The Safest Ways Into China For Americans

I just visited China... and now I’m a believer.

Until my visit a few weeks ago, I thought the “China story” was mostly hype... an investment theme that seems to come around every few years when U.S. stocks aren’t doing well. But after my recent visit, my feelings have changed completely.

Ten years ago, in Shanghai’s Pudong area, there was nothing there but hope. Today, 300 of the world’s Fortune 500 companies have operations in Pudong. It’s crazy. The amount of change that has taken place in the area is incredible.

Is it a bubble? I don’t think we’ve reached the “bubble” point when it comes to Chinese stocks. Foreigners have been burned so many times in China, they haven’t fully stepped up to the plate and bid Chinese stocks up to “bubble” levels yet.

Take PetroChina (PTR), for example...

PetroChina is one of China’s massive oil companies. Legendary investor Warren Buffett owns a large stake in it. By standard value metrics, it’s cheap... it’s paying a dividend of nearly 4%, and its forward price-to-earnings ratio is only 9. Best of all, it trades on the New York Stock Exchange (NYSE), making it easy to own.

PetroChina isn’t the only Chinese behemoth that looks cheap. Here’s a table of China’s largest companies trading on the NYSE. On average, they trade at a forward P/E of 10 – about as cheap as you’ll find anywhere in the world. These are Chinese firms with local connections... and of course, that are providing the things China needs.

If you’re simply not interested in investing directly in Chinese companies, my favorite alternative has always been BHP Billiton (BHP). Based in Australia, it’s the world’s largest diversified commodities company. “China wants ‘em, BHP’s got ‘em,” I say. BHP is only trading at a forward P/E of 12.

Another safe way to get a pile of Chinese stocks is through a U.S. exchange-traded fund, like the iShares FTSE/Xinhua China 25 Index Fund (FXI). This is an unmanaged fund of major Chinese stocks that trades in the States. This fund’s top four holdings are the same as the top four largest stocks in the table above... and they make up a whopping 33% of this fund.

To spread the risk around even more, you could buy the PowerShares Golden Dragon Halter USX China Portfolio (PGJ).This covers the same universe as the previous fund, however, it generally won’t let any holding take up much more than 5% of the fund. With this restriction, it must dip into the smaller Chinese companies that trade in the U.S.

This could be good (because you’re spreading risk across more companies), or it could be bad, as the quality of the smaller Chinese companies that trade in the U.S. is more questionable.

You can take much more risk, of course...

The list of more speculative China plays is a long one, but these may give investors more risk than the potential reward looking out over a few years. Plus, that list is beyond the scope of today’s letter.

Today, we wanted the safest and easiest ways for Americans to get in on China’s boom. You can look at them individually, or buy them through one of the exchange-traded funds above. If you’re not interested in investing directly, Australia’s BHP might be the safest indirect play.

So there you have it. China is worth investigating, and investing in, safely. Now you know the major ways to do it...

Good investing,

Steve