A China Opportunity?

Along with the previously mentioned consensus opinion on stocks, bonds and gold, there also is a line of thinking out there that there’s big trouble brewing in China. An article in Forbes by China perma-bear Gordon Chang captured a lot of attention recently, as it plays on the legitimate fear that China’s financial system faces some very real problems going forward.

China is a tough market to assess from the outside, as the government has tight control on the narrative, and it will do what’s required to keep that narrative positive. Still, recent data from China show that things are actually somewhat stable. Gross domestic product (GDP) growth came in at 7.7% year over year, a metric in line with analysts’ estimates. Meanwhile, December industrial production growth came in at 9.7% vs. the 9.8% estimate, and retail sales grew 13.6% year over year, a rise that also was in line with estimates.

The big negative weighing down Chinese stocks of late was yet another uptick in short-term lending rates. The Shanghai Interbank Offered Rate (SHIBOR) has shown several sharp increases lately, and that has prompted China’s central bank to step in and provide emergency liquidity. This intervention also happened last month, hence the legitimate fear about the health of China’s banking system.

For investors, the China scenario is one that I think begs close examination. If there is some type of panic selling, you’ll want to stay away from the sector. If you own China-based stocks, you also need to make sure you have a firm stop-loss in place.

Interestingly, any aggressive, short-term sell-off in Chinese stocks that compose the benchmark FTSE China 25 Index can, I suspect, be viewed as a potential buying opportunity. We saw such a move lower in May and June of 2013 just before a strong rebound in the index from June to early December.

The lesson here is you’ll want to keep a close watch on China in the nascent stage of 2014. The price action in this market segment could translate into a big buying opportunity as the year unfolds, and you don’t want to miss out on this potential opportunity because you weren’t paying attention.