Bullish on the "Other" Chinas

05/28/2009 11:00 am EST

Focus: GLOBAL

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of The Global Guru, says overseas Chinese are a powerful economic force in Hong Kong, Taiwan, and Singapore.

With the assets of the worldwide Chinese diaspora estimated as high as $3 trillion, the [60 million] “overseas Chinese” may represent a greater economic force than mainland China itself. The Chinese make up a majority of the population of Singapore and significant minority populations in Malaysia and Thailand.

If you do business in East and Southeast Asia outside of Japan and Korea, you actually are doing business with the Chinese. The World Economic Forum ranks the Chinese-dominated economies of Singapore, Hong Kong, and Taiwan among the most competitive economies globally.

Although it reverted back to mainland China in 1997, Hong Kong has remained one of the "freest" economies in the world. After the collapse in emerging markets, Hong Kong stocks hit single-digit price-to-earnings (P/E) ratios. In the past, every time the market collapsed to such low levels, Hong Kong stocks have gone on to double and even triple within a few years.

[Also,] every time the Federal Reserve cuts real interest rates to zero—as it did in 1992-1993, and again in 2003-2005—the Hong Kong stock market has doubled. The market is set to do the same this time around. Indeed, a few weeks ago, the Hong Kong stock market crossed the all-important 200-day moving average, confirming a long-term up trend.

With nearly 40% of its exports going to China, Taiwan's economy is almost as closely tied to the fortunes of mainland China as is Hong Kong. Taiwan Semiconductor Manufacturing (NYSE: TSM), the world's top contract chip maker, recently announced that it has started adding hundreds of staff at its research and development department and other manufacturing plants. Why? New demand is arising from China's economic stimulus plan that has encouraged spending on electronics in rural areas.

[And recently,] Taiwan's voters gave a resounding victory to Ma Ying-jeou of the opposition Kuomintang (KMT) party in the island's presidential election. The KMT advocates a free-trade agreement and eventually a full-fledged common market with mainland China. The [volatile] Taiwanese market has soared in recent weeks, as long-term investors are betting that an eventual merger between mainland China and Taiwan is inevitable. (Editor’s Note: Vardy recommends the Hong Kong and Taiwan ETFs, EWH and EWT, in his Global Bull Market Alert.)

Singapore has been hit hard by the global economic downturn. Its economy contracted 16.4% in the fourth quarter, compared to the same period in the previous year, and shrunk another 19.7% in the first quarter of this year. The International Monetary Fund (IMF) estimates Singapore's GDP may decline by as much as 10% this year, dwarfing the declines in most Western economies.

Yet Singapore's low corporate tax and personal tax rates, very low levels of corruption, skilled workforce, stable environment, and efficient infrastructure have made it a model for much of Asia. Singapore also has become the world's fastest-growing offshore banking center, and its strict bank secrecy laws and a favorable tax regime have put the country on track to become the 21st century's answer to Switzerland.

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