Investing in China: the pros and cons – Telegraph.co.uk

But the Chinese consumer still supports many markets across the world. The
country is credited with reviving the European luxury goods market, the
Australian mining sector and global car manufacturers – more than a million
cars were imported last year, compared with 42,000 in 2000. Two thirds were
from luxury motoring brands.

Unlike Western nations, the Chinese national purse is in the black, with large
foreign exchange reserves. China has also been a key buyer of gold, its
investment and jewellery demand reaching 255.2 tons last year, up by 10pc on
the previous year’s levels.

How has the stock market performed?

It has been a difficult couple of years for the Chinese stock market. Despite
an increasingly domesticated consumer sector, many industries are still
intrinsically linked to Europe – meaning that the eurozone crisis had an
adverse effect on investors in China.

The Chinese government announced a stimulus package of £370bn in 2008, which
was subsequently deemed to be overzealous, and had an adverse reaction on
the stock market.

However, after several years of volatility the market is on the rise again,
gaining steadily since June last year.

What’s changing now?

In November China unveiled its new leadership, headed by Xi Jinping who was
formally announced as president this Thursday. A new government is elected
only once a decade, and although the political party doesn’t officially
change, some are predicting that this parliament may prove to be
significantly more radical than the last. China’s middle classes are
becoming more informed about the true nature of their government through the
internet. On top of this, many business executives are being educated in the
West, meaning a generation is less tolerant of corruption and repression.

While this may take a while to play out, it will have an impact on the
investment prospects for China. Changes to labour laws in 2008 mean Chinese
workers have seen significant annual pay increases.

This has meant some US companies have repatriated their factories due to
escalating costs. The impact appears moderate, with Chinese trade figures
released last week revealing that Chinese exports surged 22pc in February,
while imports fell 15pc. The trade surplus between the US and China is the
highest it has been for four years – meaning despite China’s plans to move
towards a more domestically focused economy, it is exporting more to the US
than it has done in the last four years.

What are the big investment risks?

One very large threat on the horizon is China’s demographics. The West is
already feeling the effects of its post-war baby boom reaching retirement.

The pattern will be repeated in China, where the same demographic pattern lags
Europe and the US but will be amplified by China’s one-child policy,
introduced in 1978. What began as a boost, as households had fewer
dependants, is now a drag as that generation reaches working age. Not only
are fewer people contributing to the public purse through taxes, but an
ageing population has fewer children to support it and those retired spend
far less than those in working age, damaging the economy. Some economists
have suggested the policy will be relaxed and those rich enough to pay the
fine simply do so.

However, even if a two-child policy is introduced now, it will take 20 years
to have a positive effect on the economy.

There are other dangers. Many of the largest companies are state-owned
enterprises, meaning that even though it is possible for foreign investors
to own a stake, shareholders may find themselves relegated to second
priority behind the government. Corporate governance is also a problem in
China – company accounts are often incomplete or incorrect.

Fidelity China fund manager Anthony Bolton fell foul of fraud in 2011,
investing cash into the wrong companies. The manager has altered his
approach so as not to fall victim again.

How can you invest in China?

Demand from investors peaked in 2010 following Chinese funds producing a
return of 55pc in 2009, but since then it has been a rocky ride. China was
the worst performing of all investment sectors in 2011, down 22pc, but there
has since been a return to form.

China funds have been among the best performers in the past six months
following the election and improvement in investor confidence.

Financial advisers warn against investors putting too much money to China – or
any other single country fund, regardless of the size of that country’s
economy.

“Most people shouldn’t take the risk of getting specific exposure to
China for more than a small proportion of their investment portfolios,”
said Patrick Connolly of AWD Chase de Vere financial planners. “For
those willing to invest directly into China, we recommend Invesco Perpetual
Hong Kong & China fund.”

A more sensible way to invest is through broad-based emerging market funds,
which invest in other countries as well. Good options include JPM Emerging
Markets and Schroder Global Emerging Markets, which both currently have 19pc
of money invested in China.

For investors looking for a low fee option, Vanguard Emerging Markets Stock
Index fund costs 0.55pc a year, compared with 1.73pc for the Schroder fund.

Advisers say, however, that trackers are generally better suited to developed
markets, such as Europe and the US, where wider availability of information
makes it harder for an active manager to beat the market. In emerging
markets, funds run by managers may find it easier to find shares with
unnoticed potential.