Investing in China

China holds a host of investment possibilities. If you're thinking of making the leap, here are some smart ways to get started.
Magazine Contributor
2 min read

This story appears in the February 2006 issue of Entrepreneur. Subscribe »

If you still think of China as a third-world economy, think again. It's a country of 1.3 billion people who are increasingly well-educated and worldly, and who are preparing to compete at the high end of the business world. Name an industry, and there's a good chance the Chinese will soon be battling for a piece of that pie. And the biggest population in the world holds a certain allure for companies from around the globe who'd like to get behind the still-Communist walls.

The problem for investors--and for companies that want a piece of China--is that the business landscape is still littered with landmines. The fact that businesses operate under the thumb of China's government should give pause. It's easier to track a company's financial results than its adroitness at keeping Communist bureaucrats satisfied. The calculus remains complicated, at best.

Mutual funds or exchange-traded funds with exposure to China remain the best bets. Even these are risky and should make up only a small portion of a well-balanced portfolio. They've also experienced a strong run in recent years, which means it may be too late to turn to them for a quick buck. But as a longer-term side bet, they're worth a look.

An exchange-traded fund, or ETF, is a basket of stocks--like a mutual fund--that trades throughout the day on an exchange. You buy and sell it through a broker, which means you pay a commission each time. The advantage is lower expense ratios and the ability to buy or sell during the day. A little searching will unearth ETFs focused exclusively on Chinese stock indexes. Ideally, find one with an expense ratio below 1 percent, such as FTSE/Xinhua China Index Fund, which has a 0.74 percent expense ratio.

With mutual funds, you're more likely to find an emerging-markets fund with a strong Chinese flavor. Look for one with an experienced manager, holdings in China and an expense ratio that won't send you to the poorhouse. For those who like to put their money into the markets in small amounts, mutual funds tend to be a better option than ETFs because they save you the commission. Expenses tend to run from 2 percent to 2.5 percent.

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

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