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Beginner's Guide to China: how much should I invest?

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We know China has undergone an astonishing transformation. How should we reflect its economic success in our investments?

by Gavin Lumsden on Feb 15, 2013 at 11:00

Beginner's Guide to China: how much should I invest?

To mark the Chinese New Year of the Snake, I ask the question: how much should you invest in China?

This is the latest video in The Lolly Investor Programme series, which is aimed at beginner investors. You can watch the other videos on The Lolly Investor Programme page.

Can't watch the video now? You can read the script below.

Hello, I’ve come to Chinatown in London to talk about one of the big questions a lot of investors ask themselves. How much, if anything, should I invest in China?

The emergence of China as a super power has been a remarkable development of the 21st century.

The incredible pace at which the country has modernised has had a huge impact on the global economy as China has sucked in raw materials from around the world to build hundreds of new cities.

The rise of China affects all our lives.

I’m impressed that my two children are both learning Mandarin at secondary school. That’s something I could never have imagined when I was at school learning French and German!

It makes me confident and excited about what the future might hold.

I was also surprised to hear a colleague say recently that many of the fireworks let off in India during the Diwali festival were imported from China. No wonder China has a reputation as the ‘factory of the world’.

But what investment opportunities does the China phenomenon present?

Now is a good time to consider the question as the Chinese have just celebrated their New Year. This is the year of the Snake, or the Black Water Snake to be precise.

One of the attributes of the snake is they are said to be analytical. They’re wary of diving into situations without first carefully considering the facts.

That’s fitting because it’s exactly what investors need to be when looking at China.

Funds investing in the shares of companies in Greater China – which includes Hong Kong and Taiwan as well as the mainland – have been one of the best performing sectors over the past 10 years.

As China as grown to become the second biggest economy in the world after the US, these funds have achieved an average total return of nearly 360%.

That’s impressive but bear in mind economic growth and stock market returns are not always linked.

China’s economy has posted staggering growth figures over the years. In 2012 it grew by 7.8% its slowest rate in a decade.

But its stock market is volatile and despite a recent recovery is still down 60% from its peak in October 2007.

So where is China now?

There are two big positives with its current situation.

First, the most remarkable aspect of the China story has been that its capitalist revolution has been overseen by the Communist party.
However, there is considerable potential for instability in this vast country with its 1.3 billion population encountering new wealth and increasing inequality under one-party rule.

There was relief last year when the party managed the once-in-a-decade change in leadership without too much trouble.
Li Ke Jiang is due to take over as premier in March.

Secondly, China’s economy appears to have avoided a ‘hard landing’ after years of rapid growth. Recent figures show trade is strong with both exports and imports up. This is good news for the rest of the world.

There are problems, however.

China’s massive investment in infrastructure has created a property bubble and left many of its state-owned lenders with bad debts.

There is also concern that Japan’s recent success in cutting the value of its currency, the yen, may affect China: either crimping its exports or increasing its inflation.

And speaking of Japan, the dispute between it and China over the Senkaku islands has raised the risk of military conflict between the two old rivals.

Few people have any idea of what is going on inside China. On balance, with fingers crossed, most analysts think its economy will continue to do well.

The really important fact about China is that it is going through another transition, in which the dominance of state-led investment is replaced by consumer spending.

This creates new investment opportunities in finance, healthcare, technology, retail and tourism as the Chinese become more ‘western’ in their outlook and spending habits.

The most fascinating thing about China is you don’t have to invest there to exploit these trends.

You can put some money in the Greater China funds I mentioned.

Alternatively, a slightly less risky way is to invest in funds investing in the Asia Pacific region, covering countries like Thailand, Indonesia and the Philippines as well as China.

However, investing in emerging markets like these is always high risk.

The other less risky alternative is to buy into a UK fund investing in British companies growing their business in China and Asia.

To sum up, it’s impossible to answer the question how much you should invest in China. However, you can safely say it is a theme that investors should not ignore.

4 comments so far. Why not have your say?

Dennis .

Feb 15, 2013 at 16:04

There is a fundamental problem with China (and Russia) which is one of governance. Anthony Bolton found that company valuations were not as expected (or in some cases the companies didn't even exist). Similarly Caterpiller has just had a £500m write down because they bought a company with a black hole in it and now they are finding that rival chinese companies have somehow acquired some of their technology. For me this is the wild west and there are safer opportunities elsewhere.

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Rob Walker

Feb 15, 2013 at 16:35

David Rettallack

Feb 15, 2013 at 17:24

We tried to buy a Chinese company

Had to deal with the local government officials

The company was loaded with debt which was the reason why we discovered it was bankrupt. Officials refused to acknowledge this!

We went home

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Northener

Feb 16, 2013 at 08:47

To be on the safe side which is better FUNDS or INVESTMENTS TRUST.

All depend on the management ??

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