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Is China a Stock Goldmine?

Olympics fever hits China--should your investments follow?

China's economy is growing like gangbusters, its stock market has been hotter than hot, and the 2008 Olympics in Beijing will showcase its ability to put on a world-class show. But the planet's most populous country also has world-class pollution and a poor record on human rights, freedom of expression and bureaucratic fraud. So, is it time to dive pell-mell into the Chinese investment pool, dip in your toes just a little or steer clear altogether?

Eugene Sit, chairman and chief investment officer of Sit Investment Associates, says he plans to be in Beijing for the Olympics. He believes there are signs of an investment bubble that could spell trouble in the short term but says that over time, it makes a lot of sense to hold stocks with Chinese exposure. "Near term, the country is overheating," he says, "but fundamentally, economically and currencywise, all these things suggest that China should continue to do well past the '08 Olympics." Economic growth could slow from 11 percent a year to 8 percent or 9 percent, Sit says, but that's still torrid by most standards. The trick is to figure out how to tap into that growth.

It's worth noting that Chinese stocks aren't the same as their U.S. counterparts. The government owns at least a portion of most companies listed on the dominant Shanghai Stock Exchange, and its standards for financial reporting and accounting are below those in the West. Some Shanghai shares trade in the U.S. through American depositary receipts on the Nasdaq exchange, but given their limitations, it's probably not the best way for stateside investors to play the game. Vanguard Emerging Markets Stock ETF (which recently reported that 11.5 percent of its holdings are Chinese) and iShares MSCI Emerging Markets Index Fund (12 percent in Chinese holdings) are both top-notch exchange-traded funds, which can be good access points for dabbling in places such as China. Funds like Matthews China Fund are good alternatives if you prefer a more China-specific focus or don't want an ETF.

Generally, Chinese exposure should never be more than 5 percent of your portfolio. But if you do decide to dabble in individual Chinese ADRs, Sit recommends concentrating on "consumption companies" with business models in China, such as China Life Insurance Co. and China Mobile Ltd., rather than on manufacturers or exporters. Another (safer) in: China's bleak environmental and health record. China must clean up as its economy evolves, and U.S. firms such as ITT Corp. and Perkin-Elmer Inc. already have a foot in the door.

Scott Bernard Nelson is a newspaper editor and freelance writer in Portland, Oregon.

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This article was originally published in the November 2007 print edition of Entrepreneur with the headline: Five-Ring Circus.

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