Investing in China – What You Should Know

China has over 1.3 billion people, all of whom maintain low levels of debt. With a strong middle class that is only growing each year, the Chinese economy is becoming important to the Western world, especially to investors. Investing in China is becoming more and more popular as people and companies are looking outward for potential growth opportunities, but how can you cut down on your portfolio risk while investing in American Depositary Receipts from foreign countries like China? Ask yourself first if the ADR is from an industry leader. You may be surprised to find familiar companies like Apple doing quite well in the Chinese market.

Does the company use major global accounting firms like Ernst & Young or KPMG? Are big investment funds sponsoring them or do they have venture capital funds backing them? Are there plenty of Americans on the board? Knowing the answers to these questions can help cut down on the risks that come with poor auditing, lack of support, and other red flags that could put your portfolio at risk. The good thing is that there are plenty of options to choose from.

As of 2011, there are more than 300 companies in China with market caps all totaling $900 billion, almost all of which are available in the major American stock exchanges. It’s almost impossible for personal investors to verify the authenticity of a Chinese company’s claim of being an industry leader in China, but anyone familiar with China may have an easier time recognizing major businesses. It’s also good to know if big chunks of the company’s equity are owned by internal management. This would indicate that it is a suitable investment. Having Americans on the board of directors is a bonus because it suggests that the Chinese company is concerned about gaining foreign insight.

Investing in China now can prove to be an incredible opportunity. The economy is on the rise and China’s growth as a country is expected to remain strong. Looking for highly-recognizable companies to invest in like Apple may be a good start, but certainly plenty of other opportunities exist in this flourishing market. Unlike in America, the Chinese middle class still seem to consume products at higher rates, even during slow economic growth and recession levels, making it one of the most robust middle classes in the world. That is certainly something that any American investor would want to take advantage of.

About Richard Wilson