Investing in China making more sense

by Stephen Butler

In China, the one-child-per-family rule means that two parents are doting on an only child. All that help with homework has lead to a generation of high-achievers coming out of an intellectual hot house.

By comparison, here in California, we have educational statistics that have us second from the nation's bottom, (thank goodness for Louisiana,) and further cuts in funding will make things even worse. The fruitless energy spent struggling to generate more nonexistent money for education would be better aimed at prison reform, where 55 percent of inmates are incarcerated for drug-related, nonviolent crimes. The savings from every two prisoners we let out will support one new teacher.

China's economic growth offers a testimonial as to why we would be better off hiring more teachers in place of incarcerating nonviolent criminals. Burton Malkiel's 2008 book, "From Wall Street to the Great Wall," dissects China's booming economy. If his name sounds familiar, it's because the Princeton professor wrote the investment classic, "A Random Walk Down Wall Street."

Education and respect for elders are two of the most powerful aspects of Chinese culture. This explains why their literacy rate is 89 percent. Compare this with the school in Rhode Island that just closed because the literacy rate of the half who graduated was only 55 percent. Or consider the empty rooms in New York City's school district where teachers who can't be fired are paid to just sit all day doing nothing - year after year. Compared with this lunacy, China graduates more than 600,000 engineers annually while that number for us is 60,000.

Does it make sense to invest in China? Professor Malkiel, a now-retired, long-time board member at Vanguard, certainly thinks so. The last third of his book describes the different ways to participate in China's 10 percent projected growth rate. While he is careful to point out that stock prices in a developing country don't always track the growth of the economy itself, he cites many reasons for why he has such positive expectations for China.

If anyone needs convincing, they only need to look at the results of Chinese investments over the past several years. In the mutual fund arena, the most straightforward approach is to consider funds that concentrate on Chinese stocks themselves that are sold on one of three Chinese exchanges.

Other approaches include investing in funds concentrated in domestic U.S. companies that derive most of their revenue from product sold in China. The highest-risk strategy would involve a direct investment in a selection of individual Chinese stocks.

Examples of funds that have demonstrated skill at investing successfully in China include Dreyfus Greater China; Fidelity China Region; Matthews China, and Templeton World. Past calendar-year gains range from 69 percent to 122 percent. So far, they have all lost about 10 percent year-to-date, but their average annual rates of return have been about 15 percent per year for both the last five and 10 years. These are periods during which our S&P 500 has been flat.

If our education establishment can't beat out the prison guards' union, our economy will be the ultimate casualty. At that point, investing in China may be our best hope.

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