3 Ways To Play China's Increased Defense Budget

This past weekend, China announced that it will be ramping its 2016 defense budget by 7.6 percent. In a new report, Goldman Sachs analyst Ronald Keung discusses what, if any, trades investors should make to play China’s new defense budget.

First of all, while a 7.6 percent increase may seem like good news for defense stocks on the surface, Keung notes that the announced spending increase falls well short of the 10 percent annual defense spending increase China made in 2015 and the rumors of accelerated spending growth this year.

“While China's defense budget ranks second in the world in dollar terms, it is only one-fourth of the US defense spend (2015) and we continue to see room for growth given China’s military spending as a percentage of GDP at 1.4%/2.1%, which stands below world major powers’ average of 2.8% (US is at 3.5%),” Keung explains.

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Last year, President Xi announced that China would be reducing the number of troops in its military by 300,000 by 2017. Goldman believes that decision indicates that a large part of China’s defense spending going forward will be used on equipment modernization.

Goldman names AviChina, AVIC Avionics and AVIC Helicopter its top Buy-rated China defense stocks.

So far this year the iShares FTSE/Xinhua China 25 Index (ETF) FXI is down 7.1 percent.

Disclosure: the author holds no position in the stocks mentioned.