New data shows that over the past three years, China doubled the amount of oil it imports from Saudi Arabia, to exceed 1 million barrels per day in 2009. Meanwhile, the U.S. dropped below the same threshold for the first time since 1988. That is but one of several 2009 milestones marking the eastward rebalancing in the world economy:

  • The Chinese car market grew by 46%, to become the largest car market in the world, ahead of the United States. That's mixed news for struggling U.S. automakers such as Ford (NYSE: F), which sell cars in China.
  • China was the largest source of foreign public stock offerings on U.S. exchanges last year, with 11 of 14 listings. Over the past five years, Chinese company initial public offerings raised $210 billion worldwide; American companies raised just $184 billion.
  • China passed Germany to become the world's largest exporter.
  • Japan just barely clung on to its status as the world's second-largest economy in 2009, ahead of China. That status is unlikely to last another year. Adjusting for purchasing-power parity, China passed Japan some years ago.

"The Decade the World Tilted East"
In light of those facts, it's easy to see why Harvard financial historian Niall Ferguson recently penned an article in the Financial Times titled "The Decade the World Tilted East." China's economic achievements over the past two decades have been nothing short of remarkable. The rebalancing that is occurring looks unlikely to reverse; a relative decline of U.S. economic standing appears inevitable. However, it is by no means assured that China will leap past the U.S. in absolute terms on a precise schedule that simply extrapolates recent growth rates.

China is an investors' conundrum that combines extraordinary potential with significant risks, including ethnic tensions, corruption, and enormous disparities in wealth and income. Most participants are seduced by the self-explanatory growth story and focus only on promise without any regard for pitfalls. That's certainly what the following valuations suggest to me:


P/E Multiple* (Nasdaq: BIDU)

54.6 (Nasdaq: CTRP)


Mindray Medical (NYSE: MR)




Suntech Power (NYSE: STP)


*Based on next 12 months' estimated earnings per share. Source: Capital IQ, a division of Standard & Poor's.

Long-term participant, short-term contrarian
I think that to balance risk and reward, the most sensible approach to investing in China combines:

  • A willingness to participate in China's long-term growth. Given the size of the opportunity, excluding China from one's portfolio looks like the greater risk. It is completely sensible for investors to seek exposure to China.
  • Tactical contrarianism/opportunism. China's economic rise isn't preordained, nor will it necessarily occur at a linear 8%-10% growth rate. Canny investors will seek to build their exposure during periods in which the Middle Kingdom encounters setbacks, investor sentiment is negative, and valuations are attractive.

Another possible implementation of this opportunistic approach is to focus on companies or industries that are relatively less high-profile. Everyone has read the accounts and seen pictures of gleaming city skylines in coastal cities that are at the fulcrum of China's development. But other things are taking place all over the country, in places that most investors would never dream of visiting.

Venturing off the beaten path
Motley Fool Global Gains co-advisor Tim Hanson traveled to China on a research trip and spent time looking for opportunities in rural China -- including time on the ground in inner Mongolia. One of the companies he discovered there was a small fertilizer producer, Yongye International (Nasdaq: YONG), which has a huge potential market and is well run. And, best of all, the stock was inexpensive. Apparently, fertilizer doesn't stir investors' imaginations in the same way online gaming or paid search does.

China's growth story will probably play out for years, with spurts and slowdowns along the way. So if you don't own a piece of it yet, you haven't missed the boat. However, it pays to begin implementing your China strategy within your portfolio today -- the opportunity is too large not to give it full consideration. If you'd like to see where the Global Gains team has been placing its bets in China, take advantage of a 30-day free trial now. You'll be able to see every stock pick, including a Chinese stock that has gained more than 500% since Tim selected it and is still on the Global Gains list of 10 "Best Buy Now" stocks!

Fool contributor Alex Dumortier, CFA, loves macro-themed investing; he has no beneficial interest in any of the stocks mentioned in this article. Baidu, Mindray Medical International, and Suntech Power Holdings are Motley Fool Rule Breakers recommendations. Ford and Sina are Motley Fool Stock Advisor picks. is a Motley Fool Hidden Gems selection. The Motley Fool has a disclosure policy.