Investment Strategies to Exploit Economic Growth in China
16 Pages Posted: 4 Nov 2010
Date Written: Winter 2005-2006
Since the beginning of economic reforms two decades ago, the economy in China has produced real growth rates of between 8 percent and 10 percent per year. We believe that China will continue to experience exceptional growth for decades to come at rates well above those of any other large country in the world. In this paper we first show why China will enjoy growth rates of economic activity well above those in the developed world. But economic growth does not necessarily translate into high-security returns. Indeed, returns from investments in Chinese equities have been unattractive for the past decade, and corruption and corporate-governance issues, as well as a variety of restrictions, make direct investment in Chinese opportunities difficult. But we also will show that Chinese equities now are attractively priced relative to their earnings, their historical valuations, and their growth rates and that some risks have been attenuated over time. We then will proceed to examine the potential rewards and risks of the various indirect methods U.S. investors can use to access the Chinese market. For example, we will examine the lower-risk strategies of investing in companies not necessarily domiciled in China but that sell to or service Chinese consumers and producers and thus can profit from the rapid future growth of the Chinese economy. We conclude that a mixed strategy involving both direct and indirect methods of investing in China’s future is likely to provide the best risk/reward trade-off for investors.
JEL Classification: G10, G11, G15
Suggested Citation: Suggested Citation