China hinted last week that it is now willing to allow its currency to appreciate in value against other world currencies and, most relevantly, the US dollar.
Precisely what it meant was unclear, but that didn't stop the world's stock markets rallying on the news. Nevertheless, China can expect to be pinned down to something more specific at this weekend's G20 summit in Toronto. A knowing nudge and a wily wink are unlikely to satisfy the G20 leaders.
By seeing the value of the yuan rise, the Chinese government hopes to keep its inflation in check by cutting the cost of imported raw materials. It will also calm the tempers of some in the US Congress who have for years complained that the low value of the yuan has kept Chinese manufacturing goods at an artificially low price, costing American jobs.
A stronger yuan would also increase the purchasing power of the Chinese, which would help reinflate embattled global economies. For that reason, investors should try to have some exposure to China in their share portfolios.
Investing in China need not be difficult. Just investing in companies such as Vodafone and HSBC will give you some exposure; both firms have stakes in Chinese firms. So you are already indirectly investing in China if you have an index tracker that tracks the FTSE100, or even a pension.
Investors who prefer to have greater control over their Chinese investments can soon do so through Exchange Traded Funds such as the iShare FTSE/Xinhua China 25. This ETF, which invests in "red chips" and "H" shares listed on the Hong Kong Stock Exchange, can be traded inexpensively, just like ordinary shares. This makes them ideal for private investors. They can also be included in your Share ISA or Self-Invested Personal Pension, which will shelter any investment gains from tax.
You can also invest in the large number of Chinese firms listed on the London Stock Exchange's AIM. There are around 50 such companies, with a combined market capitalisation of £4.5bn. The range of companies is vast. Central China Goldfields, for example, started as a gold and copper company, with a Chinese focus. It has now turned its attention to other parts of Asia. It has yet to strike gold and register a profit, though. However, China Wonder does make money. It makes and sells packaging machines for the Chinese confectionery and pharmaceutical industries. Last year, it reported a profit of £600,000, which values the £2m outfit at around three times historic profits.
Another firm, Asian Citrus Holdings, is not only the largest orange plantation owner in China, but one of the largest Chinese companies traded on AIM. It pays a small dividend, and yields 1.4 per cent. The payout has risen steadily since 2006 and may reflect the little-known soft spot that Chinese managers have for raising dividends. Often, instead of an aggressive pursuit of growth, they prefer to return cash to investors because it is seen as proof of success.
David Kuo is director of financial website fool.co.ukReuse content