Is China headed for a knockout?

Long-term, I am definitely a China “bull.” It’s currently behind only the U.S. in size of economy; it’s the biggest market for many consumer items like cars and the biggest importer and exporter of many other goods and commodities. In short, China is a powerhouse that should keep growing into the future.

But there is a problem. China is a centrally controlled economy that is racking up debt that makes our recent housing bubble look financially conservative. Much of this debt is well hidden “off the books.”

I’ve already written about China’s housing bubble with prime properties selling for $1000s of dollars per square foot. That’s not sustainable. Many others have written about this problem, too. Recently, Harry Dent listed seven reasons why China is about to pop. He mentioned the huge amount of public and private debt, totaling 277 percent of the countries’ GDP. That’s also not sustainable.

It does look like there’ll be a reckoning for their markets. The big questions are when will it happen? And what will happen to their markets? The perennially pessimistic Harry Dent says it won’t be pretty.While China appears very cheap compared to other emerging and developed markets, currently may not be the best time to invest. Yet, long term the economy appears to be a no-brainer investment, at least for a small amount of your money.

When the time is right, how do you invest into this budding economy?

HOW TO INVEST IN CHINA

You can invest in China through individual stocks, open-end mutual funds, closed-end funds and exchange-traded funds (ETFs), indirectly through commodities funds or even an Australia fund or stocks. I prefer ETFs for their low expenses, liquidity and transparency among other reasons.

The four largest ETFs are iShares FTSE China 25 Index (symbol: FXI), iShares MSCI China Index Fund (MCHI), SPDR S&P China ETF (GXC) and PowerShares Golden Dragon Portfolio (PGJ).

The one I’m most familiar with, and have used in the past for clients, is iShares FTSE China 25 Index. This fund has 28 investment holdings; a low forward P/E ratio of 7.29 and both the price-to-book and the price-to-sales ratios were just over one. Both of those ratios being that low are considered undervalued. It’s currently yielding 2.9 percent annually and was recently trading at $35.97.

Remember that investing into a volatile emerging market, like China, should only be a small part of a well-balanced portfolio. Always do further research on any investment ideas you might run across.

Categories: Finance