Definitive Guide To Investing In China

By: ispeculatornew
Date posted: 10.27.2011 (5:00 am) | Write a Comment  (4 Comments)

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Yesterday, we took a deeper look at China and why I think it needs to be a significant part of your retirement holdings. While the value of those assets will fluctuate a great deal, I think there’s little doubt that over 20 or 30 years, you will be much better off than if you decide to stick to already developed economies. I can see how some would argue for more diversification among emerging economics (BRIC and others) and I do understand that but I still think that there are significant advantages to being the world’s most important economy which is exactly what China will become in the near future.

Once someone decides to invest in China, the big question becomes what type of investment should be made. First, we can take a look at the biggest names on the Hong Kong exchange (where most large Chinese corps have generally gone in the markets)

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I think it’s easy to start off by excluding direct trading in China. Not only are there complications with trading in the Chinese currency but there are also a number of legal issues to deal with that make it only worthwhile for large institutions to be active. That leaves a few different options:

Buying ADR’s on US markets: Here is the list of the largest ones:

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You can certainly get exposure to some of the bigger names such as Baidu (BIDU) that trade on US markets which also gives some level of assurance that the financial statements by these companies are legitimate. I think the main issue when doing this is to get exposure to the right names, as many large Chinese corporations are not listed in the US.

Buying Pink Sheets: We had discussed pink sheets trading and it can certainly be a viable option but I think that becomes rather risky for many Chinese corporations. There have been so many scandals and frauds in the listed stocks such as Sino-Forest that buying companies that operate under even less restrictions becomes very risky. How in the world would you verify what you are actually buying.

Buying ETF’s: Personally, I think getting exposure through ETF’s is by far the best way to get long term exposure to China’s stock market. Not only are the costs more reasonable but you have a manager that is paid to do do stock selection and has access to the best companies no matter where they are traded. Here is a list of US traded China ETF’s:

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Personally, as unoriginal as it may seem, I think FXI is a great play. Why? Because it’s difficult to know which Chinese companies will dominate 10 or 20 years from now but I think it’s easy to imagine that going with the biggest ones is a good bet. Over time, the index will add “emerging ones” and as China becomes a global leader, it is likely to promote national champion companies as it has done with Baidu (BIDU) in the internet giving the company a very favorable environment against competitors such as Google (GOOG). So personally, I think FXI should be a significant holding in any very long term portfolio, do you agree?

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  1. Comment by awake — October 27, 2011 @ 11:44 am

    I like FXI long term, but I think EWZ is also a good one as far as ETF’s go for countries. Your thoughts IS?

  2. Comment by IntelligentSpeculator — October 27, 2011 @ 12:09 pm

    @awake – Stay tuned, tomorrow EWZ will be discussed:)

  3. Comment by UltimateSmartMoney — October 28, 2011 @ 3:07 pm

    I think you are absolutely right about holding onto Chinese stocks for long term. However, it is still very risky just because any of the companies go under at any time before your retirement. So if you choose the wrong stock, you could lose all your investment value.

  4. Comment by IS — October 28, 2011 @ 6:48 pm

    @UltimateSmartMoney – I agree, and that is why I’d stick to an index of market leaders rather than just picking companies!

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