Will China Save Us All?

"Thank God for China. They saved us last year."

Maybe that's a strange thing for an American of any stripes to say, but it was a recurring theme among the micro-cap investors who gathered at Roth Capital's 20th annual growth stock conference last week.

These are folks with a lot of money, a lot of smarts, and a lot of experience ... and China saved them all.

A likely saviorSee, while micros had a brutal 2007 (down nearly 10%), Chinese stocks had a banner 2007 (up nearly 60%). And while China may not replicate that success in 2008, now is still a great time to make sure your portfolio has at least some exposure to this long-term economic success story.

And by "now," I mean "right now."

Chinese stocks have dropped more than 20% in 2008 because of a generally panicky investor environment. Ask yourself: Has one-fifth of China's economic promise evaporated in less than 60 days?

Not even closeThis is not to say that China will go unscathed by economic fallout in the Americas, Europe, and Japan. Roth's resident China expert, Don Straszheim, wrote in a recent report that "China's economy is likely to slow considerably in 2008," from a real GDP growth rate of 11.5% in 2007 to 8.9% 2008.

That 8.9% growth, however, "will still be the fastest in the world," and Mr. Straszheim expects "China's best-in-the-world economic growth record to continue for the next several years."
And while a rising tide will lift a lot of boats, the stocks that will rise the most are those that you can buy cheap, and that will benefit most from the country's economic priorities.
Those priorities, specificallyThanks to its five-year plans, the Chinese government makes it easy for outside investors to know where the country is headed. Central themes include building infrastructure, increasing domestic food production, improving public health, and cleaning up the environment.

Money in earthmovers...Staraszheim expects "major" investments in infrastructure in China through 2020, including highways, railways, airports, subways, and sewers, with "considerable opportunity" for foreign companies.

Caterpillar (NYSE: CAT) is one of those names set for China's rapid growth. It recently opened a new plant in Wuxi, and it now has 11 facilities in the country. Cemex expanded its footprint in the country through the acquisition of Rinker. And Ingersoll-Rand (NYSE: IR) spent the last couple of years buying up a number of Chinese toolmakers.

None, however, are as pure a play as China Housing and Land Development -- a real estate company in Xian, and a stock that one of our China contacts said was his "top personal holding."
And food...When it comes to agriculture, there's no disputing that China has more than 1.3 billion mouths to feed. And while China's farm production is on the rise, arable acreage continues to decline -- meaning that Chinese farmers need to get more bang for their buck.

That's been a boon to fertilizer- and seed-seller Monsanto (NYSE: MON), which has more than doubled its sales to Asia since 2003, as well as for Deere (NYSE: DE), which just finished an acquisition of a Chinese tractor manufacturer and is expanding its China product line.
Neither, however, is the pure play that China Green Agriculture is.

And energy...Finally, green tech. The sector was a market darling in 2007, with First Solar (Nasdaq: FSLR) returning more than 795% and China's Suntech Power (NYSE: STP) returning more than 140%. This is all for good reason. China is both a growing consumer of energy and the world's most significant emitter of greenhouse gases.

Something -- as the old saying goes -- has got to give.

And while the Chinese government has put forth some aggressive alternative-energy goals, you won't find many cheap stocks in the sector. The story is too well-known, and it's worth noting that A-Power Energy Generation Systems (Nasdaq: APWR) was the best-attended presentation I saw at Roth's conference.

Cash in on ChinaIf you can find a player in any one of these niches, it's worth further research -- though keep in mind that sound fundamental research and thorough valuation work are crucial.
That's particularly true when it comes to investing in small Chinese names. While the upside potential is huge, small Chinese companies can also have issues when it comes to corporate governance and internal controls.

To account for that, look for:
Experienced and aligned management
Proven cash-generating business plans
Friendly relationships with the government
Scalable business models
Stocks that are also owned by reputable American institutional investors
And above all, demand a hefty margin of safety when you buy.

Go on and get startedThis is how we approach investing in China and other emerging economies at Motley Fool Global Gains. As a result, our picks have beaten the U.S. market by nearly 12 percentage points on average.