While China is most definitely one of the top places to be as an investor and while most of the articles you can find on ChinaFund.com make it clear why as well as how to maximize results, it is worth nothing that there are challenges you need to be aware of if you are thinking about investing in China. Some obvious, others less so.
In no specific order, here they are five of the most important ones:
- Culture, language and everything in-between. Those of us who live in the proverbial West make the mistake of assuming that everyone sees the world through our glasses. Nothing could be farther from the truth, with the West actually being… well, outnumbered. Let’s just say that if culture were to be chosen democratically, we would be living in an Indo-Chinese world due to sheer arithmetic. If you think you can simply extrapolate and apply the same rules/principles you’ve learned to internalize in your own country over in China, you will be in for a rude awakening. If you are not willing to at the very least have a firm grasp on the basic cultural differences between China and your country, you are better off staying away. Fortunately, as many more ChinaFund.com articles will prove, mastering the basics is not as difficult as you might believe
- Legislative and administrative volatility. Don’t be shocked to come across “X has been banned in China”-type headlines, headlines sometimes related to aspects you have a vested interest in. While China is working on becoming more transparent and predictable from a legislative and administrative perspective, it’s not quite there yet. As such, if you’re not planning for volatility at higher “doses” than what you find with Western nations… well, you should be
- Impressive track records being sometimes hard to come by. While it is great to discuss the many opportunities that are unexplored in China and the returns that are to be had by those who fill the various voids that exist, we need to just as thoroughly look at the other side of the coin. The fact that a lot of services/industries that are considered status quo in the West either don’t exist in China or they do exist but their track record doesn’t really say much in light of how new they are. When blazing trails, don’t be shocked if you sometimes stumble
- China assets being primarily perceived as risk-on. In other words, people love investing in China when the worldwide economy is in good shape or when they believe the worldwide economy is in good shape. However, whenever there’s a downturn, investors are more likely to liquidate Chinese assets than they are to sell their let’s say US Treasuries. Therefore, in the event of an exogenous shock such as a global financial crisis, don’t be surprised if industries that have better fundamentals in China than in the United States for example end up being hit harder. For the time being, the United States is considered the safe haven of last resort, followed by other nations such as Germany. In this equation, China is not yet perceived in a similar manner, which can pose problems when it comes to certain scenarios even if China is in no way at fault in those instances
- Occasional “pump and dump” mentality, prevalent in many industries within China or external industries with a significant involvement of Chinese investors. Perhaps as a result of the fact that the average Chinese investor is less experienced than his or her Western counterparts, maybe due to other reasons. The bottom line is that even more so than Western investors (who are not saints in this regard either), euphoria as well as fear tend to come in greater doses when it comes to China. Think of it as the business cycle on steroids
… depending on your preferences as an investor, one or more of these challenges might be deal-breakers. Those who accept these challenges, do their best to minimize their negative impact and properly include them in their risk assessment system will, however, be in a very good position to generate life-altering returns through investments related to China.