"The best companies in China are cheaper than the best companies in the United States," said the vice chairman of Berkshire Hathaway (NYSE:BRKa) — Charlie Munger — in the latest annual meeting. The very comment must have made investors attentive about China investing. After all, who doesn’t want to follow such investing gurus?
This year has not been great so far for China equities. iShares China Large-Cap ETF (TE:FXI) has lost about 0.7% so far (as of May 9, 2018), but that is much lesser than the broader emerging market ETF iShares MSCI Emerging Markets ETF (NYSE:EEM) EEM which is off 3%.
Trade war concerns between the United States and China and the Fed policy tightening probably have been weighing on Chinese equities this year. But the underlying momentum of China investing is pretty solid.
MSCI Inclusion Coming Closer
Global investors are purchasing China stocks at the fastest clip ever as MSCI will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index from June 2018. The move bolsters China’s standing as a major investment destination in the world.
As a result, investors bought an average 2.38 billion yuan (US$373.9 million) of mainland-traded shares on a daily basis in April, marking the highest level since the stock connect programs were launched in 2014. JPMorgan Chase (NYSE:JPM) expects the inflow to touch as much as US$40 billion, after taking into consideration the investments by actively managed funds.
Economy & Markets in Transformation
The country’s 19th National Congress of the Communist Party meeting held last year indicated “coordinated policies to reduce financial risks, more institutionalized environment policies, and accelerated state-owned enterprise (SOE) reforms.”
Chinese President Xi Jinping also indicated that “China will relax market access for foreign investment and expand access to its services sector, as well as deepen market-oriented reform of its exchange rate and financial system, while at the same time strengthening state firms.” The country is looking to reduce debt and pollution in older industries without inhibiting growth.
Announcement of $72bn Tax Cuts
China started preparing to counter the negative impact of U.S. President Donald Trump’s proposed trade restrictions, mainly on manufacturing and technology. The Asian country is implementing more than 460 billion yuan ($72.2 billion) in tax cuts annually.
Value-added taxes were cut this month to 16% from 17% for the sale of goods, and to 10% from 11% for transportation, logistics and construction services. The government also planned in late April to widen “the qualification criteria for the preferential 3% VAT rate applied to smaller businesses and startups.” Per Zhongtai Securities, the new rates will result in more than 100 billion yuan savings for manufacturers alone.
Cuts Deposit Reserve Rate
China’s central bank announced in mid-April that it would lower the amount of cash that most banks are needed to keep in reserve to pour cash into the banking system. This happened for the first time since February 2016. This can be seen as relative monetary easing and came at an opportune moment when capital inflows are draining out. Such easing should boost growth momentum.
Stock Picks
Against this restoring backdrop, investors can tap the below-mentioned Chinese stocks that are top-ranked and have relatively low P/E in the Chinese equity universe.
Daqo New Energy Corp. (NYSE:DQ) – P/E 6.48x
The Zacks Rank #1 (Strong Buy) company is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. The VGM (Value, Growth, Momentum) Score of the stock is A.
SINOPEC Shangai Petrochemical Company Ltd. (NYSE:SHI) – P/E 7.47x
The Zacks Rank #2 (Buy) company is China's largest petrochemical company. The VGM Score of the stock is A.
China Life Insurance Company Limited (LFC – P/E 15.98x
The Zacks Rank #2 company is the leading life insurance company in China. The VGM Score of the stock is C.
Baidu Inc. (NASDAQ:BIDU) – P/E 25.10x
It is a Chinese-language Internet search provider. The stock has a Zacks Rank #1.
JinkoSolar Holding Company Limited (NYSE:JKS) – P/E 26.84x
The Zacks Rank #1 company is a solar product manufacturer.
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