7 Stocks to Tame the Chinese Dragon

Recently, Alan Greenspan prophesied a "dramatic correction" in the Chinese stock market -- and the world listened. In the weeks since, the Shanghai Composite Index has roller-coastered up and down. Investors the world over seem nervous. Greenspan's clearly not the only one thinking such thoughts.

Asia's richest man, Li Ka-shing, echoed similar remarks, dropping the one word that shall not be mentioned. I'll give you a hint: It rhymes with "rubble," and we had a tech one some six years ago. Further doom was hinted at by the governor of the People's Bank of China, Zhou Xiaochuan.

So, is the Chinese market headed for catastrophe? And are investors with exposure doomed to failure? No, they're not doomed. I'm going to give you seven stocks that will help you profit, no matter what happens in the near term.

But before we get to the stocks ...
Though investors aren't doomed, the Chinese market is fairly overheated. Millions of Chinese citizens with newfound wealth are buying up stocks of companies they don't understand. More than 20 million brokerage accounts opened in China between January and May, a sum four times the number opened in all of 2006.

Moreover, the Chinese stock market was recently valued at roughly 40 times earnings, a multiple almost triple that of the market here in the states. And this is on top of a 2006 performance that surged 130%.

Dare I say it?
But any correction is not going to last, particularly for companies with solid business models, good leadership, and a manageable capital structure. And that's because China's entire economy is expected to grow between 8% and 9% over the next five to 10 years.

Chinese productivity and export growth should also continue to expand. Meanwhile, a multiplying Chinese middle class will undoubtedly consume, consume, consume.

Regardless of whether China is the leading economic power in years to come, people should feel confident in the nation's ability to grow for the long term and overcome any near-term hiccups. Because it most certainly will.

Stocks that can survive the storm
To find stocks that will profit despite a correction or two, an investor must evaluate a company's business model apart from the rising tide of China's rapid economic growth. Ask yourself whether this business could succeed in a nation that wasn't growing as quickly. Similarly, evaluate the rest of the company as if it were a company in your own backyard. Is it producing free cash flow? Does it have manageable levels of debt? What are its competitive advantages? Are those advantages lasting? And, finally, does it have defensible sources of income?

A stock's exposure to China will only take it so far. It has to be a sound investment first. So I'm going to give you seven stocks with promising exposure to the Eastern nation, proven ability to generate free cash flow, and manageable debt levels:

Solid companies with great opportunity
RealNetworks and Rofin-Sinar are two American stocks that have China in their crosshairs. While Rofin-Sinar already brings in a substantial amount of its revenues from China and the larger East Asian subcontinent, it has attested to its lucrative future in the country calling China its greatest source of growth over the next 10 to 15 years. And although RealNetworks brings in only a marginal 12% of its revenues from Asia, it's currently evaluating the massive strategic opportunity inherent there and has implemented a foothold in China with a multiplayer gaming platform.

China Mobile and China Unicom are two telecom behemoths that will supply the nation's growing thirst for data and wireless connectivity. The rest are well-positioned businesses with strong models.

The Foolish bottom line
Perhaps the Chinese market is poised for a correction, perhaps not. Of course, if a correction does come, it might just provide you with a great entry point for one of these stocks.

Regardless, China is growing rapidly, and you won't miss out on the action if you've got a financially sound company with a competitive edge to exploit. These are precisely the stocks we seek out at our Motley Fool Global Gains international-investing service. In fact, the Global Gains team just completed a pan-pacific tour of some of Asia's best investing opportunities. If you're interested in taking a free look at their picks and research click here for a zero commitment 30-day trial.

This article was first published June 1, 2007. It has been updated.

Fool analyst Nick Kapur owns no shares of any company mentioned above. Rofin-Sinar is a Hidden Gems recommendation. Netease.com is a Rule Breakers recommendation. The Fool has a disclosure policy.