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How To Invest In China Safely

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How To Invest In China Safely With Signs That The China Economy Is Slowing

How To Invest In China SafelyHow to invest in China safely is something that is concerning long-term investors, as China’s economy shows signs of slowing.  While there are questions about whether China’s official government economic data can be trusted and whether China’s economy is slowing more than the official government view indicates, the current slowdown in China may present an excellent entry point for long-term investors.  With an economic growth rate that is well in excess of the anemic economic growth rates in developed world countries, China presents a way for long-term investors to expose their investment portfolios to a higher rate of growth, and potentially a higher rate of return.

Since China is a developing world economy, the country does not have the same standards as far as regulatory oversight that developed world countries in North America and Europe have; therefore, additional precautions need to be taken by investors to invest safely in China.  Many of the precautions are common sense investing precautions;  following these precautions while investing in China is critically important to preserve investment capital from significant losses.

The Case For Investing In China During The Current Downturn

China Building Boom
Whether or not Chinese economic growth is currently less than the official government statistics, few economists or investors believe sub-par Chinese economic growth will last for a sustained period of time or turn into an outright recession.  In fact, any slowdown in Chinese economic growth, whether reflected in official government statistics or not, may present an excellent entry point for investing in China to get ahead of a rebound in Chinese economic growth.

There are no developed world countries that have economic growth rates that are anywhere near China’s official 7 percent plus annual Gross Domestic Product growth rate.  Even if China’s Gross Domestic Product growth is actually between 5 percent and 7 percent, as some pundits suggest, it is still far faster than the growth rates in any developed world countries.

China’s Gross Domestic Product is likely to pick up in coming years, as the Chinese government takes measures to increase economic growth.  With over 1.3 billion people, many of whom are trying to move out of poverty and into the middle class, China has a great amount of future growth potential for many years to come.  Another factor that will likely boost economic growth in China is the economic recovery taking place in Europe. The Eurozone is one of China’s largest trading partners.  With European economies finally showing signs of growing again, it is likely that China’s economy will benefit from the renewed economic growth in Europe.

How To Invest Future Chinese Economic Growth Safely

China ETFs
While there are a number of Chinese companies that trade on United States stock exchanges via American Depositary Receipts (ADRs), it is a good idea to steer clear of direct investments in Chinese stocks.  This is due to the fact that there are ongoing concerns about the financial statements produced by Chinese companies.  A number of high profile cases of outright fraud associated with Chinese Companies have heightened these concerns.  One notorious case of Chinese company fraud involved the United States based Fortune 500 company Caterpillar (NYSE:  CAT).  Caterpillar bought a Chinese heavy equipment manufacturing company that was later found out to be a work of fiction, costing Caterpillar $100s of millions in losses and a lot of negative press on Wall Street.

If one wants to dabble in individual Chinese stocks, it is best to stick with top tier blue chip Chinese Stocks.  China based companies that fall into the top tier blue chip category and trade in the United States as ADRs include companies such as:  China Telecom (NYSE: CHA), China Mobile Limited (NYSE:  CHL), and China Petroleum and Chemical Corp (NYSE: SNP).  While these are well established large capitalization companies, the possibility of future accounting irregularities is a reason for concern for investors that want to invest in China safely.

A safer way to invest in China’s to take advantage of future Chinese economic growth is via the purchase of exchange traded funds (ETFs), exchange traded notes (ETNs), mutual funds that invest in Chinese companies.  While even the managers of these funds may occasionally be mislead by fraudulent Chinese companies, the funds offer the protection of diversification, as only a small portion of the funds’ assets are invested in any one Chinese company at any given time.

The following are ETFs that invest in Chinese companies, which can be used to safely expose an investment portfolio to future economic growth in China.

  • iShares MSCI China Small Cap Index (NYSE: ECNS) is an ETF that invests in companies in the MSCI China Small Cap Index.  The fund invests in equity securities in the bottom 14%, by market capitalization, of the Chinese equity securities.
  • PowerShares Golden Dragon Halter USX China Portfolio (NASDAQ:  PGJ) is an ETF that invests in small-capitalization Chinese stocks that are well established in China.  The small-cap Chinese companies the fund invests in are mainly in the industrial, healthcare, and technology sectors of the Chinese economy.
  • iShares FTSE China (NYSE: FCHI) is an ETF that invests in large and mid-capitalization Chinese companies.
  • iShares China Large-Cap (NYSE:  FXI) is an ETF that tracks the Xinhua 25 Index, which consists of 25 of the largest and most liquid Chinese stocks.  The companies that the fund invests in are in the large-capitalization part of the investment spectrum.
  • Global X China Materials ETF (NYSE: CHIM) is an ETF that tracks the Solactive China Materials Index.  The fund offers a way to invest in companies that do business in the materials sector of the Chinese economy.

While investing in funds that invest in Chinese companies by no means protects an investor from a broad downturn in the Chinese economy or Chinese stocks, they at least provide protection against loss of investment capital due to financial reporting irregularities or bankruptcy that may affect individual Chinese stocks.  If China’s growth picks up in coming years and decades, as expected, then long-term investments in funds that invest in China should prove to be a profitable way to invest in China safely.

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One Response to “How To Invest In China Safely”

  1. Chitra says:

    Thanks for giving the list of ETFs that invest in Chinese companies. I will also research into this and invest in these company stock


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