The world’s second-largest economy has had a tough year. Concerns that China’s growth rate was slipping was compounded by weaknesses in certain sectors. This had prompted the government to implement measures designed to stimulate the economy. Recent data suggests that such measures are bearing fruit.
HSBC PMI Peaks
The HSBC flash PMI has increased to 52 in July. This is the index’s highest level in one and a half years. The reading came in above most economists’ estimates. Any reading above 50 indicates that manufacturing has expanded. The nation’s benchmark index, the Shanghai Composite, jumped 1.3% last Thursday to close at a three-month high following this development.
The final reading of the HSBC index is due on Aug 1. Official manufacturing data will also be released based on this information. This gauge increased to 51 in June from a level of 50.8 in May — its highest reading for the year up to now.
Industrial Production, Retail Sales Rise
Earlier this month, industrial production increased during the first half of 2014. According to official figures, China’s value-added industrial output increased 8.8% during Jan-Jun on a year over year basis. This is higher than the 8.7% increase experienced in the first quarter. Output grew 9.2% in June, the fastest increase so far this year.
Retail sales also grew during the first half of the year, by 12.1%. Growth was powered by strong performance by the online sector. Performance during the Jan-Jun period outperformed first quarter performance. Retail sales grew by 12% during this period.
Stimulus Measures Take Effect
The Chinese government has implemented several stimulus measures to ensure that growth remains on track. This includes both monetary and fiscal measures, namely easing credit and increasing government spending. However, it also includes significant regulatory reforms.
This includes changes to house purchase regulations to rejuvenate a beleaguered property sector. Such steps have possibly been triggered by a decline in home prices. However, the good news is that they have been greeted with resounding applause by the markets. E-House (China) Holdings Limited (EJ) posted gains for a fifth successive day last Thursday following reports of such reforms.
In fact, key China ADRs have continued to move upward. Despite recent volatility in tech stocks, caused primarily by the resumption of IPOs, promising earnings from Baidu, Inc. (BIDU) was all it took to push up other China ADRs on Friday. Among these gainers were YY Inc. (YY), Qihoo 360 Technology Co. Ltd. (QIHU) and Ctrip.com International Ltd. (CTRP).
Growth Numbers on Track
These indicators and PMI numbers in particular indicate that the economy is on track to achieve its 7.5% growth target for 2014. The economy grew at 7.5% in the second quarter on a year-over-year basis.
The growth report was of great significance because it was a marginal improvement from the 7.4% experienced in the first quarter. Second quarter growth numbers prompted analysts at several banks to revise their 2014 growth forecast upward.
Our Choices
Taken together, these factors indicate that the Chinese economy may be back on track. Below we present three stocks which are good choices in this environment, each of which also has a good Zacks Rank.
NetEase, Inc. (NTES) is a holding company operating in the Internet technology domain. NetEase has three business units. These are: Advertising Services and E-mail, Online Game Services, and Wireless Value-added Services and Others.
The company offers these services to Guangyitong Advertising and Guangzhou NetEase. These two companies run the online advertising business of the group and the NetEase Websites. Using its subsidiaries and affiliates, the company provides online gaming services that include in-house developed massively multi-player online role-playing games and licensed titles.
NetEase holds a Zacks Rank #2 (Buy) and has expected earnings growth of 3.50%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 14.33.
China Petroleum & Chemical Corp. (SNP) or Sinopec is one of the largest petroleum and petrochemical companies in Asia. The company is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China.
The company is also the largest producer and distributor of petrochemicals in the nation. Sinopec operates through four business segments: exploration and production (E&P), refining, marketing and distribution, and chemicals.
The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 3.30%. It has a P/E (F1) of 10.97.
JinkoSolar Holding Co., Ltd. (JKS) engages in the design, developing, producing, and marketing of photovoltaic (PV) products in China and internationally. This company sells its solar modules to distributers, project developers, system integrators, and other players in the solar industry.
Following its first quarter results in May, JinkoSolar has reported in the black for four quarters in a row. The company has successfully enlarged its geographic footprint and expanded its downstream business, which has ensured net profitability for four straight quarters on the trot.
Apart from a Zacks Rank #3 (Hold), JinkoSolar has expected earnings growth of 7.90%. It has a P/E (F1) of 8.15.
Some concerns about whether the current rate of growth is sustainable still linger. This includes signals from the top political leadership that it would be comfortable with a slower pace of growth. However, analysts from leading banks have revised their growth targets upward. Recent economic data also supports such a view. This is why these stocks would make good additions to your portfolio.
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