During the past decade, dozens of Chinese companies began
trading on U.S. stock exchanges, and more than a few were complete
frauds, causing investors to lose 100% of theirmoney .
You can blame it on the auditors. The accountants who were
tasked with digging deeply into these companies' books never made
much of an effort. They willingly signed off on the veracity
offinancial statements , even though many numbers were a work of
As a result, many U.S. investors concluded it's wise to steer
clear of Chinese companies altogether these days.
And that's a shame, because China, warts and all, has the most
fertile economic climate in the world. Itseconomy has been growing
at a fast rate for more than a decade and, by some accounts,will
overtake the U.S. economy within a few decades.
Swinging for the fences
Investors' troubles resulted when they erroneously equated high
growth with small company size. The notion of a fast-growing
economy immediately leads investors to think about finding little
acorns that can grow into big trees.
Take ChinaMedia Express Holdings. This relatively obscure
company claimed to be China's leading player in alternative
advertising -- for example, ads found on the sides of businesses
and on elevator video monitors.
ChinaMedia's management issued a series of gushing press
releases that noted robust sales growth. The company eventually
sported amarket value of hundreds of millions of dollars. But by
2010, rumors had swirled that the company was cooking the books, so
investigations were launched into the company's specious claims of
nationwide ad sales.
By the time auditing firm Deloitte said it could not verify the
company's claims, it was too late -- ChinaMedia's stocks had been
halted and would never trade again.
These days, U.S. investors are edging back toward Chinese stocks,
but in a different way. They are seeking large, stable companies
with long track records and provenmarket share . The long track
record is crucial. If a company were fraudulent, then that would
have become apparent in a few years. But if a company has been
operating in the public sphere for more than a decade, then it's
unlikely it's a sham.
Based on these two principles, here are four stocks to
China Mobile (NYSE:
This is China's largest wireless service operator -- "the
Verizon of China," if you will. The $232 billion market value
attests to its solidity. To be sure, sales growth mirrors the
Chinese economy, averaging 9% in each of the past three
years. But with a national network that is largely
established, investors can enjoy the prodigiousfree cash flow
that China Mobile now generates. In fact, free cash flow
exceeded $10 billion for the first time in 2010.
China Southern Airlines (NYSE:
As an economy grows, businesses and consumers step up their
travel plans. And that's surely been evident for China
Southern, one of the country's largest carriers. Sales have
doubled since 2006 to about $15 billion this year. But don't
think of this as "theDelta of China." Perhaps
Southwest Airlines (NYSE:
is a more apt analogy. China Southern's fleet of planes is
quite young and fuel-efficient, and the company continues to
expand into dozens of cities surpassing 1 million in
As the Chinese economy grows, the rate of Internet usage
steadily expands. Web usage is rising at a 10% annual pace,
according to the China Internet Network Information Center.
Still, just 40% of all Chinese are online these days, well
below the levels seen in neighboring Japan (80%) and South
Korea (83%). With time, that gap should narrow, helping to
fuel further growth for Baidu.com, known as "the Google of
China." Baidu's sales have risen a minimum of 39% annually
going back to at least 2004 and now approach $3 billion.
Yet considering the still-rising Internet penetration rate,
this looks like a long-term winner.
Still, in the short-term, investors have seen the flip
side of growthinvesting . A slowdown in the Chinese economy
has pulled the stock down from $150 last spring to a recent
$94. Looked at another way, investors who missed this
stock's meteoric rise have just been handed a second chance
whileshares are on sale.
iShares FTSE China 25Index Fund (NYSE:
Rather than focusing on specific stocks, some investors
like to take the basket approach, and thisexchange-traded
) is the most popular way to invest in China. It typically
trades more than 16 million shares every day.
Thefund owns all of the companies that are members of
the FTSE China 25, which are the 25 largest and mostliquid
stocks in that country. This brings exposure to all corners
of the Chinese economy, and theETF carries a reasonable
0.74% expense charge.
Action to Take -->
Economists grew concerned earlier this year that the Chinese
economy was headed for a major slowdown. Those concerns appear to
have receded, and the Chinese economy now looks set to keep
growing at very fast pace in 2013.
Though it will be hard for China's economy to keep growing
continually at an 8% annual clip, as has been the case for the
past decade, longer-term growth rates are still likely to be
higher than what we'll see in the mature economies of Western
Europe and the United States. That's why it's not too late to
pursue Chinese stocks. And these companies, plus the ETF, possess
a solid, broad-based approach to that growth.
This article originally appeared on InvestingAnswers.com:
4 Stress-Free Ways
To Invest In China's Boom
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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