More Proof That These Stocks Are Risky

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Trust us: It only seems as though our government's proposal to buy up bad mortgages is the only financial news worth covering these days. In fact, there's a lot going on around the world, and if it makes you feel better, some of it is even more bizarre than what's been going on here in the U.S.

For example
Ladies and gentlemen, Beijing is back in business. As of Monday, the factories that were closed in advance of the Summer Olympics to keep down air pollution were reopened. Construction projects can now restart, too, and the city's traffic restrictions have also been lifted. Though these measures are credited (in the Chinese press, anyway) for delivering blue skies during the Olympics, they also probably exacerbated the current economic slowdown in China -- though neither effect should last long.

What the whole experience does illustrate, however, is just how much control the Chinese government and the ruling Communist Party continue to have over the nation's economy. The government shut down an enormous amount of production in and around China's second-largest city in the name of "national good" without batting an eyelash or encountering much vocal resistance.

The lesson to investors is that when it comes to buying Chinese stocks, don't fight the system. Pick companies that complement the government's goals and have been awarded favored status from the government in the past, in the form of tax breaks, contracts, or favorable merger terms. At Motley Fool Global Gains, we call these companies -- names that include China Security & Surveillance (NYSE: CSR) and General Steel (NYSE: GSI) -- state-sponsored entrepreneurs.

Apparently, they didn't get the memo
Ignoring conventional wisdom, Brazilian iron giant Vale (NYSE: RIO) is taking the Chinese dragon head-on. A bit upset because rivals Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP) were able to secure 97% price increases for iron ore after Vale locked in only a 71% bump, Vale is now retaliating by demanding that Chinese buyers accept higher prices.

It always hurts when your competitors show you up, but it's not smart to take out your frustrations on your biggest customers. Vale's timing could be better, too, since a slump in demand from Chinese automakers and builders is reducing demand for iron ore and further reducing Vale's leverage.

Meanwhile, thinking for the long term, Chinese companies are feverishly investing in iron mines in Australia, to make sure they have access to the raw materials they'll need to continue the country's incredible development. So it really seems that Vale is cutting off its nose to spite its face.

If you need more proof of China's iron fist …
Building on a theme that should be eerily familiar by now, the Chinese government also announced steps in the past week to strengthen its plunging stock market. They included repealing the state tax on stock purchases and enabling the country's state-run investment fund to start buying stakes in public companies -- notably banks -- in hopes of enticing Chinese investors to do the same.

After all, there's a lot of fear among investors. The Shanghai market has fallen by more than 60% this year, GDP growth is slowing, and problems with quality -- such as the melamine-tainted milk powder disaster -- don't inspire confidence. Yet now does look like a pretty good time to be a buyer of Chinese stocks. China's GDP growth should still check in at around the 8% to 9% range next year. With the government taking steps to make companies more accountable, valuations do look compelling after recent declines.

Finally, if power consumption can be used as any sort of proxy for development (and it can), then China continues to grow despite the economic headwinds. Data from the China Electricity Council this week showed that China's power consumption rose nearly 10% year over year.

Despite the current challenges, the drivers behind the Chinese story remain firmly in place. Warren Buffett has called the 21st century the "Chinese Century," and we at Global Gains agree. With the collapse of the Chinese stock market, investors have a chance to get in on what could be the greatest economic growth story in history at reasonable prices.