China (Still) Rising

By Eric Jackson
RealMoney Contributor
5/14/2010 7:32 AM EDT
Click here for more stories by Eric Jackson

Despite all the worries about a China bubble, many of its U.S.-listed companies are posting real profits and boasting tremendous potential for growth.

Next week, I'll be attending a conference in New York put on by CCG Investor Relations featuring up-and-coming U.S.-listed Chinese companies.Oppenheimer & Co. is also running a China conference next week. As many in the media took notice of the fact that Shanghai's stock market entered "bear" territory early this week, it's important to revisit the outlook for these Chinese names.

First, let's talk about the Shanghai market, perhaps the most unusual in the world. You can't short stocks or trade futures (although the Chinese government has recently proposed changing this). I haven't seen any studies, but anecdotally, it is pretty clear this index has the lowest correlation with other world markets. Therefore, you have to take its movements with a grain of salt.

This year, the Shanghai Composite Index is down 17%, compared with a 5% gain for the S&P 500. Some market watchers have been worried about this being a leading indicator of a pending China crash, with the commodities that feed the country's booming demand about to fall off a cliff. In fact, my RealMoney colleague, Don Dion, wasout this morning with an article titled "Avoid China." Recall, however, that Shanghai surged 80% in 2009 vs. 27% for the S&P. This means that, since Jan. 1, 2009, Shanghai has climbed 46% vs. 32% for the S&P.

An investor also needs to keep in mind that U.S.-listed Chinese stocks trade in line with U.S. indexes -- not the Shanghai or Hong Kong exchanges. Why? Simply because they trade on U.S. exchanges, where the primary movers are U.S. investors. A good rule of thumb is that, if U.S. equities are rising, these China-based equities trading on the Amex, Nasdaq or OTC, are up some multiple of that. However, the same holds true in down markets. One reason is that these equities are smaller and less liquid. Sometimes, just a few retail investors dumping their holdings can drop a stock.

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