Investing In China: Tips And Advice

Determine the best way to diversify your assets to China: mutual funds, individual Chinese stocks, or US companies operating abroad.

China is an emerging market worth paying attention to. It is the world's most populous country with over 1 billion people. Recently China has begun to take a more central position on the world stage, through both its developing economic muscle and culturally through the hosting of the 2008 Olympics in Beijing. As China continues to grow, it will propel people and businesses with it. There is no reason why your money shouldn't be a part of the money that is growing in China.

For individual investors in the United States, there are three practical ways of owning a piece of China: owning a specialized mutual fund, investing in specific Chinese stocks, or investing in US companies with substantial operations in China. Each method has its own rewards and risks.

Mutual Funds

A number of mutual funds invest exclusively in Chinese stocks, and mutual fund investing has several key advantages. First, it offers diversification among Chinese stocks, potentially including access to attractive non-US listed Chinese companies. Second, it is very convenient, with many brokerages allowing simple on-line account setup. Finally, mutual funds are run by financial professionals who may have better information - and certainly have more time - to manage your investments than you do.



Before investing in any mutual fund, you should check its past performance history, expense ratios and fee structures. For Chinese funds in particular, you should pay careful attention to the background of the fund manager. To be considered qualified as a fund manager for a Chinese-focused fund; a manager should be fluent in Mandarin and should have at least ten years of experience with international financial markets. You should also read and understand the fund's investment strategy. Consider whether the strategy is high-growth and high-risk, or more conservative, and use this as a guide when interpreting the fund's historical returns.

Individual Chinese Stocks

The next option available to the individual investor is Chinese stocks. Most listed Chinese companies are listed on either the main Chinese or the Hong Kong stock exchanges. These exchanges are difficult and expensive for individual US investors to access; as a result most investors are better served by sticking to Chinese stocks listed in the US.

Chinese stocks are typically listed on US exchanges via shares known as "ADRs" or "ADSs," that is, American Depositary Receipts or Shares. In this arrangement, a US bank purchases a large block of shares from a Chinese company, and then resells the shares to US investors. The difficult thing about ADRs and ADSs is that they frequently correspond on a 10:1, 2:1 or other basis with shares trading in Chinese markets. You must determine this proportion and consider its effects on your calculations, so that you do not find yourself receiving, for example, half of the dividends that you expected.

Purchasing individual securities gives you much more control over your portfolio and by doing some research yourself you can frequently save on mutual fund expenses and loads. However, before you begin investing in individual Chinese stocks you should carefully assess your personal financial expertise and commitment. You need to make sure that you have both the willingness to carefully research companies in the first place and the persistence to continue to monitor them.

US Companies with Operations in China

The last option is one many investors might not think of, yet it has many attractions. US companies publish financial statements in English at regular intervals, they are easily researched using standard techniques, and they are frequently world-class companies with significant international expertise. More and more US companies are building factories, sourcing labor, and opening retail chains in China. By owning a piece of one of these companies, you can own a piece of China.

The primary disadvantage to this technique is that it does not offer the unadulterated China experience you may be looking for. But consider China as a part of your whole portfolio. US companies frequently break out their revenue and operating income by the part of the world in which it was earned. If you can find a great US company with 30% of its operations in China, that company may be your best alternative in terms of risks, rewards, and exposure to China.

After you've decided on the mechanics of investing in China, go invest your money! Your cash will be helping to support a huge amount of development in the world's most populous country.

© High Speed Ventures 2011