We got some AMAZING responses to the question:

“People are saying the China bubble has popped and we won’t see profits there for a while now — thoughts?”

Click here to read a few of them.

And now I feel like it’s my turn to weigh in on the “China Story.”

Anybody who’s known me for a while, knows I’ve had an interest in this market for quite some time. 

I lived in China for a while; I speak Mandarin Chinese, I studied the subject extensively in college and some of the biggest winners I’ve ever had in my portfolio happened to be investments in Chinese stocks. So needless to say, I’m a long-term bull on the overall success and prosperity of China as a country and as an opportunity for profits.

But the member who asked the question definitely has valid concerns here.

The Negatives

The Chinese equity markets have been white hot for several years now. In four years the FXI (FTSE/Xinhua 25 Index) — the ETF that tracks the 25 largest companies in China — shot up 300% before beginning a decline in November 2007.

Since then, the fund has dropped by more than half in a very short period of time.

China’s also been hit with a number of well publicized infrastructure shortfalls, such as its inability to deal with a massive cold snap that gripped half the country last year.

Not only that but the product quality issues that have been making headlines (tainted medicine, children’s toys containing toxic chemicals, etc.) and the latest spat with Tibet, it’s no wonder why many people would question if it’s wise to continue sinking money into this country.

But, as always, there’s another side to the China Story…

The Positives

I could sit here all day and list the positive qualities the Chinese economy has going for it.

I can talk about the massive consumption of commodities, the record number of college graduates and the tremendous amount of homegrown industries cropping up all over the place.

But the fact of the matter is, somebody could come along and have three arguments against each of these reasons.

So I’m not going to even discuss those things here. Because there’s one thing about China’s economy that nobody can argue or disagree with: China’s demographics!

This is a country with 1.4 billion people! To put that in perspective, the U.S. only has 280 million people, so that’s about five times the size of our country.

Back in 1981, almost 53% of China’s population lived below the poverty line. Today, that number is under 8% — that means China has almost 500 million people who were once poor and no longer are!

That’s half of a billion people who are now part of the middle class and want to buy goods, services and products commensurate with that newly found social status. Goods like cars, homes, technology products, etc.

The aggregate demand that has been built up in this country is only just beginning to be unleashed. In this writer’s opinion, China is by far and away the greatest wealth generating opportunity for the next 20–30 years!

Long-Term Opportunities

Now, is this to say that China’s market couldn’t go down further? Of course not…anything’s possible.

But I’m not talking about investing in China for the short term here — these are long-term factors we’re talking about (demographic shifts, aggregate demand, etc.), and therefore, we need to take a long-term perspective when looking at this country as an investment opportunity.

So, if you have a belief in this sector as I do, then the question should not be, “Should I invest in China?” The only question in your mind should be, “When should I invest in China?”

And remember…this isn’t a recommendation to run out and start buying stocks or funds in this market.

It’s a recommendation to take the opportunity in China VERY seriously and equip yourself with enough information to make the right decisions. Because you have two choices here:

1. Be the guy on the golf course listening to stories about how much money your golfing buddy made investing in China.
    
2. Or, be the guy telling the story!

Good luck!

Sincerely,

Wayne Mulligan
April 30, 2008

Growing Your Money in China was originally featured in the Penny Sleuth.