Forex

These days, we have been fed an unvarying diet of how China, with its sustained economic growth and burgeoning trade surplus, is a prime, don't-miss investment destination. Yet, there is little objective information available specifically for the small investor wishing to try his hand in the thriving China markets. Thus a well-researched guide, the effort of a collaboration of an American economist, a US-educated, Beijing-based Chinese finance professor, an American writer, and a Chinese fund manager, that educates and advises the layperson looking to invest in Chinese markets, is not only welcome, it is timely indeed.

There is a curtain-raiser of Chinese political and economic history, which segues into a laudatory but somewhat hackneyed account of China's present economic and civic accomplishments. The history lesson isn't over yet, continuing into the chapter on the stock markets, but thankfully it is only a brief outline. The ways and peculiarities of the Chinese equities markets are well laid out, along with an analysis of the advantages, present problems and future outlook. On to the strategies, one finds a treasure trove of tips and information that may have been previously available only to finance professionals. Two highlights are investment in commodities and real estate packaged securities.

The Chinese demand for raw materials as manufacturing and construction inputs has contributed to the price increases for raw material commodities. This demand is not only a reflection of demand for Chinese goods, but also domestic demand for more consumer goods, cars, public transport, housing and other infrastructure. Consequently, the commodity prices for copper, aluminum, wheat, corn, cotton, and timber have hit new heights. Investment instruments that rise in sync with commodity prices (which will continue to rise as long as there is sustained demand fueled by healthy economic growth) are an excellent strategy, due to low volatility and their recent tendency to move oppositely to equities, thus adding useful diversification to one's portfolio.

As China races to build up every inch of land in order to house the increasing middle and upper classes, as well as expand upon infrastructure for the coming Olympics and 2010 World Expo in Shanghai, partaking of the real estate boom looks more tempting than ever. This can be achieved through real estate investment trusts (REITs) which manage property stakes for trading in the stock market. REITs are high-risk, high-reward but also have high income yield and longevity, due to increasingly high demand for this particular instrument.

While it is important to have some Chinese investment strategies in one's portfolio in order to enjoy the returns of diversification, some degree of risk is inevitable. The authors are not shy about admitting that China is a risky destination, and they provide anecdotes galore to that effect. From corruption in trading and price manipulation to the lack of transparency in corporate financial statements to the visible and heavy hand of the state on the markets, the extent of risk leads to high volatility in the stock markets, and that has been the case over the last seven years. In order to minimise risk and have some reward too, the strategy is to diversify broadly by buying mutual funds rather than individual stocks, commit one's investments slowly and gradually over time, not paying too much for investment brokerage and fund management costs, and using both direct and indirect investment vehicles. Non-Chinese nationals wishing to strike it on their own should note they can buy only restricted classes of equities, which may not include the best-performing stocks. In fact one of the best strategies put forth — buying discounted closed-end Chinese funds near maturity — is open only to locals and international investors satisfying certain requirements, so it is better to hitch one's wagon to a large financial institution with local rights.

It is not often that one comes across a guide to investment strategies whose insights are clear and accessible to all, regardless of financial background. It is even rarer that experts from both sides of the equation — the Chinese and the American — come together to produce a harmonious and yet objective tone on a tricky subject. Indeed, the first useful strategy is to begin reading this book.