Chinese economy – emerging market of the day

As the Chinese economy (FXI, quote) continues to show signs of a resurgence in growth, investors are beginning to turn their attention back to the world’s second largest economy.

Image courtesy Mike Beltzner: http://www.flickr.com/photos/beltzner/

Nanjing Road Pedestrian Mall at People's Sqaure, Shanghai

Although the Shanghai Composite dropped a little more than a percent in Thursday trading, this is little reason to fret. Given that the Shanghai Composite has rallied more than 15% since its lows a little over a month ago, the exchange has been due for a bit of a breather.

Today’s drop was largely the result of profit taking, especially in the financial sector. In light of the heavy weighting of FXI in financials, traders should not be surprised to see the ETF lag in New York trading on Thursday.

In addition to profit taking, the Chinese real estate sector underperformed as a result of rumors pertaining to new real estate tax mechanisms. Outside of a few major cities, few Chinese citizens pay taxes on their real estate holdings; an increase in taxation could adversely affect the country’s major developers like Sun Hung Kai Properties (SUHJY, quote) going forward.

However, such a move by Beijing wouldn’t necessarily harm overall market performance if additional taxes drive more retail investors into equities instead of property.

On the whole, the Chinese economy remains attractive to Western investors. As economists continue to ratchet up growth forecasts, equities with exposure to China are likely to perform well, in particular those that have faltered over the past few months as doom and gloom for the Chinese economy was the repeated narrative.

While Chinese tech stocks like Baidu (BIDU, quote) Qihoo 360 (QIHU, quote), and SINA (quote) and casino stocks like Las Vegas Sands (LVS, quote) and Melco Crown Entertainment (MPEL, quote) have all run up over the past month, if more positive news pertaining to the Chinese economy continues to materialize this week, these stocks could run higher.

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Author and family are net long BIDU, LVS, and MPEL.