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How to tame the dragon

If you want exposure to China, but want to avoid the pitfalls – here's how
September 10, 2009

If you want exposure to China, be warned that trying to pick individual shares in China is hopelessly ambitious for the private investor - as I hope previous sections have demonstrated. But there are other ways to tap into the country's growth.

■ Use mutual funds and exchange-traded funds (ETFs). Most private investors would probably be better off using a stock-picking, actively-managed fund that can afford to investigate the underlying company's business structures. Many Asian fund managers invest in Asia and Greater China (including Hong Kong and Taiwan) and there's even a specialist investment trust run by JPMorgan that focuses exclusively on China.

 

Unit trust/OeicMEXID
Baillie Gifford Greater ChinaBGGCF
First state greater China growth ACFGCGA
Gartmore China OpportunitiesGEHKCA
HSBC Chinese EquityMDHKA
Invesco Perpetual HK & ChinaBRHKA
Jupiter ChinaRWCHAC
Neptune ChinaNECFA
Premier China EnterpriseAREEA
Threadneedle China OppsADCHIN
The links take you to a page in our funds data section from where you can download a PDF factsheet about the fund in question

 

In the index-tracking space there's a large range of ETFs that track Chinese indices including ETFs from Lyxor, Deutsche DBX and iShares that track key indices such as the Hang Seng China Enterprises index (of red chips) and FTSE Xinhua 25. These tend to be cheaper than actively-managed funds but they also tend to be larger-cap focused. Structured products providers (Barclays and Royal Bank of Scotland) also offer trackers on China, some with capital protection and others with accelerated returns that multiply any increase in an index.

Investing in Chinese real estate. Yes, there are huge speculative forces at play in China's property market. But there's also an underlying theme: that the Chinese are moving from the countryside to the cities in mind-boggling numbers. As professor Malkiel notes: "The Chinese urban population has almost tripled from 172m to 502m in 27 years. In addition, about 100m Chinese migrant workers are working in cities." According to a United Nations study, by the end of 2015, Shanghai and Beijing are expected to have a 50 per cent population increase and will have over 20m inhabitants each. Such growth has put tremendous pressure on urban land prices. There are a number of real-estate investment trusts (Reits) quoted on the US market with a focus on China, while in the UK there's a small fund called China Real Estate Opportunities.

Natural Resources. For many analysts, this is the best way to play the big China story. As Tim Bond points out, if China's per-capita copper consumption were to reach Korean or Japanese levels, world copper output would have to just about double within the next 15 years or so. That simply isn't going to happen, so copper prices can only go one way – up. His advice to investors looking to bet big on China is to buy commodity-producing firms and funds, and especially those with a focus on metals and energy.

Buy emerging markets currencies. Another way to play the commodites angle is through currencies, according to structured products specialists Blue Sky AM. "If one takes the view that China's dollar holdings will be redistributed by buying commodities over time and opportunistically, then taking a strategic view on the currency flow implications makes sense". Almost all commodity transactions are priced in dollars, but the resulting capital flows tend to strengthen the currencies of commodity-producing countries. So a intriguing way to play China's growth would be to be long of currencies like the Chilean peso, Brazilian real and Australian dollar.

Aim shares: During 2005 and 2006, there was a substantial increase in the number of China-related shares floating on the Alternative Investment Market. As already documented, several have run into difficulties or even blown up altogether, but the best of them have been very good indeed. In 2008, we identified five potentially lucrative China-linked shares on the junior market. Of the five, West China Cement was the star performer – it's up 193 per cent in the past year, while battery-maker China Shoto is up 70 per cent and Asian Citrus is up 19.6 per cent.

We had bad luck with Geong International and Blue Star Secutech, though – down 22.3 per cent and 40.3 per cent respectively. Since the start of this year, the Aim China index assembled by Investors Chronicle, which tracks a universe of 30 Chinese shares listed on the junior market, has outperformed the FTSE Aim Index and, so far at least, has largely escaped the meltdown that beset China's markets in August.

 

Books on China

There are dozens of books about investing in China. You can buy Burton Malkiel's From Wall Street to the Great Wall and Jim Rogers' A bull in China at substantial discounts, in the IC Bookstore. Call 01730 233 870, or online at www.investoschronicle.co.uk/bookshop.

MORE ON CHINA…

Part one: How to win in China

Part two: The challenges in China

Part three: The great red hope

Read more Investors Chronicle cover features here.