Your Investments: How to invest in China

Many analysts believe China will be the US of the 21st century.

By AARON KATSMAN
January 19, 2011 22:05
3 minute read.
Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

 
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Chinese President Hu Jintao’s visit in Washington has brought increased attention to relations between the United States and China. While those relations are chilly at best, the state of the Chinese economy is anything but. As the world continues to be mired in an economic slowdown, and even the rosiest of scenarios has stronger growth returning in the second half of 2011, China’s 10.3 percent GDP growth in 2010 and similar growth expected this year sure seems attractive for investors. China has become the world’s growth engine.


Economist Larry Kudlow wrote in the National Review: “Fortune magazine recently reported that the number of US companies in the world’s top 500 fell to the lowest level ever, while more Chinese firms than ever made the list. Thirty-seven Chinese companies now rank in the top 500, including nine new entries. Meanwhile, the number of US firms has fallen to 140, the lowest total since Fortune began the list in 1995. This is not good.

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“China also surpassed the US as the world’s biggest automaker in the first half of 2009, with June sales soaring 36.5 percent from a year earlier.

The Chinese registered 6.1 million car sales for the first half of the year. That way outpaced American sales, which were only 4.8 million.”

With no capital-gains tax and low corporate taxes, China has created a very friendly business environment. Within this environment, a new middle class has emerged, which will probably be the largest middle class in the world in the not-too-distant future.

In spite of all the success that China is enjoying, there are still potential roadblocks ahead.

Lack of corporate transparency, potentially high inflation and a banking system that has lent money for decades to money-losing companies could burst the China bubble. The potential banking crisis in China could make the US subprime debacle seem like child’s play.



In addition, China faces a major water problem.

Investor Jim Rogers said in a Money Morning interview: “China has a huge water problem. In Northern China, they’re running out of water. They know this and they’re working on it, big time. But if they don’t solve it, or if they don’t solve it in time, then China – as you put it – has failed.”

Over the last four years, Chinese stocks have seen huge rallies and equally steep drops. I get many calls from clients wanting to know what options are available for investors to gain exposure to this market. Investors need to remember that past performance is no indication of future results. An investment in China should be part of a broader investment strategy and is full of risk.

For those investors who are looking at China, here are three ways you could consider investing:

Commodities

This is an indirect way of investing in China.

As China continues to record strong growth and build its infrastructure, there should be increased demand for basic materials. Couple that with more disposable income from the new middle class, which should increase demand in cattle and other agricultural commodities, and China could singlehandedly pull global commodity prices higher.

Stocks, ETFs, mutual funds

For investors who want to be part of the explosive growth taking place in China, and who are able to handle the high risk to have the potential for high returns, there are plenty of Chinese stocks that now trade in the US, and a host of Exchange Traded Funds (ETFs) linked to different indices are now available. For investors who want someone to manage their exposure, many mutual funds invest broadly in China and greater Asia.

Currency

For investors who don’t want equity or commodity exposure, consider investing in the yuan. While just a few months ago it was virtually impossible for individual investors to own the Chinese currency, the launch of some currency ETFs linked to the yuan has made owning the currency much easier.

Many analysts believe China will be the US of the 21st century. If that happens, it could prove to be a worthwhile investment destination. Do some research or speak with your financial professional to see what type of exposure best fits your portfolio.

aaron@lighthousecapital.co.il
Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.

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