3 ETFs and a Mutual Fund to Ride China's Long-Term Growth Trend

Tony Sagami

Many U.S. companies are struggling against low-cost Chinese competition and blowhard politicians eager to play the blame game for our economic woes, and they are ratcheting up the rhetoric about the China's currency (the yuan) being undervalued.

You probably saw news coverage of Chinese Premier Hu Jintao's recent visit to the United States and his meetings with President Obama. President Obama and Premier Hu talked about a number of issues, but I suspect the main issue was the value of the yuan.

While the yuan issue is important, the biggest news of the week for investors was the blowout economic news from China.

The China Boom Continues

2010 was great! China's economy grew by an impressive 10.1% to $5.98 trillion in 2010, making it the second largest economy in the world.

2011 expected to be more of the same! The World Bank expects 2011 to be another booming year for China. The World Bank is looking for the Chinese economy to grow by 8.7% this year, a lower but still impressive number.

All the "experts," including Wall Street and the World Bank, have consistently underestimated China year after year. And I'm pretty darn confident that China will surprise everybody — except us — this year.

You can expect the entire Southeast Asian region to continue prosper. In fact, The World Bank expects the economies of China's neighbors to grow by 8%.

Spend less than you make! Unlike the U.S. government, the Chinese government is enjoying booming revenues. In fact, revenue grew by 21.3% in 2010. At the same time, China's national expenditures rose by 17.4% last year, according to China's Ministry of Commerce.

Isn't it amazing that a communist government actually brings in more money than it spends? You would think the United States, with its free-enterprise, capitalistic system, should be the responsibly managed government. Sadly, China is embracing capitalism while we are moving toward socialism.

More money to spend! It shouldn't be a surprise that a booming economy is boosting incomes. The per-capita income rose to 5,919 yuan (US$898) in 2010. I understand that $898 may not sound like a lot of money, but it is (1) a 10.9% increase from the previous year and (2) the biggest income surge since 1997.

That rising income is powering China's domestic consumption, making it less reliant on exports.

Booming retail sales. China has built its fortune by becoming the workshop of the world, producing cheap trinkets, clothing, toys and electronics. That dependency on exports makes China vulnerable to the economic woes of the United States and Europe. The next phase of China's economic miracle is going to be based on the domestic consumption of its growing middle class.

Chinese consumers are already on the job, pushing retail sales up by 18.4% last year. Could you imagine how many cartwheels U.S. retailers would do if sales were growing like that?

E-commerce sales sizzle. China is very wired, and its citizens are quickly becoming extremely computer literate. They are using that literacy and their rising incomes to buy more "stuff" and are doing so over the internet with e-commerce sales rising by 22% to $684 billion in 2010.

That number is even more impressive when you understand that the average Chinese consumer doesn't own a credit card. So how do they buy these billions of dollars worth of goods over the internet? Well ... that is a story for a future issue about the PayPal of China, one of the most exciting e-commerce companies I have ever found.

Don't write off the exporters! On the other hand, China's sales of clothes, toys, and electronics are still pretty darn good. In December, exports increased by 17.9%, and in 2010, China had a trade surplus of $186 billion.

What real estate bubble? Naysayers have been predicting doom and gloom for the Chinese real estate market for several years, but the reports of its death have been greatly exaggerated. The average price of real estate in China's 70-largest cities increased by 0.3% in December, the fourth consecutive month of rising real estate prices and is up by 6.4% over the last 12 months.

Jim O'Neil, the chairman of Goldman Sachs, summed up the opportunity in China very accurately. "At the core of all of this is the behemoth known as China" and advised that China "must be part of every intelligent investor's long-term strategy," he said.

I absolutely agree. So what should you do if you want to make China part of your long-term strategy? There are several exchange traded funds that will give you immediate exposure China.

3 China ETFs and a Mutual Fund

iShares FTSE/Xinhua China 25 Index (FXI): Seeks to track the performance of the FTSE/Xinhua China 25 index. This index consists of the largest 25 Chinese companies listed on the Hong Kong Stock Exchange.

PowerShares Golden Dragon Halter USX China (PGJ): Seeks results that correspond to the returns of the Halter USX China index. This index consists of 103 Chinese companies whose common stock is publicly traded in the United States. The index uses a formula that prevents the largest market-cap companies from becoming too large a component of the index.

SPDR S&P China (GXC): Seeks to replicate the total return performance of the S&P/Citigroup BMI China index. This index consists of the largest 342 companies that are publicly traded and domiciled in China.

If you prefer actively-managed mutual funds, take a look at U.S. Global China Region (USCOX), a China-focused mutual fund that has a heavy weighting of Asian companies that are profiting from China's insatiable hunger for natural resources and commodities.

Or if you're more of an individual stock investor and are looking for active money-making recommendations and short-term profit opportunities, consider a subscription to my Asia Stock Alert for only $199 a year.

I am a little biased (okay ... a lot biased), but I think my service will be the best Asian investment you can make!

Best wishes,


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Posted 01-28-2011 9:59 AM by Tony Sagami