Myths about China Investing

Robert Hsu, May 19, 2008

Despite the U.S.'s economic slowdown weighing heavily on the global economy and investors' minds, many of the stocks of Chinese companies are preforming well. For those who realize the incredible economic growth in China, they are profiting handsomely from China's amazing boom.

Unfortunately, many investors are missing out on the profits. This is because many investors are now basing their knowledge of China on outdated information and misguided assumptions, and are still highly cautious, and even uncomfortable, with the idea of investing their hard-earned money in a country that they still see as mysterious. Instead of learning the facts about China, many people are relying on the talking heads who say that investing in China is dangerous and full of pitfalls for their investment advice, and in turn, are avoiding China investing.

I don't like to see so many investors missing out on the once-in-a-lifetime opportunites that China offers. That's why I often point out why much of this information is untrue and focus on changes and opportunities in China. But I know it's hard to turn a deaf ear when the rest of the world still believes this misguided information.

So today, I will set the record straight on an economic myth about China. There's a vast number of profitable opportunities in China, and I want to make sure that we're all on the same page and comfortable with investing in this emerging country.

Dispelling the Myth

The biggest myth that I hear about China is that Chinese stocks are in a speculative bubble and that they are trading at dangerously high valuations. Because of this, many investors look at China's economic growth and see only waving red flags, thinking that it's only a matter of time before all of China's economic success comes crashing down.

But the reality is that the Chinese government realizes that the stock market has been booming, and it has taken steps in the past year to try and cool it off. Since the Chinese stock market hit its record high in October 2007, stocks have since corrected over 40%.

Now Chinese companies listed on the Shanghai exchange are still expensive, trading at 22 times 2008 earnings. But investing in Shanghai-listed companies isn't easy -- it's actually next to impossible for American investors. That's why, as you know, we avoid companies listed on this exchange and focus on companies listed in Hong Kong or New York.

Leading Chinese companies listed in Hong Kong and their U.S. traded ADRs are now trading at 15 times 2008 estimated earnings -- which is cheaper than the S&P 500 and much cheaper than Shanghai -- and attractively priced for companies growing earnings at 20% a year. S&P companies, in contrast, are only growing in the single digits. And that's why I continue to recommend that we keep our focus on these companies and steer clear of those traded in Shanghai.

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