The Best Way to Buy Emerging Chinese Powerhouses

Nathan Slaughter's picture

Tuesday, December 8, 2009 - 2:27pm

by Nathan Slaughter

There are a plethora of Chinese ETFs already on the market, so what can investors expect from another offering?

Emerging powerhouses of Chinese business.

This ETF isn't limited by size and has free reign to invest across the entire market capitalization spectrum. Thanks to its flexible all-cap approach, shareholders will have a stake in small businesses like China Huiyuan Juice Group as well as giants like PetroChina (NYSE: PTR), and everything in between.

By contrast, the much larger iShares FTSE/Xinhua China 25 (NYSE: FXI) is strictly limited to the market's largest stocks -- most of which are highly-regulated, state-owned enterprises. And by concentrating on huge banks and commodities stocks, there is nothing left for other sectors. In fact, the fund doesn't own a single healthcare, consumer staple or technology stock.

Claymore's Exchange Traded Chinese All-Cap (NYSE: YAO) rectifies that problem. The 100-stock portfolio is anchored with familiar names like Aluminum Corp. of China (NYSE: ACH), but it also includes plenty of others that are far more leveraged to the country's explosive growth in domestic consumption.

That list includes promising companies like electric car battery maker BYD, online gaming firm Shanda Interactive (Nasdaq: SNDA), travel portal Ctrip International (Nasdaq: CTRP), and search engine Baidu.com (Nasdaq: BIDU), China's answer to Google.

If you're looking to capture China's true growth potential, these companies are a much better option than the giant exporters that only deal with foreign customers. And now, investors can own a broad basket of these stocks along with China's blue-chips all rolled up in one convenient package.

The market greeted the new fund with a warm reception. In fact, more than 1.3 million shares changed hands on its first day out of the gate -- the heaviest trading of any launch this year. I don't pay terribly much attention to volume, but the activity does show that investors are still buzzing about China.

And for good reason.

I've already outlined a number of bullish reasons that should excite long-term investors. There's no need to repeat them again here, other than to say China continues to lead the global economy out of this recession and could grow ever more powerful in the years ahead.

Spurred by an effective mix of stimulus initiatives, economic output continues to expand. After growing at "just" +6.1% from January through March, GDP rose +7.9% in the second quarter and then +8.9% in the third -- China isn't just growing, it's growing at an increasing rate.

That acceleration won't last forever, but next year's projected growth rate of +9.0% would be the world's strongest. I expect to see policy makers raise bank reserve requirements to keep a lid on inflation and prevent a lending bubble, which could bring the added benefit of currency appreciation.

In any case, China's 800 million-plus consumers only account for about 30% of GDP -- versus two-thirds here in the U.S. The higher that percentage ticks, the stronger the earnings (and share prices) for YAO's small, entrepreneurial holdings.

YAO will move in the same direction as most other China-based funds, but with greater magnitude. So if you think the market has more to give, then this new fund could be a smart choice.

P.S. -- China used to be off-limits, but the country opened its doors to foreign investors and profits poured in for those who got in early. Don't miss the opportunity to take advantage of another investment by clicking here.

Nathan Slaughter 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.