China's Down Periods May Be Buying Opportunities

Chinese stocks have unusually determined global market direction lately, bringing equities crashing down earlier this week, and talk about an end of the rally has intensified.

Fears that the country's government will be tightening monetary policy after the economy grew more than 8 percent in the second quarter sparked the selloff, but some analysts are saying that this is in fact a time for investors to get in.

But periods of weakness in the Shanghai market should be viewed as buying opportunities, Stephen Davies, CEO of Javelin Wealth Management said, adding that on a longer-term basis, his outlook for China remains positive.

The Shanghai A-share benchmark index has served as something of a leading indicator for quarterly gross domestic product (GDP) growth over the past three years.

Until recently China's market was "virtually unknown" to most people, Alan Landau, president of Marco Polo Pure Asset Management said.

"Now people know what an A-share is and for good reason — it is now the second-largest market in all of Asia. It actually almost surpassed Japan recently at the recent peak and is already far more liquid than any market in Asia," Landau explained.

China Skyline.jpg

"We do believe this is actually quite early in a secular bull cycle and we're going to see big new highs in the coming years," he said, adding that he sees the Shanghai Composite breaking above 10,000 "before this market cycle is over."

Fear of "Fine-Tuning"

The trigger for the recent pullback was fear that liquidity was being squeezed. After $1.1 trillion in new loans in the first half — a record surge — lending dropped sharply in July and the central bank said it would begin "fine-tuning" monetary policy.

China's benchmark index fell 20 percent from two weeks ago, after enjoying a world-beating 80 percent rally in the first seven months of the year. But the Shanghai Composite rebounded sharply Thursday, rising 4.5 percent — its second-largest gain for 2009, and closed 1.7 percent higher Friday.

China is still the emerging market darling in investors' eyes, with experts telling CNBC that it will be one of the best sources of growth in the next few years.

"The development of a nice growing economy in China, supported by other economies in Asia, is going to be very useful for the rest of the world," Stephen Perry, chairman of The 48 Group Club, told CNBC.

China's sudden increase in initial public offering activity (IPOs) is good news for foreigners, since when China outputs more and more of its economy into stock exchanges, there's an opportunity for the world to participate in its development, Perry said.

"Traditionally, there've been three drivers of growth in the Chinese economy," Tom Orlik, China analyst at Stone & McCarthy Research Associates, said. "We've had very high levels of fixed-asset investment, combined with a rapidly growing domestic consumption and finally a boost from net exports."

"What we're going to see in the second half of the year is the government hoping that those drivers of growth become more balanced," Orlik added.

A lot of growth has been coming from the public sector, with local governments spending money on roads, railways and airports, but what the government will want to see from now on will be the private sector stepping in with its own investment, he said

Orlik told CNBC the Chinese government is already beginning to decelerate its stimulus spending.

Tricky Getting In

When asked how investors can participate in China's 8 percent growth over the next few years, Perry said it is not simple: "Access to the Shanghai market is limited."

Stock investors watch stock movement at a stock exchange in Chengdu, China.
Stock investors watch stock movement at a stock exchange in Chengdu, China.

"You've got to be able to buy into the Hong Kong market – I think it's the safest place to buy in. There's quite a difference between Hong Kong prices and Shanghai prices but that will close over time," he said.

He suggests creating a fund that "reflects what China's economy will do" by focusing on the country's increasing demand for energy, water, Treasurys and commodities like platinum and iron-ore.

"The Chinese effect on commodity prices will probably be the most significant over the next couple of years," Perry predicted.

Mutual funds are forecast to be able to inject $8.8 billion into the market before October, either through newly-approved funds or via new products, the Shanghai Securities News said Wednesday.

Authorities approved three exchange traded funds for Chinese stocks and two domestic equity funds in recent days, other reports said.

More on Investing in the Emerging Markets: