"The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly." - Warren Buffett
China is one of the fastest growing emerging markets in the world. After posting high single-digit growth over the past two decades, the country is expected to surpass the United States and become the world's largest economy over the next few years. And with its enormous population, the country's economic growth isn't expected to slow down anytime soon.
But China's stock markets have been a different story. The Shanghai Composite fell nearly 15% in 2010, making it one of the worst-performing markets in the world. The government's actions to slow down growth by raising interest rates and reserve requirements have proven very bearish. So, should you follow Warren Buffett's advice and invest in this popular emerging market?
An Overview of China's Economy
China has historically been one of the world's leading powers. But civil unrest, famines and military defeats caused it to stagnate in the 19th and early 20th centuries. It wasn't until 1978, when Deng Xiaoping took power, that the country focused on market-orientated economic development and began its comeback.
Today, China's economy is best-known for its manufacturing sector, which surpassed the United States as the largest in the world in 2010-2011. While the communist country maintains many state-owned enterprises, its free market policies have encouraged a large amount of foreign investment. Now, the country is challenged with a transition to a more sustainable consumer-driven economy.
The country's 2010 economic statistics included:
- Gross Domestic Product (PPP): $10.08 Trillion
- GDP Real Growth Rate: 10.46%
- GDP per Capita: $7,518
- Unemployment Rate: 4.2%
- Inflation Rate (CPI): 4.9%
The Benefits and Risks of Investing in China
China's economy may have a solid track record of success, but its stock market has been a different story. The government's efforts to contain growth led the Shanghai Composite to fall nearly 15% in 2010, making it one of the worst performers in the world. As a result, international investors should be cognizant of the benefits and risks before investing in China.
The benefits of investing in China include:
- Strong Economic Growth. China has reported high single-digit economic growth over the past two decades, making it the fastest growing major economy in the world.
- Rising Global Status. China holds a significant amount of U.S. debt and is poised to become the largest economy in the world, giving it growing sway in global politics.
The risks of investing in China include:
- Less Predictable. China has a government that has proven less predictable than democratic governments like the U.S. or E.U. members.
- Social Instability. China's richest residents pull in up to 25x more than its bottom residence, which could create social instability or rapid capital outflows.
- Changing Demographics. China's economic success has been due to a cheap and young workforce, but those demographics could be changing with its aging population.
The Best Ways to Invest in China
There are many different ways to invest in China, ranging from U.S.-listed exchange-traded funds (ETFs) to securities listed on its two domestic exchanges. ETFs offer the easiest way to gain exposure without worrying about legal and tax implications. Meanwhile, American Depository Receipts (ADRs) offer exposure to individual companies operating within the country.
Popular Chinese ETFs include:
- iShares FTSE China 25 Index Fund (NYSE: FXI)
- iShares MSCI China Index Fund (NYSE: MCHI)
- SPDR S&P China ETF (NYSE: GXC)
- Guggenhiem China All-Cap Fund (NYSE: YAO)
- Guggenhiem China Small Cap ETF (NYSE: HAO)
Popular China ADRs include:
- PetroChina Company Limited (NYSE: PTR)
- Baidu.com Inc. (NASDAQ: BIDU)
- New Oriental Education & Technology Group Inc. (NYSE: EDU)
- Spreadtrum Communications Inc. (NASDAQ: SPRD)
- China Mobile Ltd. (NYSE: CHL)
Key Takeaway Points
- China is the largest and most influential emerging market in the world, and it is poised to surpass the U.S. to become the largest economy in the world.
- The easiest way to invest in China is using ETFs, but investors looking for more direct exposure can also look at ADRs or foreign stocks.