Investment Insider: Investing in China is a waiting game

Ignoring the country's stock market could be an expensive mistake

Sometimes you can be in the wrong place at just the wrong time.

Consider, for example, investors who jumped into the Chinese market in 2007. That was probably the worst time to invest in Chinese equities.

At the time, the Shanghai Stock Exchange Composite Index was hovering around 6,000 points. Today, the index is a smidgen above 2,000 points, which means that investors would have lost around two-thirds of their investment.

However, early entrants into the Chinese market have not done too badly. Someone who invested in China 20 years ago, when the index was around 900 points, would have seen their investment more than double. That equates to a return of around 4 per cent a year before dividends are included.

Chinese shares do not look expensive when compared to other markets. That said, much depends on the ability of the Chinese government to move its economy from one that is heavily dependent on exports to one that will eventually be driven by consumer spending.

It should be said that many developed economies such as ours in the UK and America are predominantly consumer driven. China wants its economy to be more like those of developed economies too, because future growth should then be more predictable.

China's economy is going in the right direction and it is something that we investors should embrace. The prospect of more than one billion consumers with disposable income can significantly improve the performance of companies that are exposed to it. It is for that reason that many UK companies have already laid foundations in the Middle Kingdom. They include many London-listed businesses such as Burberry, Unilever, GlaxoSmithKline and HSBC. Investing in those companies should provide some exposure to China for most investors.

Investors looking for more exposure may want to consider Exchange Trade Funds such as the iShare FTSE/Xinhua China 25. The ETF, which invests in Hong Kong-listed Red Chips and H shares, can be easily bought and sold inexpensively like shares. They can be included in an individual savings account or self-invested personal pension, which will protect any investment gains from tax.

Meanwhile, investors with brokers connected to overseas markets could also look at the many Chinese companies quoted on the Hong Kong, Singapore and US exchanges.

It is hard to ignore the growing band of Chinese consumers. They have already propelled Lenovo into becoming the biggest computer maker in the world.

Elsewhere, BYD, which counts Warren Buffett as one of its investors, has pushed its electric vehicles into the West Coast of America. In the meantime, Chinese carmaker Geely owns the London taxi manufacturer Manganese Bronze.

A question mark still hangs over the ability of the Chinese government to restructure its economy. According to the World Bank, household consumption in China accounts for only a third of its economy a present. By comparison consumers account for around two-thirds of the US economy.

But if China can shift the balance of its economy successfully, then ignoring its stock market could be an expensive mistake.

It will take time for China to make the transition, but investing in China is a waiting game.

David Kuo is director of fool.co.uk

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