Getting a slice of the China pie

China Pie(copy)(copy)
I have just returned from a month motorbiking in Yunnan Province in Southern China. It is hard to accurately describe what is and has recently been happening there as words just do not do justice to the massive changes that have occurred. One needs to visit China to truly appreciate the scale upon which development is being rolled out. The opportunities in China are enormous.
Yunnan is one of the less developed provinces so I can only imagine how the major cities are looking. I suspect it is staggering. There is no denying China is rapidly emerging as a world economic power and can only go from strength to strength so it is logical someone like myself may want to share in China’s economic upside.
So how can one invest into China? The answer – in many and varied ways!
Table 1 summarises the options with key benefits and disadvantages for each.

Investment method Benefits Key risks and disadvantages
Buy shares in a private Chinese company Direct ownership Cannot speak Chinese, concentration of exposure to just one company. Corporate governance standards may be somewhat lax compared to NZ and no guarantee of receiving dividend payment, plus difficulty in selling the shares
Buy shares in a Chinese listed company Direct ownership Same as above
Buy units or shares in a  Chinese index fund or an exchange traded fund Provides exposure to the Chinese market index.
Good diversification and liquidity so easier to sell.
China is slowing down so the index may suffer poor returns in the short term.
Potential volatility of returns.
Investing into an actively managed fund that invests into China A quality fund manager will buy and sell only those companies which are deemed to outperform. May be less volatile and can potentially give a better return but no guarantee. Higher fund management fees will be charged.
Fund manager may underperform the index.
Investing into a high quality actively managed international fund which has a concentration of large international stocks which have a high exposure to China. Improved diversification as not 100% exposed in that fund to China - therefore lower risk. Piggybacking on the skill set of the fund manager in selecting the right international companies who can best manage their exposure to China to maximise the Chinese upside.
Fund manager can quickly sell out of those stocks.
Liquidity of investment.
Will not have as great an exposure to China as that which could be achieved with the previous methods (or options). Fund management fees are likely to be higher than if using an index or exchange traded fund.
China is certainly an attractive investment opportunity but it does come with some inherent risks such as:
  • Is China’s economy suffering speed wobbles and will an economic slowdown severely hurt any investment?
  • How well developed is the Chinese stock market and is it as open and transparent as other markets around the world?
  • How accurate and reliable is company reporting in China?
  • How good is Chinese corporate governance?
Despite the risks, some exposure to China may be prudent for a number of investors with longer term time horizons. Talk to your financial adviser about what is the most appropriate way for you to obtain an exposure to China or increase the exposure you may already have – be it directly or indirectly via international companies who are trading with or operating in China.
David Greenslade. Director Milestone Direct Ltd