Credit and property prices are exploding — yet the dissenting voices contend that massive government stimulus programs are propping up the growth.

The mainstream media are beginning to echo these China bubble warnings. Consider a recent Bloomberg article in which James Rickards, former general counsel of hedge fund Long-Term Capital Management LP [Ed. Note: Yes, that Long-Term Capital Management], claims the Asian giant is smack in the middle of “the greatest bubble in history.”

That’s a bold statement considering the world’s recent dealings with the credit crunch and multiple property bubbles, both domestic and overseas.

But we all know that fear is contagious. And it would appear some investors have bailed on China’s growth prospects in favor of greener — and safer — pastures.

However, in our opinion, investors who sold China early may have made a huge mistake…

Sure, some experts have raised legitimate concerns over certain facets of the Chinese economy. However, this does not mean opportunity has ceased knocking. Even though the Chinese economy slumped with the rest of the world during the recent recession, it has quickly returned as one of the fastest growing markets in the world.

While reporting on China’s stronger-than-expected first-quarter growth earlier this year, Reuters noted that the Chinese government is “already winding back its anti-crisis investment spending and has ordered banks to reduce new lending by more than 20% in 2010.”

What investors should focus now are retail sales, specifically electronics.

The Rural Spending Boom

China’s electronics market, which includes computers, mobile phones and traditional personal electronics such as televisions and CD players, will be worth more than $150 billion this year, and is expected to increase to approximately $219 billion by 2014.

The main driver behind this growth will be rural customers…

Demand for items such as televisions, smartphones and computers in small cities and rural areas will bolster these numbers, according to Business Monitor International. This is due in part to the expansion of a government program that subsidizes electronics purchases for rural customers. You read that correctly: The Chinese government is helping its rural citizens “catch up” to the urban middle class by offering price breaks on LCD televisions, computers and phones.

Fortunately for us, there are scores of publicly traded Chinese electronics firms that are set to greatly benefit from the expansion of electronics sales in the People’s Republic. They’re easy to buy through any broker, but thanks to cryptic financials and plenty of Wall Street noise, it’s absolutely imperative that you do your homework before you put your cash on the line with any of these tiny companies.

Sincerely,
Greg Guenthner
Penny Sleuth

June 24, 2010

Are Chinese Small-Caps a Good Buy? was originally featured in the Penny Sleuth.

Sure, we could give you the typical facts. You know China will be the largest economy in so many years. The Chinese middle class is growing at such and such a rate. We could fill hundreds of pages with this information. But you don’t need us to go through that.

No, instead of spewing out these facts, we are going to let you in on one very overlooked aspect that Wall Street has been dying to get in on, but can’t. Today, you can beat Wall Street to it… And it can’t do anything about it…

Sometimes Wall Street Does Get It Right

As you know, China is growing in every way. Investors have been jumping into just about every industry they can think of.

Just look at the Chinese steel industry. At the beginning of 1996, monthly steel production in China was around eight million tons. By the start of last year, the country was producing over 38 million tons. China expects to turn out 36% of the world’s steel this year:

It’s pretty obvious that with the mass growth of cities in the country, steel is a great investment. Many investors have made plenty of money on that growth, and many more are still doing so. But now it has become a bit too mainstream for our tastes.

Another industry that has done quite well in China is automobile manufacturing. As more and more people travel between home and work in China, the demand for personal transportation is going through the roof. China is now producing over eight million cars per year:

Even though the steel and automobile industries should continue to grow, it’s too late to get in now. Wall Street already knows about these industries. Sure, you may find a couple of 50% winners. But we are looking for the huge gains that only penny stocks can deliver.

Today, we have one growing opportunity that, so far, isn’t exploited…health care.

The Health Care Revolution in China

Chances are you have taken an antibiotic, swallowed a vitamin or popped an Advil sometime in your life. We take them for granted. We’ve been exposed to simple health care like this our whole lives. But for hundreds of millions in rural China, this is foreign.

That’s starting to change…

Recently, the Chinese government is finally starting to require better education on modern medicines in many small farming towns in the far-off areas of China. It’s already having an effect.

Over the past decade, the Chinese pharmaceutical industry has grown, on average, 20% per year, to $97.8 billion…the nutraceutical industry is valued at $12.5 billion and growing…even the health beverages market is up to $5 billion per year.

So the question remains: Why hasn’t Wall Street already exploited this? The answer is twofold.

First, the Western world cannot break down the wall surrounding the Chinese health care industry…meaning Pfizer and company are willing to front millions upon millions of dollars to get their chances at this lucrative market, but the Chinese government won’t allow it.

Even though China entered the World Trade Organization in 2001, the country just isn’t playing fair with foreign companies.

You have probably heard this story many times over the past decade. A large U.S. pharmaceutical company tries to set up shop in China. China says no. Instead, a Chinese company rips off its large Western counterpart and manufactures the drug both cheaper and with approval from its government.

After several years of intense battles, U.S. pharmaceuticals make up only 10–20% of the Chinese market.

The second reason is size. Many investors — realizing that China is still many years away from treating foreign companies fairly — have tried to invest in China-based companies. Unfortunately, there aren’t any large Chinese pharmaceutical companies for Wall Street to invest in. The average annual revenue for the top-tier domestic drug makers is about $100 million, which is nothing compared with Pfizer’s $48 billion per year.

This gives us penny stock investors a niche way to exploit the mass growth of China’s pharmaceutical industry. With between 3,000–6,000 small Chinese companies, the pickings are plentiful.

Sincerely,

Jim Nelson
April 10, 2008

P.S.: As I was researching this industry, I found one company that is absolutely amazing. It’s a small Chinese drug maker that has seen its revenue grow 15-fold over the past six years. The next few years should be even better.

The One Hard-To-Reach Industry Where Penny Stocks Rule was originally featured in the Penny Sleuth.