COMMENT
Three Reasons To Invest In China

I am often asked if it is a good idea to invest in China. The answer is an emphatic yes, and here are my top three reasons why.

Perhaps the most obvious reason is China's huge growth potential. The Chinese economy has been growing at 8% every year for the last five years, and the pace of growth is expected to continue. In the second quarter of this year, the Chinese economy resisted its government's attempts to engineer a slowdown, and grew at 9% year-on-year.

China's extraordinary pace of growth is part of the reason why its government recently decided to revalue its currency. By massaging the value of the yuan, the Chinese government hopes to moderate the growth of exports that has not only fuelled corporate investment but boosted spending by its consumers. However, the revaluation of the yuan by just 2% is unlikely to deter exporters, which could instead benefit through cheaper imported raw materials. The upshot, then, is an economy that should continue to grow at a blistering pace.

The second reason why investors should look to China is its inclusion into the World Trade Organisation in 2001. Membership of the free trade club should lead to a speedier transition from what is still an essentially command economy to a more competitive market driven one.

Free market economics should also result in a more robust legal framework that could see a further opening of the Chinese economy to foreign investment. That should increase China's integration into the world economy and benefit those sectors that are internationally competitive.

Finally, and perhaps the main reason why investors should invest in China is because it's still quite cheap. Chinese shares are valued at around 11 times earnings, which is not too expensive for a growing economy. By comparison, the Indian market is valued at 14 times earnings and Russian shares are even more expensive at 17 times. What's more, Chinese shares are yielding 2.3%, which is higher than both India and Russia.

As a parting thought, Chinese managers are known for their soft spot for raising dividends. So instead of an aggressive pursuit of growth, Chinese bosses prefer to return cash to investors because it is seen as better proof of their success!

There are different ways of playing the Sino market, and that has been covered here and here.