Editor's note: Following is part 1 of an article that looks at China stocks focused on the newly emergent Chinese consumer. Here is part 2.Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage. BEIJING ( TheStreet) -- China stocks that focus on the consumer are the place to be this year. China's GDP is expected to grow at nearly 10% in 2011. Some of that growth is clearly unsustainable. There's an obvious bubble in real estate, and the runaway growth of the nation's auto industry is likely to slow as the government takes steps to reduce air pollution and traffic. As a result, I'm avoiding stocks tied to real estate, construction, steel and cement. I am also avoiding most of the auto sector. But the country's growth has created a wealth effect that is building a new consumer class, and I'm extremely bullish on China stocks that benefit from this trend. Because Chinese incomes are growing from a very low base level, each increase in income translates directly into disposable income, and from what I observe here in China, consumers are spending very heavily in all areas instead of saving all of the extra income.
The company's corporate governance is a complicated story, so I will do more research into this stock before buying any shares. Also, shares have doubled since their lows in September, so I clearly missed the bottom on this China stock. Although I'm bullish on China's travel industry, I'm avoiding China stocks in the hotel sector such as Home Inns ( HMIN) and 7 Days Group ( SVN). My concern is that there's excess hotel capacity, which is related to the country's real estate boom. Whenever I travel I see many brand new hotels under construction, and in Beijing new high-rise hotels seem to pop up every week. With all this construction, the hotel business in China is getting very competitive. Just by shopping around a bit haggling, I am often able to get 50% discounts. The competition isn't just from Chinese companies either. International chains like Holiday Inn continue to expand their presence here. Please look for Part 2 of this article on Wednesday. I'll reveal my favorite China stock in the food and beverage sector. At the time of publication, Pearson had no positions in stocks mentioned.