Is China an Afterthought?

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Could slowing growth spark a
stock market rally? Usually, we tend think of slowing growth as a main reason
for stock prices to head lower. But I can’t help but think, in the case of
China, that the strong growth numbers it’s put up have
convinced investors that
China’s economy is a bubble and that Chinese stocks are
fundamentally unsound.

There have been plenty of
headlines out there from big name hedge fund managers calling for the imminent
crash of
China’s export economy. And in a demand-challenged world,
this message has certainly resonated. Chinese stocks are down across the board.

Shell-shocked investors are
worried enough about
U.S. stocks. Chinese stocks are currently an

Inflation in China has picked up to 3.1%. That’s just above the
government’s ceiling of 3%.

The World Bank has said that
low interest rates and stimulative monetary policy in
China have caused a real estate bubble. It also says that
simply raising interest rates would go a long way to solving the problem.

China pegs its currency, the yuan, to the U.S. dollar.
When you peg your currency to another, it means you are accepting the monetary
policy that governs the other currency. So
China has essentially adopted U.S. monetary policy, or at least the secondary risks and
benefits associated with it. But given the interest rate fueled housing bubble,
a dollar peg may not be in
China’s best interest.

Now, China wants its currency to be undervalued because it
helps its exports. But a real estate bubble is not good for

So what does China do? Does it raise interest rates? Or re-value the
yuan? Raising rates would affect
China’s domestic economy, and real estate prices.
Revaluing the yuan would affect
China’s exports, but it would also ease pressure from the U.S.

I won’t be surprised to see China do both – raise rates and incrementally revalue the

So, how would that affect
Chinese stocks?

I hold a
few Chinese stocks in the Small Cap Investor PRO portfolio.
And yes, they’ve been beaten around pretty good. But I haven’t even considered
selling them for two reasons: valuations are incredibly low and
China’s economic growth will continue, current conditions
notwithstanding. Remember,
China is a long term play with short term opportunities
that periodically come up.

I realize this may put me in
the minority of investors, but I don’t see
China’s economy collapsing. The World Bank has trimmed its
growth estimates for
China’s economy to 7% a year for the next 10 years. That
hardly sounds like an outright collapse. Leaders in Western economies would
give anything for even half that amount of growth.

China is also on more solid financial footing than virtually any other
country in the world.
China never suffered a credit bubble. And even now, its
stimulus spending comes out of its cash surplus, not debt.

The there’s the issue of
valuations. The Chinese stocks in Small Cap Investor PRO are trading
with forward P/Es of 6 and 7, and
PEG ratios of 0.3 and 0.5. They are very cheap, and there is far more
upside for these stocks than downside.

The only thing missing right
now is a specific catalyst to take them higher. But with triple-digit upside
potential for these stocks, I can wait.

I hope you
enjoyed the small cap energy dividend stock report I offered you yesterday.
However, I heard from one reader that noticed I can’t count. Here in Daily Profit, I told you that the
dividend stock report had three stocks, when it actually has two.

So, I’ll offer another nice
dividend paying
MLP that I like a lot: Energy Transfer Partners (NYSE:ETP). This company owns and leases natural gas pipelines and storage

It’s not a play in natural
gas prices so much as a play on natural gas demand. So long as there is demand
for natural gas, this company will make money, regardless of natural gas prices.

It’s been very stable,
trading between $37 and $49 for the last year. And it pays an 8% dividend of
$3.58 a share. That would certainly make up for the loss of the BP (NYSE:BP)
dividend anyone might be smarting from right now.

Finally, thanks
for all your comments and keep ‘em coming to

[email protected]

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