How to Invest in Chinese Stocks

Chinese companies are fascinating and enormously challenging targets for American investors. This is especially true if you don't know the language or are unfamiliar with China. Investing in Chinese stocks has become easier than ever in the past. In fact, many Chinese companies have started to list stocks on American exchanges. The fact that so many transactions in China are made in the U.S. dollar further makes it easier to invest in foreign stocks.

Instructions

1. Determine your strategy. The primary choices open to you as a foreign investor are between targeting mutual funds, individual stocks listed on foreign exchanges and investing directly into Chinese stocks on their native exchanges.

   It's often quite difficult to conduct research on individual Chinese companies. As they become more savvy to the potential benefits of opening up to American investors, more are publishing information about their activities. Unfortunately, that's far from unbiased information. The Chinese press is heavily censored, but there are a few business publications that are relatively independent, such as the Chinese-language "Caijing Magazine."

2. Learn the difference between "A-Shares" and "B-Shares." Most of the best stocks in China are denominated as A-Shares. These can only be purchased by domestic residents, but B-Shares are open to foreigners. The latter generally have lower market capitalizations. Keep this in mind if you're wondering why the stocks that are available to you directly are so relatively low performance.

3. Explore the history of the company that you choose to invest in if you decide to go the B-Share route. Many companies that are listed as B-Shares were only recently privatized, and some of these are highly inefficient and have low profits.

4. Avoid purchasing shares in derivatives of Chinese stocks. Be sure that you're either going with a fund that controls many stocks directly, or make sure you are going for a stock itself. There are many investment vehicles that are just companies that have a contractual relationship with a Chinese company. Such investments will likely eat up many of your potential profits in fees, currency conversions and other irritations.

5. Track Chinese companies based on the deals that they make with American ones, particularly if you're having difficulty learning more about them. Some information is better than none at all.

6. Hedge your investments. Chinese stocks are highly risky. Counter-balance that part of your portfolio with low-risk investments like bonds, treasuries or dividend stocks. Put stop-loss orders on your investments to limit your potential losses.

Tips & Warnings

• Despite the ease, your risk tolerance had better be very high if you plan to invest in China. The Communist government, although softened in recent decades, is still not an entity that can be easily predicted.

Resources

• Chinese Mutual Funds