MARKET COMMENT
How To Invest In China

By David Kuo (TMFDragon)
March 27, 2003

With anaemic growth prospects in store for the developed countries, it can be quite tempting to look outside of the industrialised nations for slightly better returns on our investments. Europe is expected to shrink, yes shrink, in the first quarter. Businesses in Europe are delaying investments and even those once-reliable high street, or haupt strasse, shoppers are keeping their wallets and handbags firmly shut. That does not augur well for European growth, given that consumer spending is one of the main pillar for any economy to stay healthy.

For this reason, it is not entirely unreasonable to consider investing overseas. China, for example, has been touted as a country that promises huge growth potential. The Middle Kingdom is forecast to grow at 8% a year for the next four years. It has grown at that rate for the last five years, though some experts question whether the data is really that reliable. Nevertheless, China has captured the imagination of many investors who are bound to salivate at the prospect of sweet Chinese growth at a time when their domestic investments sour.

Investing in China is, however, far from a stroll through the paddy field. The concept of "A", which are available to local residents only, and "B" shares, which are bought by both foreign & local investors respectively, is only one of the many peculiarities of the Chinese stock market. Additionally the accuracy, transparency and availability of financial information are other hurdles that investors need to overcome. Tack on some currency fluctuations and any gains that you are likely to make could easily be wiped out.

It is also worth bearing in mind, especially from recent events in the high tech sector, that high growth is usually synonymous with high risk. Bubbles are after all there for the bursting, and for this reason few investors are likely to sink their last remminbi into the Chinese stock market.

Interestingly, many UK companies already have a vested interest in the Chinese market. Vodafone Group (LSE: VOD)(NYSE: VOD) holds a 3.27% stake in China's number one cellphone company China Mobile. HSBC (LSE: HSBA)(NYSE: HBC), Europe's biggest bank also has the largest network of any foreign bank in China. Imperial Tobacco (LSE: IMT)(NYSE: ITY) is in talk to build a factory in China, where over 1.7 trillion cigarettes are reportedly smoked each year. Unilever (LSE: ULVR)(NYSE: UN) is no stranger to the Chinese market either. It's history in China dates back to 1923 through its China Soap Company founded by Lever Brothers.

These are but four examples of well-known UK companies that are already important players in China. Clearly with plenty of other international outfits peppering the FTSE 100, that's more than enough exposure to China if you are invested in an index tracker. That in my opinion is a smarter way of investing in China, and without taking on extra risks and costs.

The writer has a beneficial interest in Unilever & Vodafone Group.