A Hot Market You Can’t Ignore

by George Leong, B. Comm.

While the U.S. markets are showing some fragility at this time, China continues to boom, with the benchmark Shanghai Composite Index (SCI) up over 55% this year.

The People’s Republic of China has a population of about 1.3 billion people and a rapidly growing consumable-hungry middle class of about 300 million people. Investment bank Goldman Sachs predicts that China will become the largest economy by 2040.

Creating a strong growth area for growth investors is the fact that China has become the epicenter of the Internet world, with Internet demand growing at a staggering pace. The number of Internet users in China is tops in the world, with about 275 million on the Internet. According to BDA China Ltd., China’s Internet usage could grow at 18% annually and reach a staggering 490 million by 2012. In addition, about 30% of Internet users in China, or about 84.5 million of 275 million Internet users, roam the Web via their cell phones, according to the Telecom Research Institute in China. These are massive numbers and cannot be ignored by investors and traders.

The market for adventure multiple role-playing games is hot in China, according to research firm IDC. The research has also estimated that the market could reach $2.1 billion by 2010. China is booming and it is expected to become Asia’s largest gaming market.

We expect the number of online gamers to rise, as Internet usage increases, especially amongst the country’s youth, who are technologically savvy. In fact, IDC predicts that China’s online game market will grow to over US$3.0 billion by 2011, up from the current US$1.5 billion. Stocks in this area include Webzen, Inc. (NASDAQ/WZEN) and Perfect World Co., Ltd. (NASDAQ/PWRD).

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.

In addition to the Internet, China is also tops in the usage of cell phones, with over 540 million users. Stocks in the cell area include China Mobile Limited (NYSE/CHL), Research In Motion Limited (NASDAQ/RIMM), Cogo Group, Inc. (NASDAQ/COGO), and Qiao Xing Universal Telephone, Inc. (NASDAQ/XING).

Chinese stocks listed on U.S. exchanges have also been on fire, with gains this year over 100% in many cases.

We continue to like the longer-term situation in China and believe you should have some capital invested in China, 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 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.