Check on China: Let the buyer be careful

Chinese stocks are proving to be highly popular with small-cap investors, and the reason is simple: the Chinese economy is going to keep on growing.  And as with most investments, the key to cashing in is to beware of the minefields, and use common sense.

For a time it seemed as if the bull-run for Chinese stocks ended on February 27, when the Shanghai Exchanged dropped 8.8% in one day, to 2,581. The dip ignited fears that China’s phenomenal growth, which has recently averaged an incredible 10% a year, was coming to a screeching halt. However, two months later, the Chinese market has more than recovered, with the Shanghai Index topping 3,800 points (as of May 4, 2007), up more than 30% for the year. Chinese stocks listed abroad are also doing well.  The year-to-date gain for the Matthews China Fund (Nasdaq: MCHFX), a mutual fund basket of big- and small-cap Chinese stocks, is hovering around 10%, compared with about a 6% gain for the Dow Jones Industrial Average.

Despite this growth, many observers believe the Chinese stock market is a bubble waiting to burst (the Shanghai Index is up more than 80% from this time last year), pumped up by excess liquidity from Chinese investors mortgaging their homes in order to have money to invest.

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