No one wants to invest in China right now.
The country’s stock market is teetering on the brink of collapse.
And it is about to lose its biggest foothold in America — TikTok.
Yet, beneath its crumbling economy, military weather balloons and blatant propaganda tools lie some epic opportunities…
…if you have the stomach and the knowledge.
Because as Jim Woods wrote in his newsletter last month:
“China has been so battered for so long, that there is a lot of deep value here for the ‘blood in the ‘’red’’ streets’ investors.”
And boy was he right.
However, this battle-tested veteran didn’t recommend buying individual Chinese stocks.
He was more interested in the exchange-traded funds (ETFs) like the CHIQ.
And here’s why…
Predictable Manipulation
China’s heavy-handed approach creates gaping economic inefficiencies.
When markets falter, President Xi calls on his “national team” to prop up prices.
$17 billion flowed into index-tracking funds in January as the Hang Sang fell over 13% while the CSI dropped over 7%.
Jim Woods saw this coming from a mile away.
In late February, he highlighted the Chinese ETF CHIQ in late February, which has rallied rather nicely since then.
This ETF focuses on the Chinese consumer, a recent passion project for the central government.
You see, around 2018, when President Xi decided to smother his own economy, notable shifts were already taking place.
The once burgeoning retail market had slowed markedly. Developers left cities abandoned, including weird copies of Paris (Tianducheng) and England.
Source: Shutterstock
So, Xi and co. shifted the focus to the consumer… which went terribly.
For starters, a lot of the consumer wealth was tied up in real estate.
Then you had a growing population of unemployed younger adults who didn’t have any money to spend.
Once the pandemic hit, everything collapsed.
That’s why it took China far longer to recover even a sliver of its former economy.
While it’s not the growth engine of the early 2000s, the old girl still has some life left in it.
As Jim pointed out, China’s consumer spending rebounded nicely in Q4 2023.
Source: National Bureau of Statistics of China
Combined with looser central bank policy, it was only a matter of time before Chinese stocks caught a lift.
The resurgence may be largely tied to China’s desire to travel. After all, its people have been cooped up longer than any other country.
But make no mistake, this doesn’t make China a long-term investment.
Beyond what most people understand about China’s politics, there’s a little-known fact about how they treat foreign investors.
Money in. Nothing out.
When we buy a stock, we’re taking partial ownership in that company. This entitles us to a portion of the profits (or assets).
That doesn’t happen with Chinese companies.
American depository receipts (ADRs) aren’t actual shares of a company. It’s a note that the intermediary ties to shares of the company they own overseas.
So, we can only own Chinese companies indirectly.
But there’s another key feature you probably weren’t aware of.
Many of the Chinese companies we, as Americans invest in, don’t pay dividends. In fact, a much smaller percentage of Chinese companies pay any dividends.
Alibaba is a perfect example.
Despite generating billions of dollars in cash every year, it doesn’t pay dividends.
What do its managers do with the money?
Other than squirreling away $80 billion on its balance sheets, they do share buybacks.
Plenty of investors will tell you that’s even better than dividends.
But you have no legal ownership rights in China. So, what is that ADR in reality?
We’d argue nothing but paper profits at best, and air at worst.
That’s why it’s flat-out dangerous to own shares of individual Chinese companies long-term.
Any one of them can be nationalized at any moment.
Chinese ETFs reduce that risk through diversification, similar to junk bond funds.
Short of an all-out ban, like between the United States and Russia, the majority of the ETF holdings should remain intact.
Opportunistic Investing
If China is so unstable, and capable of changing at a moment’s notice, how can investors uncover pockets of value?
As Jim showed with his ETF selection, you can have some sector or thematic idea so long as you have the data to support it.
China, like any large institution, isn’t going to change its broad economic policies overnight.
As long as you study the general movements of the government, you can steer clear of the catastrophic zones and towards the diamond caves.
Because when things look THIS bad, you know the opportunities are even juicier.
But rather than try to run this maze solo, take this opportunity to check out Jim Woods’ latest report on China.
In it, he details the broad economic themes driving the Chinese government, and how to exploit them for gain.
