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The China Fund Syndrome

World stock markets are hot and you can barely find a sector or region that isn't way up in the last year. This environment incites investors to take on more risk, not cut back. Owning a fund that was up 35% last year doesn't create happiness for investors -- it creates envy for markets and funds up 100% or more. China fits the bill.

As fear becomes optimism, the fund industry rolls out products to satiate the appetite of investors ready to take on the world, after licking their wounds in safe U.S. treasury bills. They want a story of boundless prosperity and potential profits. China delivers on all fronts.

Frenzy Over China

You can't watch TV or read a financial publication today without hearing about China. China and the huge trade surplus; China and Internet growth and stocks up 1,000%; China and the fastest growing GDP; China and the undervalued yuan; Chinese citizens with money to burn -- ready to stop riding bicycles and start maxing out credit cards.

A world of obese Chinese driving home in SUVs loaded up with consumer spoils from the mall, yapping on cell phones and eating fast food is surely right around the corner. Compared to a maxed-out, unemployed, stagnate wage-earning U.S. consumer, the smart money is betting on this new wave of prosperity.

Or at least that's what a national advertising campaign for the recently launched China-U.S Growth Fund by Fred Alger & Company implies.

The new fund breaks from the typical China-oriented fund by placing about half the portfolio in U.S. companies doing business in China and half in Chinese stocks. This means investors in the fund will own Yum! Brands (YUM), which apparently does a bang-up business hocking KFC to the Chinese, and Nike (NKE), currently building a brand in China alongside Netease (NTES) and other less speculative Chinese stocks. The fact that these U.S. multinational companies currently do less than 5% of their worldwide business in China isn't the issue -- they're there early and will profit from the region's growth.

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