Largest tech IPO coming from China soon, but its economy is headed south

As the financial world casts its eyes on the initial public offering of Chinese Internet company Alibaba, likely the largest ever tech IPO, the bigger picture of Chinese economic growth is in question.

Since most of China’s big export customers are showing sluggish or no real growth this year, the world’s second-largesteconomymay be taking a breather after nearly a generation of expansion. Manufacturing in the People’s Republic showed a fourth straight month of slowdown in April.

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Despite myriad concerns about Chinese stockmarkets, real estate and banking systems, the long view onChinais still bullish. For one, Neena Mishra, director of ETF research for Zacks Investments in Chicago, sees a little slowing in China in the near term. But, she notes, it’s “not likely China will see a hard landing” akin to a meltdown given its $3.8 trillion foreign exchange cash pile and growing middle class. She still sees some relatively good values in Chinesestocks, and “wouldn’t be surprised to see that market moving up."

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Lately, Chinesestockshave not reflected the long-range growth optimism as global investors fear contraction. The largest exchange-traded fund of major Chinese stocks , the iSharesChinaLarge-Cap ETF, which holds half of its portfolio in financial services and energy stocks, is down nearly 10 percent year to date through March 9 and off about 7 percent for the past 12 months.

In the short term, you would be better off investing in a broader portfolio of emergingmarketsstocks and reducing direct exposure to China.

Like many single-country, emerging markets funds, the iShares fund is highly volatile: It lost nearly half of its value in 2008, then regained almost all of its loss the following year, but lost ground in two out of the past four years. It charges 0.73 percent in annual management expenses and holds companies such asChina MobileLtd, PetroChina Co Ltd and ChinaLife InsuranceCo.

A similar fund, the SPDRS&PChina ETF, is down 11 percent year to date through May 9 and off about 2 percent for the past 12 months. The fund charges 0.59 percent in annual expenses. The fund’s top holdings included Tencent Holdings Ltd, China Construction Bank Corp. and Industrial and Commercial Bank of China ltd.

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TAKING THE LONGER VIEW

Despite the sour short-term news, the Chinese government is committed to growth in its long-range plans, and has ample cash to stimulate its economy, should it need to do so.

The Chinese are still building infrastructure at a breakneck pace, leading to construction of entire cities. Its long-term goal is to produce an economy driven mostly by domestic demand and not exports.

At its current 7.5-percent expansion rate - compared to 2.5 percent for the U.S. and 1.2 percent for the euro zone - the size of the Chinese economy will eclipse America in roughly five years, possibly sooner, according to a projection by The Economist magazine.

In the interim, the Chinese will be ramping up production of everything from computers to vehicles. China may also benefit from falling energy prices and Western sanctions on Russian banks. And a slowly recovering United States and euro zone may only serve to keep China’s export machine humming.

But as a global investor, you would be adding several layers of risk to your portfolio if you loaded up on Chinese stocks. Public companies based in China don’t have to comply with the rigorous accounting standards found in Europe and the U.S. and transparency on company operations is a major concern. Facing myriad questions over accounting practices and privatizations, more than 20 Chinese companies have been de-listed from U.S. exchanges over the past three years.

A broader focus on emerging markets and developing economies is a much more prudent play - move away from a China-focused ETF into one that focuses on a wider selection of emerging markets to mitigate your risk. One popular fund, the Vanguard FTSE Emerging Markets ETF, is up 0.75 percent year to date through May 9 and off 4 percent for the past 12 months. It charges 0.15 percent for annual expenses.

Half the portfolio is invested in Asian-based companies - including many of the same top holdings in the two other China funds above - but it also has stakes in Africa, emerging Europe and Latin America. Lately, the fund has benefited by holding a quarter of its portfolio in favored financial services companies.

But note: Although the fund is likely to be less volatile than a single-country fund, it will still exhibit higher-than-average risk than a U.S. stock-index fund.

Reuters