HOW TO INVEST IN CHINA
The current visit to Washington D.C. of Chinese President Hu Jintao has once again brought increased attention to U.S./China relations. 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, the 10.3% GDP growth posted by China for 2010 and similar growth expected for 2011 sure seems attractive for investors. China has become the world’s growth engine.
Economist Larry Kudlow writing in the National Review says, “Fortune magazine recently reported that the number of U.S. 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 U.S. firms has fallen to 140, the lowest total since Fortune began the list in 1995. This is not good.
China also surpassed the U.S. 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, as well as a banking system that has lent money for decades to money-losing companies, are just a few reasons that 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. As noted 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.”
In the last 4 years, Chinese stocks have seen both huge rallies as well as 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, and that 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 3 ways that you may consider investing:
1. Commodities – This is an indirect way of investing in China. As China continues to record strong growth and build out its infrastructure, increased demand for basic materials to help the build-out may occur. 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.
2. Stocks and ETF’s and Mutual Funds – For investors looking for the ability to be part of the explosive growth taking place in China and are able to handle the high risk in order 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 (ETF’s) linked to different indices are now available. For investors who want someone to manage their exposure, many mutual funds exist that invest broadly in China and greater Asia.
3. 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 Exchange Traded Funds (ETF’S) linked to the Yuan has made owning the currency much easier.
Many analysts believe that China will be the U.S. of the 21st century. If this is so, it could potentially 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.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
