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How to Invest in China Businesses

By: , dated March 16th, 2012

Despite its single party communist government, investors are increasingly interested in how to invest in China due to the huge East Asian country’s position as the world’s most highly populated nation.Sweetening the attraction for investors has been China’s impressiverecent growth rate that has averaged 10.5% between 2001 and 2010, in spite of financial crises and recessions in other major countries. Furthermore, the country’s GDP ranked 2nd globally on both a PPP and nominal basis in 2011.

Also benefitting China from an investment perspective is the fact that the country has become a major global manufacturing center due to its undervalued currency, low cost work force, substantial infrastructure investment, good productivity, and a positive government policy environment. This winning combination has made China an increasingly popular location for relocating manufacturing facilities from the United States and other developed countries where production costs are higher.

Fortunately, those interested in learning how to invest in China have a growing number of choices available to them. Since the Chinese Yuan — the national currency of China — has recently been allowed to float by the People’s Bank of China, perhaps one of the easiest methods is to purchase the Yuan against another major currency, such as the U.S. Dollar or Euro, using the forex market.

The Yuan’s ISO 4217 currency code is CNY, and the Yuan is conventionally quoted as the counter currency in currency pairs. Due to increasing interest in how to invest in China, currency pairs such as USD/CNY and EUR/CNY are now being offered by some online forex brokers as trading instruments to clients who qualify to open a forex trading account.

Since currencies can be considered analogous to the stock of a country, making an investment in China relative to the United States using the forex market would be as simple as establishing a long Yuan position by selling USD/CNY.  Also, since the People’s Bank of China’s benchmark one year lending and deposit ratesare typically higher than the U.S. Federal Reserve’s benchmark interest rate, holding the Yuanagainst the U.S. Dollar generally provides an investor with positive carry, as well as the potential to benefit if the Yuan appreciates.

Although purchasing Chinese stocks directly via the Hong Kong stock market is possible, the Shenzhen and Shanghai stock exchangesremain subject to capital controls and so present a challenge for foreign investors. Nevertheless, equity investors can easily purchase American Depository Receipts or ADRs issued by largeChinese companies that are listed on major U.S. stock exchanges.

Yet another way to invest in Chinawould be to purchase into a mutual fund or Exchange Traded Fund (ETF) that holds a substantial share of its portfolio in Chinese stocks, bonds or other Chinese investment grade assets. Such funds typically have the added advantages of diversification and professional management.

This article was brought to you by the InvestorGuide Staff Writers and Editors.

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