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Could You Retire Off Investing In China?

19 August 2009 3 Comments

I’m in the camp that believes the 21st century belongs to China.  The long term growth strategy, the billion plus population, the desire to achieve a higher standard of living, the work ethic, the surpluses that can be used to invest in future growth… it adds up to years and years of strong growth.  Will there be mishaps along the way?  Sure.  Do the Chinese need to improve on aspects of their society such as corruption in government?  Yes.  But, every developing country (America was not an exception) grows and improves as time moves forward.

China Is Investing In Their Future

In a stark contrast to the next re-election cycle focus of our leaders, China seems to have a very long term focus on their economic strategy.  Coupled with this are the trillions in reserves that China has built up by exporting products to the entire world, especially America.

As such, China is buying up resources that will help fuel and sustain growth for decades.  China is buying commodities and establishing relationships with countries around the world, even Africa, to help fuel their growth requirements for years.

Furthermore, when it comes to stimulus, China is doing more of it and way more effectively than America, and, as I already mentioned, they actually have the money to do it (ironically, the Chinese are also paying for our stimulus through buying our debt).  As a percentage of GDP, China is spending way more money on stimulus during this current recession than America.  More importantly, China is actually spending on things that will stimulate and improve the economy both now and in the future.  Specifically, China is building massive infrastructure projects including a huge high speed rail project.  Check out the awesome video below from Fortune:


With that said, I’m a believer in China over the long term.  Currently, the market is over heated.  So, you could stand to wait before buying into securities with China exposure.  But, even if you decide to buy now, you will make lots of money in the long term.  I strongly believe that getting into China now is like getting into America a hundred years ago.

How To Invest

You have a few options if you want China exposure.  You could invest in American multi-national companies that do business in China (i.e. the video above mentions IBM).  You can buy China ETFs that hold Chinese companies, and for those looking for even purer plays, you can invest directly on the Chinese stock market through global trade accounts such as ETrade.  Lastly, some brokers specialize in investing abroad (check out Euro Pacific).

Two ETFs Worth Considering

iShares FTSE/Xinhua China 25 Index (FXI)

This ETF invests in 25 large Chinese companies.  It is diversified across industries in China.  You can view the top 10 holdings by clicking hereClosing share price on Aug 18, 2009 was $40.03.  Target Purchase price $30.00.

iShares S&P Asia 50 Index (AIA)

This ETF is a little more broad, it invests in the top 50 companies in the following four Asian markets: Hong Kong, Taiwan, Singapore and South Korea.  Closing share price on Aug 18, 2009 was $35.43.  Target Purchase price $26.00.

I personally like both of these ETFs over the long haul.  Again, these ETFs are up big in the last few months.  Wait for them to come back a little bit, then find your entry point.  After getting a position, I’d recommend continuous buying for the next few years.  The dollar-cost averaging over time will help prevent you from buying too much and too high of a price, and like I said before, we’re looking years out on these investments.  If you do most of your investing in a 401(k), you are probably way overexposed to American companies.  I’d recommend opening a brokerage account immediately simply for some China investments.  It would be a fantastic compliment to your 401(k) and provide some healthy diversification.

As the title says, I want to retire off buying big and buying early in the long term China story.

A Quick Note On Chinese Markets This Week

The Shanghai index tanked another 4+% overnight similar to the start of the week.  Interestingly it looks as if the U.S. markets are following Shanghai’s lead (both in the run of the recent months and the turn lower over recent days).  If you are a long term investor, THIS IS A GOOD THING.  We want attractive prices.   Be patient. This applies to U.S. stocks and Chinese stocks.  Assuming most of my readers are 20-somethings, the long term play here is to invest in undervalued stocks NOT OVERVALUED stocks.  If you’re frantic about stocks going down, you’re not making the right moves and you definitely have the wrong approach.

With the overnight move lower, the Shanghai index is now 20% off the top.  Many view this as a definite correction.  I imagine the index is going lower.  Determine your target entry points for your China ETFs, pull the trigger on them if they hit those targets, and then stick to your strategy, even if they move lower from there.

3 Comments »

  • Nick said:

    Kevin, have you looked at PGJ? Its through Powershares, its been going longer than AIA and has higher volume than AIA. Less volume than FXI, but much greater diversity than FXI between sectors. The only downpoint I see is the lower yield than either, but it seems to have good performance in comparison, good volume, and good diversity.