China Is Not in Bubble Territory

Earlier in the year, many investors thought that speculation was the main driving force behind the uptrend in China, and that Chinese real estate and stock markets may be in a bubble. But it appears that they're wrong.

China's stock market is up by over 60% since last November with a P/E ratio of 24. This may seem high, but it's a far cry from the eye-popping price/earnings ratio of 70 seen during China's previous bubble in 2006-2007, and much lower than the nation's long-term average of 37.

In regards to real estate, volume of property sales has surged by 85% over the past year and prices of new apartments in Shanghai have risen by nearly 30%. Additionally, average Chinese home prices are nine times average annual household income. Some believe that prices have been pumped up due to imprudent bank lending, which is a red flag. However, when one looks at the sector in more detail, average nationwide house prices have risen by 2% over the past year, and in relation to income, average house prices in China have fallen slightly over the past decade. As for prices, they're rising nowhere near as fast as they did during the previous boom in 2004-07.

In the short-term, it appears that China is safe from bubble territory. To make the Asian nation even more attractive, its growth seems to be driven by a rebound in construction and private-sector investment, as opposed to state spending funded by the government.

To gain access to China, take a look at the following ETFs:
 

• The iShares FTSE/Xinhua China 25 Index (FXI) is up 99% from its March low of $22.80 to close at $45.46 on Wednesday.
  
  
• The SPDR S&P China (GXC) has more than doubled from its March low of $36.21 to close at $74.56 on Wednesday.

To help mitigate the inherent risks involved with investing in equities, it's important to utilize an exit strategy. An upward trend in the mentioned ETFs could come to an end at the following price points: FXI at $41.99 and GXC at $69.26. Keep in mind that these price points change on a daily basis.