China Still Offers a Potentially Profitable Investment

China’s Internet demand continues to grow at a staggering pace and, according to a recent report put forth by China’s government, the number of Internet users has surged to 221 million, or about the same as the United States. Based on the trend, it will soon become top dog in the online world. The year-over-year growth of 61% from 137 million in 2007 is staggering.

Many pundits still view China as having more upside potential in the Internet space, as the country’s current penetration rate of 16% of the population is lower versus the average of 19% worldwide and the U.S. penetration rate at a whopping 71% (source: The Pew Internet and American Life Project). Given these comparisons and even discounting the fact that much of China is rural and poor, there are still excellent growth opportunities in China. According to BDA China Ltd., China’s Internet usage could grow at 18% annually and could reach a staggering 490 million by 2012.

In addition to the Internet, China is also number one as far as cell phone usage, with over 540 million users. Stocks of interest include China Mobile Limited (NYSE/CHL), Research In Motion Limited (NASDAQ/RIMM), Comtech Group, Inc. (NASDAQ/COGO), and Qiao Xing Universal Telephone, Inc. (NASDAQ/XING).

But, while the Chinese markets have been in correction mode, with the benchmark Shanghai Composite Index (SCI) down over 40% since its 52-week high of 6,124 in late October 2007 and with selling pressure on Chinese stocks listed in the U.S., we continue to favor China for growth investors. At the same time, we do advise caution and for investors to take some profits after run-ups. Until a bottom is firmly reached, stocks could trend lower in the foreseeable future.

We continue to like the longer-term situation in China and believe you should have some capital invested in the country, whether it is with large-cap, blue-chip Chinese companies or with small, emerging, higher-risk stocks. Areas that look encouraging are insurance, banking, technology, retail, industrial, and online advertising.

In spite of the risk in China-related stocks, we believe that it would be an error to bypass the country. Investing outside of the U.S. helps to diversify returns and add some growth potential. The key to investing in China is to be diversified. Invest only a portion of your capital in China.