Posted on: Thursday, April 8, 2004
Investing in China carries big risks, experts say
By Peter Svensson
Associated Press
The Chinese economy is booming and seems to have room to grow. What's a good way to benefit from that through investing?
It depends on what you mean by "good." The Chinese stock market jumped last year, and has been attracting a lot of interest. But experts say Chinese investments carry large risks.
According to fund tracker Lipper Inc., investors have doubled the size of mutual funds focused on China in the last year. These funds drew $840 million in investments last year, compared to just $96 million in 2002.
Those figures may bring back unpleasant reminders of the Internet boom, and there is concern that Chinese stocks are a bubble about to burst after rising 70 percent last year.
Part of the problem is that although it's a big country, China's stock markets are in their infancy and there aren't a lot of investment opportunities. This means hefty capital inflows can distort the market easily.
"The flows may be a tip-off that the bloom may be off the rose at this point," said research analyst Andrew Clarke at Lipper. He still seems investing in China as a good long-term bet, but one that's as volatile as any other emerging market.
Benjamin Tobias, a certified financial planner specializing in overseas investing, sees much interest in China among his clients. The country has everything going for it, he believes, at least if the government stays stable.
"I think that 50 years from now, if not a lot sooner, China will be the pre-eminent economy in the world, completely surpassing the U.S. But I'm not sure they're going to allow us to participate in that game," he said from his office in Fort Lauderdale, Fla.
For one thing, Tobias sees the Chinese government as untested in a stock market crisis, and worries that it might react the same way Malaysia did in 1998, when it imposed a hefty tax on sales of Malaysian stocks by foreigners. The tax was lifted a year later.
Tobias believes investors should allocate about half of their portfolio to overseas stocks, and puts the maximum exposure to mainland Chinese stocks at 5 percent.
"Wherever I'm investing, I want to be able to know that I can get in and get out," Tobias said.
For retail investors brave enough to take the jump, mutual funds are the only way to go.
"Absolutely they should not be going out and trying to buy Chinese securities from Hong Kong or elsewhere," he said. "The local investor in the U.S. is not going to be able to get updated info and know when to get out."
Even the popular iShares exchange-traded funds that track the Hong Kong and Taiwan exchanges are too risky for foreign investors, he said. Exchange-traded funds, which can be bought and sold as if they were listed stocks, work best when a market is large and efficient, which doesn't apply to the China region.
He recommends funds whose managers know the area well, and sees an office in the area as good sign.
When looking closely at a "Greater China" or "China Region" fund's investments, don't be surprised if most of the investments aren't in mainland China. Such funds typically invest only about 20 percent of their funds directly in mainland stocks, according to Lipper.
About 60 percent usually go into Hong Kong stocks, some of which may be mainland stocks listed on Hong Kong exchanges.
The idea is that Hong Kong will float with the tide raising China, but the investments should benefit from the greater transparency and efficiency of the more mature Hong Kong market.
The remaining 20 percent is usually invested in Taiwan, which provides some of same benefits that apply to Hong Kong, but can also be very sensitive to the island's volatile relationship with the mainland.
Some funds invest even farther afield, including stocks from Singapore, Malaysia, Indonesia, and other Pacific Rim countries.
