One of the important stories of 2014 is likely to dominate headlines this year as well. China, till recently one of the world’s powerhouses of growth, is witnessing a slowdown. Despite the recession of 2008, the country’s GDP has jumped to nearly $10 trillion from $1 trillion in 2000. However, growth is slated to decline this year to a rate of 5-7% from 10% witnessed only five years ago.
Economic Indicators
The country’s manufacturing sector has been struggling for some time now. Even as costs rise, producers face lower demand because of an economic slowdown. China’s GDP is expected to increase at its slowest pace in 24 years. Annual growth for 2014 is expected to come in at 7.4%. Some economists are of the view that the country should target growth of 7% this year.
However, services sector data has been encouraging. The HSBC/Markit Services PMI increased to 53.4 from the level of 53 recorded in November. Any reading above 50 indicates an expansion. This means that this area of the economy is faring relatively better.
Additionally, the economy experienced a relatively low rate of unemployment during 2014. According to the country’s Human Resources and Welfare Authority, an additional 13 million people found employment during the year. The country’s social security system has also experienced improvement. According to official figures, 837 million people had been inducted into the system by end-November. This is a year-over-year increase of 130 million.
Stimulus Measures
At the same time, China’s political leadership has expressed satisfaction with a lower level of growth. The country now seeks a path of slower but sustainable prosperity even as it transitions from an export-led manufacturing economy to one which depends more on services and domestic demand.
However, the government has responded proactively to the series of dismal economic reports. In November, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. This was the first reduction in rates undertaken in more than two years. Market watchers were taken by surprise since the PBOC has till recently stuck to more moderate stimulus measures.
The government continues to undertake several reform measures targeted at specific sectors to boost growth. This includes increasing the pace of reforms of state-owned companies as well as relaxing property purchase and lending norms.
Stocks Jump Higher
Following the rate cut, the benchmark Shanghai Composite Index increased 11% over November, the highest gains registered since Dec 2012. During the next two weeks, close to 5,000,000 new investor accounts were created to trade on the Shanghai stock exchange. This was revealed by the China Securities Depository and Clearing and the pace of new account openings has doubled since the move.
Stocks closed at their highest level in more than five years on the first trading day of 2015. Energy shares led gains with companies related to coal benefiting in particular. These gains came after many provincial governments undertook major changes on the resource tax regime. This is part of nationwide reform measures which seek to aid companies hit by low coal prices since 2012.
Oil Price Slump
The continuing slump in crude prices is another positive for China’s economy. On Monday, WTI crude oil price had fallen as low as $49.95 a barrel, its lowest level since May 1, 2009. Additionally, Brent crude also fell below the $53 a barrel level, sparking fears that a spurt in oil production will lead to instability in energy markets across the world.
This comes as welcome news to China’s central bank authorities. It will provide a much needed boost to the economy and provide room for the PBOC to ease rates further. Markets have continued to rise on further rate cut hopes. Given the need to meet the yearly growth target, such a move seems increasingly probable.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Concord Medical Services Holdings Ltd. (CCM) operates a chain of diagnostic imaging centers across China. Concord owns a wide network based in over 70 hospitals across more than 50 cities. Nearly all these hospitals have the highest rankings in terms of size and quality in keeping with the latest standards of China’s health ministry.
Concord Medical Services holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 25.6% for the next year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.22.
JA Solar Holdings Co., Ltd. (JASO) is based in Ningjin of the Hebei province in the People’ s Republic of China and manufactures high-performance solar cells. The company is a recent start-up entity, established in May 2005, which commenced manufacturing operations in Apr 2006. JA Solar was incorporated in Jul 2006 with its initial public offering on Feb 7, 2007.
Apart from a Zacks Rank #1 (Strong Buy), JA Solar has expected earnings growth of 25.5% for the next year. It has a P/E (F1) of 6.66x.
Huaneng Power International, Inc.’s (HNP) principal operations are related to producing, distributing and selling electricity and heat to regional and provincial companies which operate grids in the People’ s Republic of China as well as Singapore. It also operates cargo transportation services in coastal regions as well as port management services.
Huaneng Power holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 24.7% for the next year. It has a P/E (F1) of 7.58x.
Despite short-term hiccups, China remains one of the world’s powerhouses. Additionally, efforts to usher in reforms will boost the economy’s stability this year. Given these factors, adding these stocks to your portfolio would be a prudent choice.
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