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berman’s view

China's fast-growing economy, surging consumer affluence and rising global clout is hard for investors to ignore these days.

But Chinese stocks? Yuck. The better bet by far has been to invest in companies that do a lot of business in China, but are based elsewhere.

The Shanghai Stock Exchange composite index is closing in on a four-year low, even as China's economy continues to grow by about four times the rate of Canada and the United States.

The index has fallen 43 per cent over the past three years and is down 64 per cent from its bubbly peak in early 2008.

Just as bad, Chinese companies are still tainted by corruption. In an interview with Bloomberg Television on Tuesday, Carson Block of Muddy Waters said that he was no longer interested in betting against Chinese companies – and certainly not because these companies had suddenly become squeaky-clean.

"China has gotten harder in the sense that the government has really taken the side of the fraud," said Mr. Block, who rocketed to international fame in 2011, when he called Sino-Forest Corp. a multibillion-dollar Ponzi scheme (the company imploded soon after).

"The government is working with a number of these companies to try to conceal records that are public. When you are up against that sort of strength ... it becomes difficult."

But companies that do a lot of business in China are another story entirely. Investors benefit from a far stricter regulatory environment, and still get to tap into China's fast-growing economy and surging consumerism.

This approach to investing in China had been discussed years ago, but the rise of China-focused exchange-traded funds – which have also been performing dismally, by the way – has essentially drowned it out. Too bad, because China has been a great place for foreigners to set up shop.

For example, fast-food operator Yum Brands Inc. opened 181 new restaurants in China in the third quarter alone and saw operating profit there rise 22 per cent. Casino operator Wynn Resorts Ltd. now generates about 70 per cent of its net revenues in China. And auctioneer Sotheby's has seen its percentage of Chinese sales rise to 17 per cent from just 3 per cent in 2004.

What would happen if you ignored Chinese stocks and went with names like these? In short: You would have done very well.

We looked at companies within the S&P 500 that had a lot of revenue exposure to China, with names including Coca-Cola Co., Coach Inc., Nvidia Corp. and Tiffany & Co. We then added Sotheby's (not in the S&P 500) and global base-metal producers Vale SA and Rio Tinto PLC.

This 16-member portfolio, on an equal-weighted basis, has risen 34 per cent over the past three years, after factoring in dividends. That has smashed the Shanghai stock exchange composite index by more than 65 percentage points over the same period.

As an investing theme, China still makes a lot of sense. But the best approach might be to avoid the country itself.

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