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The Chinese government shocked global investors last week. Prime Minister Wen Jiabao said China’s growth target for 2012 has been lowered from 8% to 7.5%.
It was a huge departure from China’s current policy.
But that was just the first of several bearish economic numbers…
This past weekend, the Chinese government released a flurry of economic data. The numbers provided the first glimpse this year of China’s economic strength.
And it wasn’t good to say the least…
Factory output growth fell to 11.4%, well below the forecast of 12.3%. Lower domestic and foreign demand for Chinese made goods stifled production growth. The reading was the weakest seen since July 2009 when the world was still dealing with the global financial crisis.
Retail sales also missed estimates. While they grew 14.7% during the first two months of 2012, they came in shy of the 17.5% growth analysts expected.
But the biggest disappointment was the surprisingly huge trade deficit China registered in February. Weak growth in car sales, industrial production, and retail sales put China $31.5 billion in the red during the second month of 2012.
As you might expect, the news media is pointing to these data as proof positive Chinese stocks are heading lower.
But I disagree.
I believe the data are proof that Chinese stocks are on the verge of moving much higher from current levels.
While economic growth has been slowing, we’re also seeing a slowdown in another important economic indicator… inflation. In February, consumer inflation declined to a 20-month low. A clear sign the tightening actions taken last year have done their job.
In fact, economists now believe consumer inflation in China will be around 3.4% in 2012. That’s well below the government’s 4% inflation target.
And with inflation under control, the Chinese government finally has the room they need to loosen monetary policy.
Last year, the government was focused squarely on preventing consumer prices from rising too fast. They gradually tightened monetary policy throughout the year, which drained liquidity from the system.
And without liquidity, the economy could not continue growing at a fast rate.
But now, the government can focus on reversing the tightening process. They can allow banks to lend more money to businesses who can use those funds to invest for growth. Of course, more lending will bring about stronger economic growth and rising corporate earnings.
The perfect prescription to drive Chinese stock prices higher.
So, how can you profit from the coming change in Chinese monetary policy?
I think the best bet is to invest in Chinese small-cap companies. History has shown that small-cap companies typically lead the way in new bull markets.
And this time around shouldn’t be any different.
However, it’s no easy task sifting through the hundreds of small, publicly traded Chinese companies to find the hidden gems. And you need a lot of investment capital to properly diversify an investment in this highly volatile sector.
Fortunately, there is an easier way…
The Guggenheim China Small Cap Index (HAO) is an exchange traded fund (ETF) that focuses on small Chinese companies. The ETF is widely diversified across all sectors of the Chinese economy and holds 230 different stocks.
The ETF is good sized with over $178 million in assets. It offers a fairly low expense ratio of just 0.70%. And it’s clearly undervalued with a P/E ratio of 7.9x and a P/B ratio of 1.0x.
What’s more, HAO offers a juicy dividend yield of 2.6%.
No question about it, the coming shift in Chinese monetary policy will be a boon for Chinese stocks. Grab your share of the profits by picking up a few shares of HAO.
– Robert MorrisSource: Dynamic Wealth Report