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It's been a rough year for China investors, and despite stocks' bounce back over the past two months, Hong Kong's Hang Seng (HSIINDICES: ^HSI ) index hasn't been able to dig out of the red in 2013. Things got worse for investors this week, as the Hang Seng fell another 2.4% over the past five days -- part of a 6% fall year to date.
Yet is China hitting a bottom? There's little chance that the world's second-largest economy will ever pick up the kind of astronomical growth that once created out-of-this-world economic predictions as recently as a few years ago, but strong data on the country's July have generated optimism about the country's direction. Could an investor boon be coming for this down-on-its-luck market?
Investment picks up
China's been stuck in a cash crunch, with the recent pressure on its banking sector, but signs of hope are emerging. Foreign direct investment inflows picked up by 7.1% year over year first the first seven months of 2013, according China's Commerce Ministry. Inflows from the U.S. alone jumped by more than 11%. However, it's vital to note that not every sector's doing so well in that category: Foreign inflows fell by more than 2% to the manufacturing sector, with the service sector responsible for the gains.
That's been the story of China's growth recently. While services have capitalized on demographic trends promoting urbanization and a rising middle class, the manufacturing sector has slowed dramatically from earlier growth. Surprisingly, the HSBC/Markit preliminary reading of China's purchasing manager's index, or PMI, showed a gain in the country's manufacturing sector for August, with the PMI increasing to a reading of 50.1 -- just a tenth of a percentage into expansion territory -- from July's 47.7 mark, a serious showing of contraction.
Unfortunately, that doesn't mean Chinese manufacturing is on stable footing. If that preliminary reading for August holds, the slight growth for the month won't counter concerns that China's desperate need for reforms in banking, bureaucracy, and elsewhere will hit growth hard in the coming quarters. Considering the dubious nature of some Beijing-produced statistics as it is, it's best for investors to play China with a cautious hand until hard evidence of the economy's rebound arises.
Even stocks from some of China's largest companies have fallen amid the nation's slowdown. China Mobile (NYSE: CHL ) is the world's largest mobile carrier by subscribers, but the stock's still fallen more than 10% year to date. Not like that's stopping the company from making progress: China Mobile recently awarded its initial batch of 4G contracts to a number of telecom companies, and without much surprise, domestic Chinese firms Huawei and ZTE won more than half of the total contracts, which in all equaled more than $3 billion.
Other foreign companies picked up some of what was left, with Ericsson (NASDAQ: ERIC ) reportedly winning around 10% of China Mobile's contracts, according to sources. Ericsson's the largest maker of wireless equipment in the world and thus a great partner for China Mobile, but the company's struggled against the likes of Huawei and others recently: Ericsson's sales couldn't match up to analyst projections in its most recent quarter.
While Ericsson, Huawei, and other wireless equipment makers struggle for supremacy, however, China Mobile's enjoying its spot atop the world's mobile carriers. With more and more Chinese moving up into the middle class, this company doesn't look like it'll be taken down any time soon.
It's pivotal to find solid companies operating in China if you're looking to increase your investment exposure to the world's hottest emerging market. There's good reason to believe that the most successful investors over the next few decades will be those with exposure to China's massive and growing population of domestic consumers. And there are few things that these consumers are likely to purchase with more enthusiasm than cars and trucks. In this brand-new free report, our analysts get out in front of this trend by identifying two automakers that are poised to surge along with China's middle class. If you want to be among the smart investors who get rich from this growing trend, then you'd be well advised to instantly download our free report on the topic by clicking here now.