August 5, 2015


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China stocks in general have resumed the plunge that began in mid-June, largely knifing through attempts by Beijing authorities to place a trampoline below them.

Investors and strategists for mutual funds and others see no near-term end to the woes.

But you can find China stocks that have held up despite the decline by A-class shares, which trade on mainland exchanges such as Shenzhen’s or Shanghai’s. All it takes is to look offshore, investors and strategists say.

Try stocks listed in Hong Kong and New York. Some investors suggest looking further afield conceptually, such as non-Chinese Asian or Pacific stocks that have exposure to China but also derive revenue from other areas.

Bearishness toward China A Shares stems from the lack of quick solutions to China’s problems. Beijing authorities have tried to curb the shadow lending — largely private, backroom lending — that fueled margin accounts, which helped pump up the bubble in China stocks. China has also limited trading in many stocks and frozen IPOs.

All or many of those restrictions will have to be lifted for investors to feel safe in returning to China stocks, says U.S. Trust chief market strategist Joe Quinlan. They’ll also want to see exports, manufacturing and car sales rise. And they’ll want to see the government post a lower, more believable GDP rate than the current Q2 claim of 7%.

Slower growth will also discourage investors from chasing speculative stocks, he adds.

Silver Lining

One benefit of the pullback is that share valuations are more attractive, says Scott Kubie, chief strategist at CLS Investments.

And a small portion of Hong Kong stocks have gained ground during the pullback. Among them, Hang Seng Bank is up nearly 4% since June 12. Property developer CK Hutchison is up nearly 1%. Casino operator Sands China is up 16%.

Andrew Herron, emerging markets analyst for $28 million Invesco Emerging Markets Equity Fund , says he likes such China stocks as Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY), which are listed on the New York and Hong Kong exchanges. Tencent also trades OTC.

All fell during the broad China sell-off. But all have exposure to China’s growing consumer class, Herron says. And all tap into younger Chinese consumers’ preference for shopping via the Internet. Those traits will help carry them through China’s current crisis.

Herron also likes companies based in other emerging markets, whose China exposure will benefit once China rebounds.

He likes South Korean cosmetics maker AmorePacific. “Korean pop culture and products are popular in China,” Herron said. Many Koreans travel to China. And on his last Korean visit he found waiters more fluent in Chinese than English. “Their products are aspirational for people making more money” — in both countries.

He also likes CJ CGV, a South Korean firm that runs cinemas at home and in China, Vietnam and the U.S. “It generates lots of cash, is very profitable, and has lots of growth ahead in China,” Herron said.

Hong Kong-listed Shenzhou International makes sports apparel parts and can shorten lead times for big customers like Nike (NYSE:NKE).