Financial Planning

The Chinese economy is booming but there is still risk in investing in individual Chinese stocks. Investors want to convert the country’s growth into their gain because they recognize that China is poised to become the next economic king of the world. There are several signs that lead them to believe this is so and entice them to make an investment in the country.

The gross domestic product in China increases 10 percent each year, while the U.S. GDP grows only about 3 percent. Growth in Chinese consumer spending also far outpaces that of the U.S. The middle class in China is estimated at almost 200 million people and is anticipated to double in the near future.

In recent years, mutual funds that contain investments in this country and its neighbors have gained 17.5 percent, compared to a 5.4 percent gain in the S&P 500 during the same period. Getting a piece of this action is not as simple as buying shares of the current hot stock. In fact, information is hard to obtain when it comes to Chinese stocks. They lack coverage by analysts and their financial reports are not always accurate.

A worthwhile alternative are exchange-traded funds and mutual funds with at least 80 percent holdings in Chinese or Hong Kong-listed stocks, more of which seem to enter the market on a regular basis. The following are a list of those funds: AllianceBernstein Great China ’97 A, Columbia Newport Greater China A, Dreyfus Premier Greater China A, Eaton Vance Greater China Growth A, Fidelity China Region, Garthmore China Opportunities A, Guinness Atkinson China & Hong Kong, Matthews China, Templeton China World A, iShares FTSE/Xinhua China 25 Index, PowerShares Golden Dragon  ETF, and iShares MSCI-Hong Kong Index. Investors should review the Morningstar ratings for each of these and focus on the funds with three, four, or five stars.

Once the list of funds is narrowed down, investors should analyze the one, three and five year returns for each remaining fund. This will provide them with a general prediction of future performance. Those who are risk-averse should avoid the funds with lower than $6 billion market caps. Since this is a new undertaking for most, the amount invested should be limited at the start.

The best way to invest in China? Gold stocks, oil stocks, and natural gas stocks. Gold and energy are the foundation of long-term economic growth.