The great funds of China

The Chinese stock market has had a tough year but the long-term prospects for the country are standing strong. Here are five funds to help you tap into this phenomenal investment growth story.

Last week we looked at seven funds providing good overall access to global emerging markets. This week we start to look in more detail at investing in the individual markets. Our first stop is China, often described as the manufacturer of the world.

Correction or something more serious?

The Chinese stock market, as measured by the Shanghai Composite index, has had a tough year, falling 24% since January over concerns that the country's impressive economic growth of recent years has become unsustainable.

Over five years the index has more than doubled so this 'correction' is not necessarily anything to worry about if your time horizons are long term.

The reasons for being interested in China are those we saw last week in our introduction to global emerging markets. The economy is expanding at over 10% per annum, its population is young, and the middle class is growing at the rate of knots, supporting the process of industrialisation and urbanisation.

However, fund managers and analysts caution that growth of 10% in the economy does not automatically mean your investments will grow at the same rate - or grow at all.

Economy needs to rebalance

Carl Astorri, head of economics and strategy at private bank Coutts & Co, said: 'China is undoubtedly a great long-term story but it requires the economy to be rebalanced towards the consumer. You can have something that is a great secular story but in the short term it can be unrewarding.' Indeed, many economists are going even further and say the whole China investment story could end in tears as concerns over a property bubble grow louder by the day. The government has curbed mortgage lending to prevent a crash, while also allowing its currency, the renminbi (or yuan), to appreciate against the dollar to tame inflation and cool the economy.

The significance of a more flexible renminbi should not be underestimated. It reduces the risk of trade frictions with Europe and the US, takes pressure off inflation due to cheaper imports, and suggests Chinese authorities believe the export sector is now robust enough to withstand trade fluctuations. Moreover, with foreign investors hoping the renminbi would be released from its dollar-peg for years, many are expecting a wall of 'hot money' to hit the country and boost the stock market.

As with all emerging market investments though, the road ahead is undoubtedly going to be bumpy. But for those willing to play the long-term game, here are two of our best investment ideas from Citywire Selection and some funds we think are worth keeping an eye on.

Best ideas from Citywire Selection:

The First State Greater China Growth

With a consistent long-term track record of investing in the region, fund manager Martin Lau (above) is A-rated by Citywire and his First State Greater China Growth portfolio has been ranked first out of 40 funds in Citywire's Asia Pacific (excluding Japan) sector over three years.

Lau and his team of analysts - who are all locally based - target companies which they believe offer growth at a reasonable price in China, Taiwan and Hong Kong. Lau puts huge emphasis on company visits and only invests in stocks for which he has high conviction.