How to Invest in China: Look Outside the Border
CNBC.com Senior Writer
Investors looking to get into China face a dual obstacle: A nation with economic data that is notoriously difficult to trust—and now one whose economy appears to be slowing substantially.
The best strategy, consequently, may be less a direct play on mainland China and one that focuses instead on global markets and multinational companies with strong ties to the country.
"The chance of getting your money out of China is not a good one," Jim Chanos, hedge fund titan and the head of Kynikos Associates, said in an interview. "The average investor should just avoid it."
Chanos appeared earlier Thursday on CNBC's "Squawk Box" during which he called China a "roach motel" that was ripe both for short sellers and an economic slowdown that would make investment choices difficult.
Indeed, the Chinese stock markethas suffered this year and was trading around three-year lows on Thursday.
One of his main gripes with the country — one often heard around the financial markets — is that China is notoriously inaccurate and indeed manipulative with its data, making it difficult for investors to believe anything relative to the economy there.
"There's a huge change and it's going to make the policy much harder to implement from Beijing when money's not coming in but going out." he said. "I would take issue with almost any corporate accounting in China. It is that bad."
But while Chanos' assessment of China is shared at least somewhat by many, there still are likely to be opportunities from a nation where slow growth is relative — gross domestic productstill gained 7.6 percent in the previous quarter and is likely to stay there for some time, according to recent economic projections.
That's why investors such as John Burke, CEO at Burke Financial Strategies in Islip, N.Y., have not given up on a nation that he, too, considers an enigma.
"The China situation is very confusing right now because they have this mysterious remaking of the Standing Committee of the Politburo, which happens every 10 years," Burke said. "So there's a lot of saber-rattling going on. It certainly has an effect on the growth, but we're not sure which way yet."
One thing Burke does know is that Chinese corporations are being pressured into raising wages for their notoriously underpaid workers.
That likely will have the effect of driving up Chinese consumer spending, and Burke sees companies like KFC-parent Yum! Brands as well as Coca-Cola benefiting.
He also likes cosmetics maker L'Oreal , which has committed to adding a billion new customers this year, most of them from China and India.
Conversely, he advocates staying away from the types of companies associated with cyclicality and organic growth, such as DuPont, Dow Chemical and Freeport-McMoRan.
Similar worries have encouraged a safety trade globally, with oil's pullback attributable at least in some part to intensified slowdown fears in China.
Michael Gurka, managing director at Spectrum Asset Management in Chicago, believes a good part of the strong gold bid has come as a brace against China, and he sees other metals getting a look as well.
"The first place that it's showing itself is in the metals market, and they remain pretty strong," he said. "There's an inherent bid in silver and especially gold and platinum."
A "risk-off" trade is likely to come back into play, Gurka added, putting pressure on the global stock marketand probably giving grains a push higher.
But he doesn't like oil here and expects it could continue to trade lower, perhaps down to $87 a barrel or so. That's both because of China's weakness as well as the U.S. political situation, where President Obama does not want to see high gas pricesheading into the final stages of his re-election bid.
"The last thing the commander-in-chief wants to see after he gets off Jay Leno and David Letterman is $4 a gallon gas. It's very coincidental that they're seeing this" price decline in oil, Gurka said.
To be sure, the fear of China is not universal, with some believing that investors have more to worry about closer to home than they do from a country that is still growing at a nearly 8 percent annualized pace.
"The China demand story and whatever iteration we're at is going to be one of the legs of the stool that we're concerned about," said Art Hogan, managing director and head of product strategy at Lazard Capital Markets in New York. "But it's less important than what the Chinese ruling class is trying to do in the middle of a transition, and that is to not orchestrate a hard landing."
Hogan believes China will offer whatever stimulus is necessary to keep the economic engine going, regardless of whether it stokes inflation.
"We're waiting to see how aggressive they get with monetary policy," he said. "The lower any of their economic data points come out, the more aggressive they will get, even in the face of inflationary concerns."