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China's Big Problems Are Creating a Big OpportunityBy
Tuesday, May 9, 2017
China's local stock market has fallen for four consecutive weeks. Investors are spooked.
And for good reason...
China has been cracking down on speculation and financial leverage. And that has caused turbulence in the market. As Bloomberg reported over the weekend...
This crackdown might sound bad for the markets at first... But the important thing you need to understand is, China is reining in what needs to be reined in... China's credit system expanded "too recklessly and too quickly," hedge-fund manager Kyle Bass told Bloomberg last week.
Bass is betting on a Chinese credit crisis. One of his big concerns is the size of China's "wealth management products" (WMP) industry. WMPs offer higher yields... But they are not part of the official banking system. Instead, they are part of China's lightly-regulated "shadow banking" sector.
Huge amounts of cash have flowed into WMPs from Chinese investors. But they encourage too much leverage and reduce transparency.
China wants to move investor money out of the shadow banking system and into the proper banking system. The government has taken decisive action here recently... And it has seen results. "The number of wealth-management products issued by Chinese lenders sank by 39% in April from the previous month," Bloomberg reported over the weekend.
And it's not just WMPs. The crackdown is happening across the board... real estate, cross-border money flows, etc. China has tightened up regulations. And it has raised interest rates.
Investors have gotten the hint. They are speculating less, and buying fewer WMPs. The Chinese government is getting what it wanted.
The thing is, this government tightening campaign creates an incredible investing opportunity...
With across-the-board government clampdowns, investors are scared of China right now. Nobody is invested. Not the Chinese, and not foreigners like you and me. Everyone who wants to sell has sold (or close to it).
This setup typically means we have an "asymmetric" trade setup... where our upside is dramatic, and our downside risk is limited.
Sure, the market could weaken a bit more in the near term. But this setup is what I want to see... China is cheap. And right now, it's also extremely hated. That means we have limited downside risk versus dramatic upside potential in China.
Don't look at this clampdown as a negative. Instead, see it as a positive... China is reining in what needs to be reined in. It's doing the right thing. Meanwhile, investors have fled.
Perfect. Get some money to work in China now, if you haven't already...
Good investing,
Steve
Further Reading:
Steve has written about the outstanding opportunity in China several times recently. Catch up on his bullish argument here...
Market NotesHOW AMERICANS ARE SPENDING THEIR MONEY Today, we'll check in on the spending of American travelers...
Regular readers know we look at several sectors that tell us what's going on in the U.S. economy. In the past, we've discussed how credit cards, swimming pools, and cruise lines can show us a lot about how American consumers are feeling. And that's true for the hotel business, too.
Today, we're looking at a top performer of the sector: Hilton Worldwide (HLT). The $20 billion hotel chain owns 14 world-class brands – with more than 4,900 properties around the world. Last year, the company opened nearly one new hotel per day. The company earns about 80% of its sales from the United States. And its business performs the best when people are traveling... So its performance is a good measure of the American economy.
As you can see in the chart below, the hotel business has been booming. Hilton's shares are up nearly 70% in the past 15 months... and just hit a fresh 52-week high. It's another good sign that the American economy is "chugging along"...
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