News Analysis date published New: 
Tuesday, July 31, 2012 - 11:00
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Tuesday, July 31, 2012 - 15:34
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Tuesday, July 31, 2012 - 11:00

The 3 Best Stocks To Play China's Still-Amazing Growth

Tuesday, July 31, 2012 11:00 AM

I love buying when there is blood in the streets.

When negativity hits its apex and everyone is down on a particular stock, sector or economy, it's often a sign it's time to buy. This bottom-fishing style of investing is not easy psychologically. In fact, it's very difficult to go against the crowd. But this is exactly why it works. In the annuals of the stock market, buying when things appear worst has proven itself time and again.

This is particularly true when it comes to large global economies.

Recently, investors have been besieged by negative economic news out of China. Slowing growth, weak property markets and internal strife have rocked the world's second largest economy so far in 2012. These items, combined with several high-profile corporate scandals, have worked together to send the once high-flying Chinese stock market skidding lower.

But even with all of these issues, China remains a rapidly-growing economy with a very bright future. In fact, investment opportunities in China are not nearly over and the recent downturn just created a nice buying opportunity for investors who want to make money on China's growth.

Here are three reasons why China is still a good investment…

1. Economic liberalization and political reform
This fall, a political transition is slated to take place with Vice President Xi Jinping to assume power from President Hu Jintao. Jinping is a strong proponent of what is called Chinese socialism. This twist on the Socialist manifesto favors economic liberalization and an aggressive political reform. In other words, he believes in the free market, at least as much as a member of his party can. In addition, the Chinese central bank is taking market positive actions to counteract the slowing economy. For instance, the bank recently lowered interest rates twice within the same month. This type of economic stimulus should help reverse the slowdown.

2. Chinese economy still in growth mode
Next, although economic growth is slowing, it's still at 8.1% year-over-year. Compared with the European economies or even the United States, this is impressive growth. China has a huge population hungry for advancement. Internet usage, for example, is double that of the United States, while Chinese consumption has superseded that of Japan. Remember, this remains a nation of super-low average wages. Imagine what is going to happen with the economy when wages eventually catch up with more developed nations.

3. China's tight relationship with Africa
Finally, and perhaps least known, is China's relationship with Africa. China has been working on trade relationships with Africa for years. Trade between China and Africa has climbed 10 times in the past decade, and economists forecast bilateral trade to reach $200 billion by the end of 2012. China is reliant on African commodity exports and Africa has an insatiable need for Chinese industrial equipment and materials. Chinese President Jintao has committed to loan an additional $20 billion to Africa. This should certainly keep the mutually beneficial relationship humming along.

Obviously, China has its issues. One of the major issues is corporate malfeasance and fraud. Recently, Rino International was a prime example. In 2011, the company was investigated by the U.S. Securities and Exchange Commission after allegedly releasing false financial statements and engaging in foreign bribery. This is why I prefer to mitigate this risk factor by diversifying my investments through exchange-traded funds (ETFs). This tactic eliminates single-company risk, while providing exposure to the overall economy. As such, here are three beat-down Chinese ETFs with powerful upside potential:

1. Global X China Industrials (NYSE: CHII)
This ETF tracks the Solactive China Industrial Index. The index is made up of industrial equipment, transportation, building materials, engineering, construction and industrials. In other words, it's a play on the industrial sector of China.

It's off 30% this year due to the supposed Chinese slowdown and euro zone crisis. But the growth of the Chinese middle class, infrastructure building and, most important, African trade makes this ETF a bargain at these levels.

Buying on a break out close above $10 with stops at $10 makes solid technical sense right now. A move above $12 appears likely by the end of the year.

2. iShares FTSE China 25 ETF (NYSE: FXI)
This is by far the most popular and heavily-traded Chinese ETF. It has more than $5 billion in assets under management and on average trades 18 million shares a day. This concentrated ETF follows the FTSE China 25 index. Its top holdings include blue-chip stocks like China Mobile, China Construction, Bank of China and CNOOC LTD. Shares have recently bounced off their bottom, breaking above the 50-day simple moving average.

I like this ETF right now with stops at $32. This one could easily trade above $38 within the year.

3. Global X China Consumer ETF (NYSE: CHIQ)
This is my favorite Chinese ETF. As its name implies, it focuses on the rapidly-growing Chinese consumer sector. Its largest holdings include stalwarts like China Yuran Food Group, sports brand Li Ning and airline Air China Limited. I am confident China's middle class will continue to expand and thrive, despite the perceived current slowdown. This ETF is a direct play on China's transition to a middle class economy.

Shares have recently bounced off their lows. A break out and close above $12.50 will make a technically sound entry point. I expect this ETF to be above $14 within the year.

Risks to Consider: Although I firmly think the worst is over for China, no one knows for sure what the future holds. The government protects businesses in China. Google (Nasdaq: GOOG) learned this the hard way as it continues to battle censorship of its search engine and other services to Chinese citizens. The Chinese government could easily revert to its heavy hand of state control. In addition, despite the African trade initiatives, China faces heavy winds from the euro crisis. Be certain to use these ETFs as a diversification tool, rather than putting all your eggs in the Chinese basket.

Action to Take -- > I like all three of these ETFs once the listed technical triggers are fired. But be sure to always use stops and position size correctly based on your risk tolerance and risk capital account size.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of GOOG in one or more of its “real money” portfolios.