China Investment Research: How to Invest in the Chinese Equity Markets

As China struggles with its transition to capitalism, its equity markets are the ultimate example of the free enterprise system’s concept of supply and demand. The country’s middle class population is larger than the total of all entire U.S. citizens, but the investing options remain limited: the number of Chinese companies publicly traded in China’s markets total less than a third the number in U.S. markets. The result is the ultimate example of the economic concept of scarcity that drives share prices on volatile Chinese markets.

For U.S. investors, this has largely been a spectator sport. As attractive as this exploding market has been, Chinese companies have traditionally been closed to outside investors. But, now, there are some ways to invest in China including Chinese a shares.

There are approximately 208 Chinese companies that are listed in the NYSE (26), Nasdaq (165), and AMEX (17) exchanges. Unfortunately, the scars from the 2006 -2008 Chinese company listing in the U.S. rush and subsequent implosion have not entirely healed. The positive outcome of that trauma is that the U.S. investing public is now seeing much higher quality companies list in the U.S. While the U.S. investor should cast a wary eye at the AMEX reverse IPO listings, China-based equities are still a good investment. China Life, China Mobile, PetroChina, and China Telecom are all examples of stable, quality investments with operations solely in China that are listed on U.S. exchanges. These companies must comply with SEC filings and regulations and most have recognizable, quality auditors - always the first box we check when researching Chinese Companies. Additionally, there are 1,400 stocks listed on the Hong Kong (Hang Seng) exchange with operations in China. These companies are not subject to the U.S. style regulations, so one must be careful, but they are open for purchase to international investors.

There are plenty of success stories according to leading China investment research firms. Take Zhongpin (HOGS), a leading food processor in China. It has been growing rapidly as an important source of pork, the meat most consumed in China. Those who invested in it have seen a 35% increase in its stock price this year as the company has reported hard-number increases in revenue and profits.

On the other hand, there have been the ones that looked good, but failed. For instance, there’s Bodisen Biotech, Inc., the largest China-based environmentally friendly bio fertilizer company that looked poised to grow, but through a series of financial failings has seen its shares drop from a high of $15 in 2006, to the current price of $0.57.

Keep in mind that the Chinese equity market has only been in existence for 20 years and the free markets have really only existed in the country for less than ten. So, you don’t go into it without some cast iron body parts. But, given the modest number of public companies for distribution to an expanding investing public bolstered by appreciating currency, China is going to become an important part of the world’s investment strategy for many years to come. The key to investing in China? Sound China company research from a respected China investment research firm.

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About the author

Zhang Zhengfeng is the author of this article on China Investment Research. Find more information about China Equity Research here.

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