The Key to Investing Successfully in Chinese Stocks

By George Leong, CFP, MBA — The Leong Side of the Market column

The Goldman Sachs Group, Inc. (NYSE/GS) recently came out and suggested that the current selling pressure in China provides buying opportunities, adding that the selling could “provide strategic entry opportunities.” I have similar views toward China and feel that the country remains one of the top growth markets in the world, despite having the worst performance so far this year, with the benchmark Shanghai Composite Index (SCI) down nearly 10%.
The key is having the patience to withstand the market jolts and believing in the long-term prospects of China. Think about it: if you bought the stocks of companies back in the early 1900s when the U.S. was going through its industrial expansion, you would have made millions. I feel that the same applies to the current situation in China, which will continue to deliver exceptional returns.Going back a year, China was where the market action was. It was hot, and it was necessary to be invested in some Chinese stocks. However, in 2010, the U.S. has outperformed China, with gains in the NASDAQ and Russell 2000 of over 10% versus a 10% decline in the SCI that has been driven by nerves and concerns about bubbles in Chinese real estate and finance. You should be aware of this, but for China, you need to think long term, as we have always stressed in this column.One thing that you cannot ignore is the growth across the board. In the cell-phone market, for instance, China is targeting 150 million 3G mobile subscribers by 2011, based on data from the Ministry of Industry and Information Technology. The goal is a long way away, since China had only 16.1 million 3G users in February, so the upside is massive.In the auto sector, China is at the top of the world. General Motors reported year-over-year sales growth of 68% in March to 230,048 vehicles, according to the Wall Street Journal. In comparison, about 188,011 vehicles were sold in the U.S. in March. The success in China is driven largely by the recent government incentives to buy fuel-efficient cars.

China also has an appetite for commodities as it builds up its infrastructure, and consumers have become wealthier while the economy has become more consumer-driven. While the U.S. consumer accounts for about 70% of GDP growth, the same cannot be said of China, where consumer spending drives a mere 20% of the economy.

Gold is holding above $1,100 an ounce, and if you believe the estimate from the World Gold Council, it could be headed higher over the next decade. The demand for gold could increase twofold by 2020. China will be an importer of gold, as the report said that it has a mere four percent of the world’s known gold reserves.

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For some, the reality of playing the Chinese capital markets involves excessive political and economic risk. However, as I have said, you need to be well diversified, which will enable you to play some Chinese growth stocks, especially those of the small-cap variety.