Before you invest your hard earned money in China, you might want to ask yourself this simple question:
Will the 21st century belong to China, or will China be the next Japan?
To answer this question, let's review some bullish and bearish cases for China:
· China has transformed itself from the past 30 years from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy
· It has the second largest GDP by purchasing power parity
· It is the largest exporter in the world
· China’s GDP is projected to surpass the United States’ by 2050 or sooner
· Low public debt to GDP ratio of 18.2% (2009 est.)
· Low unemployment of 4.3% (2009 est.-urban areas only)
· Approximately 91% of the population is literate
· Deleveraging by US and EU will slow China’s exports
· Revaluation of overvalued Yuan will decrease exports
· Bursting of China’s bubbly real estate market will dampen future lending
· Bad loans made by China’s state-owned banks will stymie future growth
· Excess capacity from overbuilding/fixed investment costs will slow future growth
· Financial reporting not considered on par with international standards resulting in lack of transparency
· Lack of social safety nets may lead to social unrest
Whether you decide to go long or short on China, be sure to tread carefully because the Chinese market on average is about one-third more volatile than the US market. Additionally, make sure you understand the different types of Chinese shares below:
Chinese A Shares - China’s “A Share” market refers to stocks that trade on the Shanghai and Shenzhen exchanges. These companies are incorporated in mainland China and their shares are denominated in the local currency, or Yuan. For individual investors, these stocks are generally off limits to non-Chinese investors.
Chinese B Shares - Here Chinese companies are listed in Shanghai and Shenzhen, but their shares trade in U.S. dollars. These stocks, known as “B shares”, were historically designed to give Chinese companies a way to raise capital from overseas. Over time, however, the B share market has become relatively illiquid.
Chinese H Shares - H shares are also Chinese companies, but these securities trade on the Hong Kong Stock Exchange rather than on the mainland, and they are priced in Hong Kong dollars.
Chinese US ADR - These are companies that are headquartered in mainland China, but have chosen to list their shares on the New York Stock Exchange or Nasdaq. There are currently nearly 70 such Chinese companies listed in the U.S., and the list continues to grow. For individual investors, shares of New York-listed companies are by far the easiest way to get started investing in Chinese stocks.
In addition to ADRs, Exchange Traded Funds (ETFs) and Close-End Funds (CEFs) are other convenient ways to invest in China. Below are some funds to choose from:
iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI)
iShares MSCI Hong Kong Index (NYSEARCA:EWH)
Market Vectors China ETF (NYSEARCA:PEK)
SPDR S&P China (NYSEARCA:GXC)
WisdomTree Dreyfus Chinese Yuan (NYSEARCA:CYB)
China Fund, Inc. (NYSE:CHN)
China Fund, Inc. (NYSE:CHN)
Morgan Stanley China (NYSE:CAF)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.