The Easy Way To Invest In China That Most Investors Don’t realise

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Visiting a Chinese iron and steel plant

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In my previous blog, I’ve touched on how China’s latest Five-Year Plan is focusing on growing the domestic economy with a focus on harmony. A lot of the foreign investments and the large capital inflows into the Chinese market have all been focused primarily on tapping into one of the world’s largest consumer markets.However, what many are missing is that China is the world’s fifth largest investor in terms of outbound direct investment at about US$56.5 billion in 2009.[1]

Last December, China announced US$16 billion in deals in India and early this year, top Chinese officials reiterated their support for European debt by pledging to purchase as much as 6 billion Euro worth of Spanish government bonds.China’s support for the European economy is regarded by many as a good strategy since Europe is currently China’s largest trading partner.

Exports are still essential for continued growth in China as it would need time to further develop its domestic market. The purchase of European assets is also seen as a way to diversify China’s US$2.85 trillion of foreign reserves assets which are heavily weighted towards U.S. Dollar investments, particularly U.S. Treasuries.[2]

Chinese investments in Africa had been subjected to intense media scrutiny in the past but it only accounted for 2.6% of Chinese outbound investments.[3] More than 70% of Chinese outbound investment was still within Asia in 2009 while 13% was in Latin America.[4] Recently while in Argentina, we learned that Chinese companies have begun to invest in oil and gas fields in the country. Chinese companies are also becoming important in the local telecommunications sector by supplying low cost switchgear and other equipment to the telecom companies.

One key point to note is that currently only a few per cent of these Chinese outbound investments are conducted in renminbi as a result of its capital controls. There continues to be a lot of debate around the Chinese renminbi (RMB) and the currency remains in an interesting cycle. In general, China did not want a strong currency with the fear that it would hurt its exporters. Yet this in turn attracted more investors into buying the currency with the view that it would appreciate in the future.

However, China does recognise that the appreciation of its renminbi would benefit its domestic companies investing overseas and has launched a gradual loosening of international trade in the renminbi. In January of this year, China allowed its domestic companies to invest their renminbi overseas, a positive move which would encourage its local enterprises to expand overseas and towards a more ‘internationalized’ renminbi. Hong Kong has become the venue for the Chinese government to test the idea of a freer currency.  This would enable Chinese companies and individuals to capitalise on the arbitrage in exchange rates between mainland China and Hong Kong, potentially resulting in greater volatility in the renminbi movements.

The Chinese financial markets are offering new opportunities to foreign companies beyond just investing in its companies. The world’s largest iron ore producer domiciled in Brazil began listing its shares on the Hong Kong Stock Exchange late last year to gain access to Chinese and other Asian investors. Chinese domestic investors have been looking to invest their wealth or savings in assets that could provide them with potentially higher returns, which at the moment is limited to domestic stocks or properties for most people.

The lack of investment choices have often been cited by many as one of the reasons driving speculation in stock and property prices. As noted in my previous blog on China, the liberalization of the Chinese stock markets to foreigners are, to a certain extent, still a long way to go but could yield beneficial results in the long run.

[1] Source: China Ministry of Commerce, as of September 2010.

[2]Source: IMF, WEO, as of Oct 2010.

[3] Source: China Ministry of Commerce, as of September 2010.

[4] Source: China Ministry of Commerce, as of September 2010.