It's Time To Buy Chinese Stocks

In case you missed the news, China's capital markets had a mild panic attack in the days before Christmas as interbank lending rates - i.e. the rates that China's banks charge to each other for short-term loans - shot through the roof, topping out at over 9%.

So, what's happening in China? Are we about to have another "Lehman Brothers moment" where a major financial power sees its banking sector implode?

The short answer is no.

The People's Bank of China (PBoC), China's equivalent of the Fed, is attempting to show China's banks who's the boss. The PBoC has been trying to subtly tighten monetary policy for over a year in an attempt to rein in speculative lending.

Well, subtlety hasn't worked, so the bank took a more blunt approach. The PBoC effectively went on strike, refusing to inject liquidity into the market via its usual open market operations (i.e. bond buying and selling). China's banks reacted by hoarding their cash, sending the short-term rate soaring.

The PBoC wanted to send a message to China's banks, and it was most certainly received. But the PBoC is not interested in starting a major financial crisis, and it has already started injecting new liquidity into the Chinese financial system. Interbank rates have fallen back to about 5% at the time of writing.

(click to enlarge)

I recommend you use this mini-panic as an opportunity to buy Chinese stocks. Last month, I recommended you pick up shares of the iShares China Large Cap ETF (FXI) noting that China was one of the cheapest markets in the world and priced to deliver spectacular returns in the years ahead. I want to reiterate that recommendation today. Buy shares of FXI and plan to hold throughout 2014 for what I expect to be some of the highest returns of any world market.

Disclosures: At time of writing I was long FXI.

Source: It's Time To Buy Chinese Stocks

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