Jun
If you’ve frequented our blog (or come across other similar ones) then you’re probably aware that China represents one of the best investment opportunities in the world today. We’d go as far as to label China as the best opportunity for growth thus far in the 2000s.
That being stated, before jumping on the train, you should still ensure you’re making the best decision possible for yourself and/or your organization when deciding to invest in China. To help you with just that, we’ve put together this list.
These are 10 things to consider before investing in China:
10) Why Are You Investing?
This is a good general question to ask yourself before investing anywhere. By ‘why’, we mean that it’s important to create firm goals as to why you want to invest your money. This will help you down the road when it comes time to making more detailed decisions. A good analogy here is that you would want to decide how much weight you want to lose before starting a new diet. In the same sense, you want to know what your investment goals are before investing.
First, decide why you’re investing your money in the first place. Then, decide why you want to invest your money in Chinese companies.
Here are a few good questions to ask yourself when tackling the ‘why’ dimension:
● Are you investing for growth, income or both?
● How much capital do you have available to invest?
● What is your risk tolerance?
● What measures will you take to protect your money while still optimizing your reward?
● What is your time horizon?
This last one is so important that we’re actually going to break it down a little bit further.
9) What Is Your Time Horizon?
Time horizon and risk capacity are the two top questions that you’ll need to answer when making investment decisions:
● Time horizon is defined as the period of time one expects to hold an investment to reach a specific goal. The younger the investor, the longer they have to keep money invested and let it collect compound interest
● Risk capacity is defined as the amount of risk an investor must take to reach his or her investment goals. A general rule of thumb is that the greater the amount of risk you take, the higher the potential reward is. On the other hand, investments that are incredibly safe will yield smaller rewards
It’s important to note that patience is a critical part of investing. If you’re constantly putting money in and pulling it out of investments, then you can miss out on long periods of sustained growth. This is particularly true for an opportunity such as China.
China has been growing consistently since 1979 and is projected to become the world’s largest economy by 2030. Please understand that it may take a few years to realize your gains and have the patience it takes to ensure that your investment will pay off.
8) In What Capacity Do You Want to Invest?
We believe there are a few different ways to capitalize on the growth presented by China. First, you can invest in U.S. companies that already have a good footing in the Chinese business-scape and benefit from their growth. In this way, you’ll be indirectly benefiting from the growth of the Chinese economy through U.S. companies.
A few examples of American companies popular in China are:
The second manner in which you can invest in China is probably the first one that you thought of. This is by just simply buying stock in Chinese companies. This method of investing in China is relatively straightforward. You can either identify Chinese companies that are listed on U.S. exchanges or try to find a brokerage company that allows you to invest internationally.
Last but not least, you can open a physical business in China. This option is by far the most involved one but also has the potential to generate the highest return. If this is something that you’re actively considering, we’d recommend reaching out.
7) Have You Examined the Risks and Rewards?
Before making decisions in any capacity on whether or not you should invest in China, it’s important to make sure that you’re measuring the risks and rewards involved. This is a good practice before making an investment anywhere. First, let’s take a look at some of the stronger rewards associated with investing in China:
● Strong economic growth – This is a hallmark of China today. The Chinese economy has been growing consistently for the better part of the last 40 years. They also have the world’s largest population (at 1.4 billion people) which presents a massive opportunity for companies
● Rising status on the world stage – To complement their growth, China has been rising on the world stage. They also hold a significant amount of U.S. debt and are a decade or so away from becoming the largest economy in the world. This means that they will become even more influential in global politics
Now let’s take a look at some of the risks involved with investing in China:
● Predictability – The Chinese government has proven to be less predictable than democratic governments. They are also much less transparent and numbers they release often come under scrutiny
● Social instability – Although there are reports that the middle class is growing stronger, China’s richest citizens still pull in almost 25x more than its least wealthy. This could lead to social instability within the country
● Changing demographics – A lot of China’s success has been built on the backs of a cheap and young workforce. However, those demographic trends might be changing due to its aging population
6) Make Sure You Understand Chinese Accounting Principles
Due to the fact that China just recently embraced a market-driven economy, its accounting principles are not as developed as those of other nations. In fact, up until the early 2000s, their accounting was still based on a socialist model. A few of the major differences between Chinese accounting and international models are:
- Valuation methods for fixed assets
- Detailed rules in the CAS
- Delayed implementation of the IFRS
To read about them in greater detail, click here.
5) You’ll Be Dealing With a Communist Country
On this same note, it’s important to remember that you will be dealing with a Communist country. This isn’t as bad as it may seem, you’ll just need to be cognizant of some of the differences between doing business in China versus a country like the United States.
This mostly means that the government has much more control over what they can ask businesses to do for them. This will be a bigger issue if you’re looking to start a physical business in China but can also impact your investments in other ways. For example, you never know when the Chinese government might ask a tech company to violate the digital privacy rights of their users.
4) You Can Invest in Chinese Growth Indirectly, Through American Companies
As mentioned previously, one way to invest in China is to do it indirectly through American companies which are already in a solid position. Instead of buying stock in Chinese companies, you’d buy stock in American companies which either already have a large presence in China or are looking to expand there. If this sounds like a route you’d like to explore, these companies represent good places to start:
● Yum Brands (KFC)
● Starbucks
● Walmart
● Nike
● Boeing
● Apple
● Coke
NOTE: Apart from Apple, we’d recommend staying away from any tech companies at this point in time.
3) You Can Invest in China Through Mutual Funds
Another way that you can get started investing in China is through mutual funds or ETFs. A mutual fund is just a collection of securities or stocks. In this sense, other people have already decided which Chinese companies to invest in for you and then you’re able to just invest in their fund so as to generate the same return. A few of the most popular Chinese funds are:
● iShares China Large-Cap ETF
● iShares MSCI China Index Fund
● SPDR S&P China ETF
This method is also a little bit easier than trying to invest in these companies yourself (since this may require an international brokerage account). Additionally, many money managers that offer China-centric funds have analysts in China who visit and vet companies before investing in them. This takes out a lot of the guesswork for you.
2) Beware of Currency Risk
If this is your first time investing in a foreign country, then you’ll need to remember to be wary of currency risk.
Currency risk is the risk of losing money to due unfavorable moves in exchange rates between two different currencies.
If you invest in a mutual fund or ETF then the fund most likely already hedges their yuan (or renminbi) exposure back to the U.S. dollar (which will reduce your risk). However, if you’re investing on your own, then currency risk is a good topic to research before you start.
1) China Is the Epicenter of the Coronavirus
We’re sure that by this point, the coronavirus is not exactly news to you. However, it’s worth repeating that China is different than other countries because the virus is widely believed to have originated in Wuhan, China. This means that China is the global epicenter of the virus.
Although it appears as though they’ve done a good job of containing the virus, there is always the risk of a second wave. If this happens, it will have lasting repercussions of the Chinese economy and could throw them back into a recession.
We hope that you’ve found this article valuable when it comes to understanding a few things to consider before investing in China. If you’re interested in reading more, please visit our “New Here” section or, of course, get in touch with us directly through the Contact page of ChinaFund.com.