How to get a direct taste of investing in China

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China may be racing to become the world's largest economy, but investors hoping to join for the ride should be careful how they hop on.

At first glance, China's growth looks like a can't-miss opportunity. The Shanghai Stock Exchange composite index is up nearly 20 per cent in the past three months. According to Bloomberg, economists project the Asian juggernaut will expand 8.2 per cent in 2013, better than last year. And many, including the U.S. Director of National Intelligence, project it will be the largest economy on the planet before 2030.

But China's rise won't be an easy ride. Not only will this year's gross domestic product most likely fall short of the 12- to 14-per-cent growth of years past, but the country's young stock markets and hesitation among domestic investors make China a very complicated place to put your money.

Investing in China is a worthwhile venture, as long as it's done with caution. That means understanding the dynamics of how its markets work, how its domestic investors behave and where to find the safest opportunities for foreign investors.

As the country continues to position itself as the dominant emerging economy, "Investors are going to increasingly have to get closer and closer to direct investment in China," says Drummond Brodeur, global investment strategist with CI Investments Signature Global Advisors.

Wild West investing climate

The country raised its foreign investment limits last December in a bid to lure more institutional investments and boost its stock markets. But that doesn't mean one should create a whole portfolio of Chinese stocks. It's a "Wild West" investing environment in China, Mr. Brodeur explains, because of the relatively short time the country has been operating stock markets (since the early 1990s).

Excluding the exchange in the relatively independent Hong Kong, China's stock markets are largely volatile and domestic-owned. Foreign investors have access to less than 1 per cent of shares in China, while Chinese investors remain wary after a 500-per-cent bubble burst in the middle of the past decade.

"There's not a huge institutional foundation under the market, or even historical retail communities underpinning the market," Mr. Brodeur says.

The short history should keep investors wary. "Wild swings are to be expected," says Nick Chamie, global head of emerging markets research at RBC Dominion Securities.

CSI training for Chinese

However, Canada is leading the way in improving China's investment environment. Since 2003, the Canadian Securities Institute (CSI) has provided training to senior managers and executives in Chinese banks and securities firms in areas such as wealth management, financial planning and investment banking.

The two- to six-week training programs, which take place either in Toronto or on site in China, convey best Canadian practices but don't propose copying Canadian systems of doing business.

"They want to know lessons to learn from, what mistakes to avoid," says Anthony Sue-A-Quan, a CSI vice-president who heads its China market division. "They're going to follow a much different evolution than our history."

Because it's now the leading international trainer for the Chinese securities industry, Canada and its investors are in a unique position when it comes to China's growth, as financial services firms between the two countries develop partnerships.

"In China, the way they do business, relationships are paramount," Mr. Sue-A-Quan says. "There isn't any other firm in the world that has developed the relationships that we have."

These relationships mean opportunities for investors, Mr. Sue-A-Quan says, as executives and senior managers return to China and encourage further partnerships, bringing growing companies closer to Canada, possibly to even list on the Toronto Stock Exchange.

Investors used to be able to play on China's growth by buying into Canada's resource sector, which has been an enormous beneficiary of the country's exploding economy; in February, it became our second-biggest trade partner, overshadowing Britain. But as it grows and urbanizes, China's economy is becoming increasingly driven by domestic demand and the service industry.

Hong Kong option

One way to get a direct taste of China while avoiding so many wild swings is through the Hong Kong Stock Exchange, whose "H-share" market is far more open to foreign investors. Comprised largely of big banks and state-owned enterprises, it's "a more relevant indicator of perception about the economy and expected growth," says Matt Strauss, an emerging market strategist and colleague of Mr. Brodeur.

But investing in a composite index such as the MSCI China Index, which is tracked by an iShares exchange-traded fund listed in the United States, is a safer way to tap into Chinese growth.

For the best success, getting into "Wild West" China without risking hard-earned dollars is best done with the help of a professional familiar with the ebbs and flows of the emerging market.

"You want to have professional help when you're going into China," Mr. Brodeur says. "It's not a 'buy the index and forget about it' [situation.] It's a matter of trying to select long-term winners, and those with strong corporate governance."