Get Ready to Buy China

There's little left to be said about China's growth prospects. They're here, they're here to stay, and they're enormous.

With that out of the way, we've saved ourselves a few thousand words describing economic statistics, trends, and forecasts, which lets us get right on to the good stuff: How you -- as an individual American investor -- can strike it rich in Chinese stocks.

The companies that won't
But before I get to how you can strike it rich, I'll start with how you won't.

You won't strike it rich buying the popular and liquid iShares FTSE/Xinhua China 25 Index (NYSE: FXI  ) .

This index is nothing more than a collection of the country's biggest state-run names -- PetroChina (NYSE: PTR  ) , China Mobile (NYSE: CHL  ) , CNOOC (NYSE: CEO  ) , et al. And while these companies will grow alongside China, they aren't the entrepreneurial companies that are driving Chinese growth, or that will benefit the most from a modernizing, liberalizing, and urbanizing China.

What's more, these companies are already well-known to and well-covered by global stock analysts -- meaning they already have the expectation of a Chinese economic miracle priced in.

The companies that will
Instead, you should be looking hard at up-and-comers -- heretofore ignored by institutional investors -- that are consistently carving out market share within China's rapidly growing spending class. And you should be looking hardest at the companies that address the country's biggest spending priorities.

What are those spending priorities? They can be hard to discern from an ocean away, but I got to see them firsthand when I traveled to China last year with Motley Fool Global Gains advisor Bill Mann. During that trip, we saw students in Beijing and Shanghai flooding extra English-language classes early on a Saturday morning. We also saw enormous housing developments being built up around Beijing, connected with the rest of the city by six massive concentric beltways (called Ring Roads).

This is no coincidence. A recent survey by CLSA Asia-Pacific of more than 1,200 middle-class Chinese families in 57 cities reveals that "housing" and "education for kids" are two of China's top three spending priorities, just behind groceries. According to the CLSA, education accounts for 15% of household spending and 24% of household saving for Chinese middle-class families.

Play those trends
Food, education, and housing. You won't get any of that in the China 25. But you can get a lot of it by making some smart individual Chinese stock picks.

One of the safest ways to play the food boom is to buy the multinationals that you're already familiar with. For example, The Wall Street Journal recently reported on Kraft's (NYSE: KFT  ) successful efforts in China to reformulate and repackage the Oreo to better suit Chinese tastes. Anheuser-Busch (NYSE: BUD  ) has a significant importing and brewing presence in China. But like the giant state-owned enterprises that compose the China 25 index, these aren't the ideal ways to capture growth in the niche.

Instead, take a look at small companies such as China Marine Food Group. Though this tiny name trades lightly over the counter, it's a serious sector play that is profitable, growing, and thanks to its relative obscurity, cheap at a P/E of 10.

When it comes to education, Global Gains recommended Beijing-based English-language-education leader New Oriental Education (NYSE: EDU  ) in January 2007. It's already more than doubled, thanks to strong top- and bottom-line growth. While the stock is expensive today, it's worth keeping an eye on. We expect its growth to continue, given the company's plans to expand both geographically and into additional subjects.

As for housing, recently Nasdaq-listed China Housing & Land is a luxury apartment developer in the city of Xian. You may not have heard of Xian -- it's no Beijing or Shanghai -- but it's the same size as New York City.

Yeah, that big ... and getting bigger.

Ideas you can use
We're watching those three companies at Global Gains investing service -- and they're yours to investigate and perhaps invest in. But they aren't the only ones we're looking at. If you're interested in learning more about China and its many investment opportunities, know that Bill and I are heading back to China in two weeks with plans to visit New Oriental, China Housing, and a score of other promising opportunities.

Because we believe that every American needs to learn more about investing abroad, we'll be sending back all of our reports from the field to any investor who wants to receive them. Simply enter your email address in the box below, and tell us where to send our first dispatch.

Tim Hanson does not own shares of any company mentioned. New Oriental Education is a Motley Fool Global Gains recommendation. Kraft is an Income Investor pick. Anheuser-Busch is an Inside Value selection. The Motley Fool's disclosure policy likes the window seat.


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