It should come as no surprise that the surge in China's stock market so far in 2009 has been favorable to investors holding Chinese shares. Over the past year, I've written about several Chinese small caps and the reasons they were cheap, based on future growth potential. While the selections have performed exceptionally well, credit should be given to China's rising market. However, it is noteworthy that many food companies have significantly outperformed the comparable index.

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Feeding the Chinese
With 1.3 billion people and counting, China must find a way to feed its people. That general line of thinking, along with more fundamental reasons, have propelled shares of China Green Agriculture (NYSE:CGA) beyond my expectations for 2009. I wrote about the company on a couple of occasions when shares were trading between $4 and $7. At the time, investors were paying less than eight times earnings for a business growing profits by nearly 50% per year. In early December, shares fetched around $18, as investors have become more enthusiastic about the future of the Chinese food industry. As such, the shares now command a P/E ratio of 20. If the company continues to grow as it has, this multiple may be justifiable. However, it is likely that the easy gains are gone for now. (For further reading, check out Investing In China.)

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China Green Agriculture was not the only beneficiary in the Chinese agriculture space. Even more impressive was the nearly 500% climb in shares of fertilizer company Yongye International (Nasdaq:YONG). Despite speculative returns, these companies all were profitable, growing very quickly and trading at single-digit earnings multiples at the beginning of the year.

More People Crave Meat
As the Chinese economy grows and the standard of living for the Chinese improves, demand for better quality foods will continue to grow. Other Chinese agriculture/food plays that have done well this year are AgFeed Industries (Nasdaq:FEED), a manufacturer of animal feed and producer of pork. China consumes more pork than any other country in the world. Shares in AgFeed Industries are up over 200% so far through December. Yuhe International (Nasdaq:YUII), a seller of day-old chickens, also has enjoyed a good year, up 60% going into December.

Bottom Line
On the whole, Chinese shares have performed very well, due in no small part to China's stimulus efforts. Until China turns off the credit spigot, 2010 may be a continuation of 2009. While that may be good in the short run, investors should remain attentive and not get caught off guard when markets correct. (For related reading, check out Top 6 Factors That Drive Investment In China.)

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