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For an emerging market, China has a huge impact on global fortunes. The nearly 9 percent plunge in Chinese stocks on Feb. 27 set off a worldwide sell-off in markets from Europe to Japan to the United States. The Dow's 416-point drop, for instance, was its biggest decline since Sept. 17, 2001, the first trading day after the September 11 attacks. China (and the rest of the world) bounced back after the state-run media reported that Beijing might allow greater foreign investment. China is already a vital market for Western corporations like General Motors, Wal-Mart and Google, and it's attracting the interest of adventurous individuals, too.
Although the potential for profits is vast, regulations and cultural differences can be daunting. To explain those complexities, NEWSWEEK asked three experts to provide tips for investing in the People's Republic of China. William Kirsch, a partner at Paul Hastings, an international law firm, represents foreign institutional investors working in China; James Dorn is a China expert at the Cato Institute, and John Frisbie is president of the U.S.-China Business Council. Here's excerpts of what they had to say:
NEWSWEEK: Why all this talk about foreign investment in China right now?
William Kirsch: China's economy has been growing steadily and robustly for more than 20 years. Investors are finding it difficult to resist an economy that has 1.3 billion people, has increased its GDP 10-fold since 1978 and has a GDP growth in 2006 of roughly 12 percent. That kind of growth rate is expected to continue, and that's why people are interested.
What's the potential for investment?
The potential is strong. There have been a number of companies who have invested in China to date that have been very successful, and recently, private equity shops have been opening up in China, too.
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To what extent can outsiders buy into the Chinese market?
There are Chinese companies and Chinese businesses that are listed on the London exchange, the New York exchange and the NASDAQ exchange. For example, China Life is listed on the New York Stock Exchange and is a Chinese company. Some of [these companies] may have a red-chip structure, where the company that lists shares is actually an offshore holding company. You can certainly buy shares of red-chip companies or H-shares of Chinese companies listed on the Hong Kong exchange. In terms of buying shares on the Shanghai stock exchange, foreigners may either buy B-shares, or if the foreigner has qualified for an institutional-investor license, can trade A-shares within the quota granted on the government.
Are the Chinese stocks listed on exchanges like Hong Kong completely open?
The Hong Kong exchange is an international exchange and is open, but the other two Chinese exchanges—Shanghai and Shenzhen—are not. Those two are for Chinese companies looking to trade their stocks domestically.
OK, so let's say I want to invest. Where do I begin?
You can talk to a financial adviser or you can just pick a mutual fund, like Fidelity or Vanguard. Those would give you the best access to Chinese companies.
What are the risks of investing in China?
James Dorn: China's stock markets are more like casinos than sound financial markets. Most of the enterprises that list are state-owned, [and] many of the shares are nontradable. So the markets are very thin and volatile. Until about one year ago, Chinese stock markets were performing poorly, but last year there was a large increase in value.
How would you characterize the recent stock-market volatility?
[The] 9 percent drop in the Shanghai composite index reflects the casinolike behavior of domestic investors. Anyone who invests in Chinese markets should be aware of the substantial risk.
Where are we seeing the majority of foreign entrepreneurs invest?
Kirsch: Entrepreneurs are investing in China in different sectors—telecommunications, manufacturing [et cetera].
What about real estate? That's a big one for foreign companies, right?
Yes, it's huge. In roughly 22 months, the amount of commercial space developed in China is equivalent to the amount of commercial space in all of Manhattan. That investment is coming from all international sources, as well as local sources.
What are the regulatory hurdles companies might face?
In order to invest in China you need to comply with a number of legal rules. You need MOFCOM [Ministry of Commerce of the People's Republic of China] approval for foreign investment, and you need various local—and in some cases, central—government approvals. You also have to register with the state administration of foreign exchange. But the kind of investment [you choose] will trigger the kind of filing or disclosure that's required and the kind of approval that's required.
What's your best advice for potential investors?
John Frisbie: Due diligence is critical. Like any foreign country, there will be some unique practices, but there is now enough experience out there that a company new to the market can hire advisory and legal help to get over this hurdle. Ultimately, the best advice is to use the same good sense as anywhere else—if it doesn't make good business sense in Seattle, it probably doesn't make good business sense in Shanghai.
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