The Golden Dragon: Chinese Market Booming While Wall Street Falters

Sept. 12, 2007 Special to ABCNEWS.com — -- In more than a few backyard barbecues across the United States over Labor Day weekend, families and friends got together to share good times and stories over a few cold beverages and grilled meats. They probably talked about the weather, the baseball pennant races and the kids going back to school.

When discussions turned to finances, the lousy state of the real estate market probably got a lot of play, and so did the bumpy ride in the stock market this summer. Those who were lucky enough or smart enough (or both) to have invested in Chinese stocks earlier this year (or sooner) had a big opportunity to gloat, if they were so inclined.

All one has had to do to be successful lately is to be "in the game" financially when it comes to China. Shrewd stock-picking really has not been necessary in order to make some serious money, although it can help nicely to juice your returns.

But is there still time to buy into the Chinese growth story, or does getting in now only mean that you're setting yourself up for the crash of yet another investing bubble? Well, that depends on how you play China, since you can do so from many angles and on several different exchanges.

Perhaps the best single source of exposure to China has been the exchange-traded iShares FTSE/Xinhua China 25 Index, a basket of some of the biggest and most liquid Chinese companies. Year-to-date through September 4, the FXI was up 37.11%, compared to a gain of about 6.3% for the S&P 500 Index. This comes after an 83.2% return for the FXI in 2006.

But just because the FXI is an exchange traded fund, don't get any foolish notions here about diversification. According to Morningstar 59.8% of the fund's assets are in the top 10 holdings. The concentration in the behemoths of the Chinese domestic economy, many of them (ironically) owned at least partially by the communist government in Beijing, has been a good thing over the past year.

Big FXI component China Life Insurance is up 170% in the past year; Hong Kong-based China Mobile Limited has doubled since last September. PetroChina is a relative laggard with a 31% return over the past year.