Chinese Stocks Promise Higher Potential Gains? [Yahoo! Inc., Phoenix New Media Ltd ADR, E Commerce China Dangdang Inc (ADR)]

china etfsGeorge Leong:  If you think Chinese stocks are too speculative to consider and buy, then you need to read what I’m going to say over the next few paragraphs.

Yes, it’s true that China-based companies have subjected U.S. capital markets to erroneous results and reporting in the past and that it is likely continuing to some degree, but that does not mean you should bypass Chinese stocks. You just need to be extra careful.

With the recent moves by the U.S. Securities and Exchange Commission (SEC) to force Chinese companies looking to list in the United States to use approved auditors along with other tighter reporting requirements, we have seen the flow of China-based initial public offerings (IPOs) dry up.

There were only about two Chinese IPOs setting up shop on U.S. exchanges in 2013; so far, this year has proven to be no different.

Yet the reality is that Chinese IPOs continue to attract frenzy when they list here, perhaps due to the limited issues. The biggest coup was the recent decision by China-based e-commerce giant Alibaba Group Holding Ltd., which decided to list in the United States and bypass Hong Kong.

The IPO is estimated to be at around $15.0 billion and will be the largest IPO listing from a Chinese company. The reason for the decision, I believe, is the currently extremely receptive environment for IPOs in America.

It’s likely Alibaba will create so much buzz that its share price will explode out of the gate for those lucky enough to own shares.

The reality is that even if you cannot get your hands on Alibaba, which has Yahoo! Inc. (NASDAQ:YHOO) as a minority shareholder, there are numerous other Chinese stocks you can buy here. Look, the risk is clearly higher, but just consider some of the amazing returns recorded by U.S.-listed Chinese stocks over the past year.

You may have read that Goldman Sachs (NYSE:GS) cut its gross domestic product (GDP) growth target on China to a likely more reasonable 7.3% in 2014 from the prior 7.6%. (Source: Kollmeyer, B., “Goldman Sachs cuts China growth estimates,” MarketWatch, March 20, 2014.) The Chinese government is targeting 7.5% growth for this year.

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