shot.

Global Insight, an economic consulting firm, forecasts that China will overtake the U.S. as the world’s largest manufacturer in 2009. This is as much because the U.S. base is shrinking, even as China’s is growing… but that still counts as an eye-opening stat.

Plus for the longest time, China was seen as the world’s source for low-tech goods. Chinese factories were known more for sneakers, trinkets and cheap plastic toys than items of real value…

That’s all changing now as China moves up the quality food chain. Now we are seeing savvy companies like China Medical Technologies (NASDAQ:CMED) produce some of the most sophisticated high-tech devices in the world. As China gets better at enforcing intellectual property laws, its high-tech skills will only increase… and profit margins, too.

Reason to Buy China #5: Personal Savings and Domestic Demand

Perhaps even more impressive than China’s long-term growth rate is the personal savings rate.

Americans spent more than a dollar for every dollar they earned in 2006. The U.S. savings rate actually went negative. The Chinese, meanwhile, salt away 35 cents for every dollar they earn.

Just imagine how much extra money you’d have on hand if you’d managed to save 35% of your income, year in and year out, ever since you started working. Then just think of all the things you could buy with that cash.

Part of the reason the Chinese save so much is because there’s no real social safety net. But that’s changing, too: As the Chinese economy evolves, things like insurance and healthcare and retirement plans grow more affordable.

The upshot is, at some point, China’s big savers will feel a little bit more comfortable spending some of that cash they’ve saved up. And the newly minted middle class in China are already taking a hard look at things like cars, air conditioners, washing machines and so on.

As local economies grow, the locals themselves feel more comfortable spending a portion of their ample savings. That in turn leads to more domestic growth, which leads to a more positive outlook, which in turn increases spending. Chinese domestic demand is headed into a virtuous cycle that could run for decades.

Reason to Buy China #6: Huge Foreign Reserves

In balance sheet terms, China is rich… massively rich.

We’ve already seen what can happen when cities and counties go bankrupt. The residents of Orange County, California, got a nasty taste of that. Jefferson County in Alabama was on the brink this year, too. (As with Orange County in 1994, they took on some really dumb trades.)

So it’s not good when some regional authority — be it local or national — is running short on cash. China doesn’t have that problem. If anything, they have the opposite problem. Economist Brad Setser estimates that China has somewhere between $2.3 trillion and $2.4 trillion in excess reserves.

That’s a lot of dough… enough to make a 20% down payment on the entire U.S. economy! And hundreds of billions more roll in every quarter.

Point being, money can’t always prevent bad things from happening. But it sure can fix a lot of things. If China has to take extra steps to keep economic growth on track or keep the domestic demand side humming, it certainly won’t be stymied by lack of funds.

Source: Six Reasons to Buy China

With the consumer price index (CPI) safely in the books for another month, economists can now turn their focus to wholesale inflation with the release of the May producer price index (PPI). Economists, mistakenly, often disregard the energy component of this data each month and focus mainly on the so-called “core” releases – which excludes “volatile food and energy prices.”

While food and energy prices often suffer from month-to-month volatility based on seasonal factors, they cannot be overlooked these days as they continue to have significant impact on the global economy.

Also, Lehman Brothers Holdings Inc. (LEH) can’t seem to avoid the limelight, as the eyes and ears of the investment community will be sharply focused on its earnings announcement today (Monday), which also is expected to detail plans for its much needed capital infusion.

U.S. Treasury Secretary Henry Paulson welcomes his friends from China for Strategic Economic Dialogue IV, as both countries are sure to bicker over unfair trade practices, protectionism, and currency valuations. (And, “bickering” has become a very popular sport in Washington as of late… too late for the Beijing Olympics?).

Market Matters

So let the partisan bickering and political pandering begin. With the executive branch up for grabs in November, the Democratic-led U.S. Congress introduced legislation that has virtually no chance of passing, merely to be used as ammunition as the campaign season heats up. So-called “Big Oil” became the latest villain with politicos proposing windfall profit taxes on record company earnings. Our friends within the Organization of the Petroleum Exporting Countries (OPEC) did not escape the wrath of the Dems, who want to file suits over perceived price-fixing.

In typical partisan fashion, Republican Presidential candidate John McCain has touted his opponent, U.S. Sen. Barack Obama, as a traditional “tax-and-spend” liberal, the wrong choice during this period of economic challenges. Sen. Obama pegged his opponent as a continuation of the previous eight years of failed policies that have led the country into recession/inflation/deflation.

Lehman Brothers has remained front and center in the “who will be the next Bear Stearns Cos. (BSC) watch“ as the financial giant attempted to raise $6 billion in new capital to compensate for its disastrous second quarter. The company also bid a (not-so) fond farewell to two high-ranking executives as it goes to great measures to regain some lost public trust. Over a four-day time frame, its stock gave up more than $4 billion in shareholder value.

Always a day late, Moody’s Investors Service jumped in to protect investors by downgrading the firm from “Stable” to “Negative.” In other business news, transactions headlined the week as Staples Inc. (SPLS) will be acquiring the Dutch office supply company, Corporate Express NV (ADR: CXP), for $2.7 billion. Anheuser-Busch Cos. Inc. (BUD) turned to Mexican brewer Grupo Modelo SA de CV (OTC: GPMCF) to help fend off an unsolicited offer by rival InBevNV.

Meanwhile, Yahoo Inc. (YHOO) finally said good riddance (presumably, for the last time) to Microsoft Corp. (MSFT) in any merger, partnership, or other relationship (and jumped into bed with Google Inc. (GOOG) with a search ad agreement). Apparently, McDonald’s Corp. (MCD) remains recession/inflation proof as the fast food chain reported strong domestic and global sales in May.

Crude traded within a $10 range throughout the week to settle around the $135-a-barrel level as traders over-analyzed news of declining demand, OPEC made comments about “unjustifiable rise on oil prices,” and polls blaming industry insiders for “unethical behavior.” In the “misery-loves-company” category, the United States is not the only nation to struggle with energy-related inflation.

China’s Shanghai Composite Index fell to its lowest level of the year as the country attempted to fight off related price pressures. Likewise, India reported that its inflation rate climbed above 8% in May, while Vietnam devalued its currency because of soaring prices. Closer to home, Broadway ticket sales are down more than 10% from last year’s levels – meaning that even the “rich-and-famous” group of consumers are suffering the ill-effect of soaring oil and gas prices.

After an extraordinary day in the markets that saw the Dow plunge close to 400 points and oil surge to almost $140 per barrel on June 6, any recent volatility seemed tame by comparison. While investors searched for bargains in equities, the fixed-income markets struggled mightily last week as prospects for future Fed rate hikes grew more likely. The yield on the benchmark 10-year Treasury surged past 4% (and beyond), reaching its highest level of the year. Anyone inside the Beltway you’d care to blame, senators McCain and Obama?

Finding these opportunities is just half the mission. The more important, and often more difficult task, is finding safe ways to play them.

Consider China. Unless you’ve been cooped up in Guantanamo for the last few years, you’re already familiar with the miracle of China, Inc.; 11.4% GDP growth, the world’s “go to” manufacturing center, a 1 billion strong local consumer market, and some of the greatest business opportunities in the history of the world.

So far, so good. But when you drill down another level, the level where you hope to find undervalued investment opportunities, things quickly get more complicated. Thanks to that country’s emerging middle class, flush with exponential growth in purchasing power and investable funds, , the Shanghai stock exchange has become one of the hottest capital markets in the world. And one of the most dangerous.

Over the last 7-years, the Shanghai Composite Index has returned approximately 80% to investors with some serious roller coaster rides along the way, including days of such catastrophic meltdown that even the most seasoned investors make a bee-line for the nearest emergency exit.

The Price/Value Disconnect

The most disturbing thing about the Shanghai market is the often complete disconnect between the price of a given stock and the value of the underlying company. In China, soothsayers in the local newspapers predict what numbers will endow great luck… just like a fortune cookie at your favorite Chinese buffet; and as you are undoubtedly aware, stock symbols in Shanghai are numbers, not letters. So when the great sage says 0, 4, 7, and 9 are today’s lucky numbers, that spells good news for Shanghai Zenhua Port Machinery Co., symbol: 900947, and poof, the stock jumps—irrational exuberance at its most irrational. This and similar actions of an inexperienced, first generation investor class, coupled with a general overconfidence among the Chinese on the outlook for their stock market, periodically drive the Shanghai exchange to bubble territory, that is subsequently corrected in stomach churning down moves.

So, the sort of booming economy and big upside we like, but with an unpredictable and wildly irrational stock market.

What’s an investor to do?

Because we’re looking to buy into the growth, and to do it safely, stepping up to the craps table in Shanghai along with all the other speculators and soothsayers isn’t going to cut it.

Instead, we invest in undervalued Chinese companies listed on more established exchanges. Simple, but effective.

Some examples…

We are currently following a Jersey-domiciled, London-traded cement company based in the western China province of Shaanxi (not to be confused with the neighboring Shanxi province…). Shaanxi is one of the fastest growing provinces in China, and this cement company is ideally positioned to capitalize on this growth. Currently trading on London’s Alternative Investment Market (AIM) at only 6.4 times earnings and 4.6 times current assets, this stock is as undervalued as it gets, especially considering the growth prospects.

While it has already provided us with solid profits, we see it as a relatively near-term double from today’s levels. But we digress from the central point here… which is, because it trades on the London AIM, and not Shanghai, your shares have nowhere near the volatility.

Confirming that point, we looked at twelve worst performing days of the Shanghai Composite Index since January 1 2007, with single day losses ranging from 5% to over 10%. On average, during those steep drops, our Chinese cement play outperformed the index by an average of 6.85%. Viewed from another angle, on the 12 worst performing days of the Shanghai Composite Index since January 2007, our AIM-listed Chinese cement company actually posted a daily gain on eight of those twelve days, and posted a far better return than the index on all twelve.

For us as investor this means we are able to capitalize on one of the fastest growing industries in one of the world’s fastest growing economies with one of the industry’s most seasoned management teams, and doing it all safely, with far less volatility than in Shanghai.

We believe in the Asia growth story, and we believe in companies like our China cement story (the name of which we can’t share here because it wouldn’t be fair to our subscribers). But we are only willing to risk our hard earned capital in a way that makes sense to us. So in China, we look for solid, undervalued companies on established exchanges – and there are a number of these gems if you dig for them – and save the gambling for the casinos in Macau.

Fitzroy McLean is the co-editor of Without Borders from Casey Research, a monthly service dedicated to searching the world for undervalued, lower risk investments. A three month, no-risk subscription offer is available that will bring you current with all of the Without Borders recommendations… learn more now.

Source: How to Safely Play China’s Growth

“Even while China’s export growth is slowing as a result of the economic slowdown in the West,” says Chris Mayer in The Daily Reckoning, “its economy is continuing to hold up remarkably well as domestic and regional demand picks up — and the country’s appetite for imports is helping the emerging markets to withstand the US slump.”

But I think it’ll do much better than simply ‘withstand’ the slump. It’ll drive money into other emerging economies at a rate of knots…

So, where is China now in the “big picture?” Is this steep decline simply a correction, or is it the first few innings of a prolonged bear market? In my opinion, this is simply a long-overdue correction, and it’s now nearing its end…

To illustrate why, let’s take a look at one of the country’s bellwether stocks, PetroChina (PTR). This stock saw its market value soar to over a trillion dollars last November.

At that level, it had the ludicrously high price-to-book ratio of 8.19. (For a frame of reference, ExxonMobil’s price to book was 4.64 at the time, Royal Dutch Shell’s was 2.47, and British Petroleum’s was 2.84.) The stock’s valuation was insane.

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But today, after a huge decline, PetroChina is no longer expensive.

After shedding about $600 billion in market cap, the company is now selling for a more reasonable 3.8 times book value of (compared with Exxon, at 3.96).

And it’s not just PetroChina… The rest of China’s stock market tells the same story. Take a look at this chart…

China Corrects… But The Long-Term Trend Is Still Up

As you can see, the long-term uptrend that began in 1998 is still intact. The stock market also looks like it bottomed in late March. Since finding its bottom three weeks ago, the index has climbed 25%.

This is the solid long-term uptrend and a short-term bottom a trend investor looks for. However, since China did experience a serious correction, let’s check how its notoriously expensive stock market looks right now…

As you can see from the above chart, China’s price-to-earnings ratio has dropped to about 20. This is still significantly higher than its long-term median of 10, but significantly lower than it was a few months ago. Also, China’s long-term P/E may not be particularly meaningful in this situation.

China is transitioning from an emerging economy into a developed one. Developed economies tend to have higher P/E ratios since they are considered “safer” investments. Thus, China’s P/E ratio should logically be trending higher as investors become more comfortable with its financial markets.

Also, the stock market always looks to the future. When a company is growing its earnings quickly, that stock becomes inflated relative to its current (backward looking) earnings, but may remain reasonably priced once future growth is taken into account.

Right now, China has a P/E of 20.5… That is slightly higher than the U.S.’s P/E ratio of 17.2. However, China is growing much quicker. The U.S. had a year-over-year GDP growth of about 2%, China’s was about 17%.If you are interested in jumping on board the China train, you may want to take a look at some of the China ETFs. For instance, the iShares China Fund (FXI) tracks the 25 largest, most liquid Chinese stocks on the Hong Kong stock exchange. Another ETF is the PowerShares China Fund (PGJ). This fund tracks about 100 U.S.-traded Chinese companies with market caps above $50 million.

These two funds perform almost identically, so it comes down to personal preference. If you are investing a lot of money, you may want to consider the iShares ETF, since it is larger and more liquid.

Good investing,

Ian Davis