So Long, U.S. Consumer: Why I’m Looking to China for Profits

It’s amazing how analysts try to spin numbers that are horrible. For instance, retail sales edged up 0.3% in May, which is not something to get excited about; however, analysts have been spinning this news, saying that the poor May reading is simply a result of the upward revision in the April reading to 0.5%. 

Now, I’m not sure what your thinking is, but my view is that both numbers stink and they foreshadow an economy in which consumer spending is scarce. 

My excitement lies 10,000 miles across the Pacific Ocean in China, where the country’s government, under President Xi Jinping, is aggressively trying to encourage consumers to spend. This is contrary to what has happened in past decades, when the massive Chinese economic engine was fueled by manufacturing and foreign investment. Both are still prevalent, but the government also understands that it must drive up domestic consumer spending in order to lessen the impact of slower growth around the world, which has a direct impact on China. 

In other words, China wants its consumers to spend the country out of the current stalling, which, at around 7.5% gross domestic product (GDP) growth, is still way ahead of the U.S. and other Western countries. The reality is that with a population of 1.3 billion people and a middle class of approximately 300 million, the potential is significant. Plus, the middle class in China has money to spend, unlike here in America, where people are struggling, just making ends meet. 

In May, China’s retail sales surged 12.5% year-over-year to $349 billion, according to the National Bureau of Statistics. This followed growth of 11.9% in April. In the first five months of the year, retail sales surged 12.1%, which is impressive. But what really impresses me is the spending in the rural areas, where retail sales surged 13.9% in the same five months. 

Make no mistake about it: the government’s strategy to supercharge the Chinese consumer is working. 

To play this investment opportunity, one exchange-traded fund (ETF) that is worth a look is Global X China Consumer ETF (NYSEArca/CHIQ), which is based on the Solactive China Consumer Index. The Solactive China Consumer Index is a play on Chinese consumer sentiment, and it will likely rise as the wealth levels in China continue to grow. 

 

Chart courtesy of www.StockCharts.com 

The fund comprises consumer cyclical (62.9%) and consumer defensive (32.13%) plays, which will translate into higher value as consumer spending increases. 

The top areas of investment for the underlying index as of March 31 are food and beverages (25.68%), retail (30.10%), automobiles (13.70%), travel and leisure (9.67%), and health care (4.49%). 

So now, instead of waiting for the American consumer to come back, I suggest taking a look at an ETF like Global X China Consumer ETF to play the rise in Chinese consumer spending.