But non-Chinese companies who operate in the country offer a way in.
Chinese companies have featured strongly in the list of accounting scandals in recent months, and many investors have discovered to their cost that Chinese accounting practices can be somewhat fast and loose.
One of the biggest cases is the Toronto-quoted forestry company Sino-Forest, almost all of whose assets are in China, which stands accused of having falsified its accounts. Unfortunately, an independent fraud investigation has failed to resolve the situation, leaving the authorities with a host of unanswered questions.
Then there's Longtop Financial Technologies, which was delisted from the New York Stock Exchange last year for numerous violations covering four years' worth of accounts. The investigation hit a brick wall recently after its accountants in Shanghai refused to release any documents, claiming that this would violate Chinese state secrecy laws...
It's enough to put you off the country.
Strong economy, but…
Every time I consider investing in China, the negatives -- such as the Sino-Forest case -- put me off. Among the things that weigh against China are its lax approach to property rights, a legal system that routinely judges cases according to the parties' political connections rather than the facts, and that corruption in China appears rife.
Then there are serious corporate governance concerns, in particular the treatment of minority shareholders and the often highly opaque nature of Chinese ownership. Though, in these matters, China is a paragon of virtue compared to Russia, where minority shareholders are often openly defrauded yet the authorities do nothing about it.
So, for me, the best way to invest in China is indirectly through other companies.
Invest in China by investing outside China
One way I do so is via companies that sell a lot of stuff to China, such as the multinational mining giants BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Xstrata (LSE: XTA).
Hong Kong and Taiwanese companies and investment funds are another way into China, given the strong commercial ties between these countries and the mainland. Companies like Foxconn, the world's biggest manufacturer of electronic components, have huge Chinese interests as most of their production has been outsourced to there.
The American company that feeds China
Another way to get a piece of the Chinese action is to invest in large non-Chinese companies that operate in China.
While companies like Unilever (LSE: ULVR) do a reasonable amount of business in China, for me the pick of the bunch is America's Yum! Brands (NYSE: YUM.US). You may not know the name, but you've almost certainly heard of its fast food restaurants KFC, Pizza Hut and Taco Bell
That's because just over 50% of Yum!'s sales come from China, having grown by 34% in 2011, where the company intends to triple its number of restaurants during the next decade.
A crucial part of Yum!'s success is that the vast majority of its managers in China are Chinese, so they know the culture and how to do business the Chinese way. And since Yum! is a $30 billion company, I reckon that it has sufficient political clout to cope with the vagaries of the Chinese legal system.
A few numbers
The problem for prospective investors is that Yum!'s shares are quite expensive. They're $64.44 as I type this, close to their all-time high, so with earnings per share for 2011 of $2.87 (up 14%), this put them a historic price-to-earnings (P/E) ratio of 22.5 where they yield 1.5% net of US withholding tax.
That said, Yum! has been on a very high P/E ratio for many years (I've owned shares for quite some time and can't remember them ever being 'cheap') and it keeps on delivering the goods for its shareholders. Furthermore, given the popularity of KFC in China, I don't see things slowing down there until the mid-2020s at the earliest.
Yum! also sees plenty of scope for growth in many other developing markets. It's just started a major expansion programme in India, where it expects to quadruple its number of outlets in the next three to four years. Yum! is also doing rather well in Russia, but that's another story!
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> Tony owns shares in BHP Billiton, Unilever and Yum! Brands. The Motley Fool owns shares in BHP Billiton and Unilever.
