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The Associated Press

China's biggest stock market hit a three-year low on Tuesday, raising the question of why investors continue to lose money in a country that's growing so rapidly. The Shanghai Stock Exchange composite index fell below 2,000 points on Tuesday for the first time since 2009, despite an economy that is expanding at roughly four times the rate of Canada and the United States.

To make the contrast even more stark, the market's slide to a close of 1,991 coincided with the release of a report by the Organization for Economic Co-operation and Development that projects strong growth for China's economy over the next two years. Yet despite the bright forecasts, investors who have piled into China over the past few years have met one disappointment after another. The Shanghai index has lost 9.5 per cent this year and is far below the 3,471 level it reached in early 2009.

Analysts say the discouraging results reflect the fact that the Shanghai market is largely driven by locals unaccustomed to investing, rather than by large global institutions, such as pension funds and mutual funds, that have poured money into other emerging markets.

Only a tiny slice of the shares trading on the market are easily open to foreign investors, though it's attractively cheap, with a price-to-earnings ratio of 11. These so-called B-shares trade in U.S. dollars, though many investors find it easier to invest in Chinese companies that are listed on Hong Kong's Hang Seng index.

More than 99.5 per cent of the Shanghai bourse's market capitalization comes from A-shares. These can be purchased by a few qualified foreign institutional investors but are largely the province of domestic investors, most of whom have limited experience in equity markets.

"Investors who are [in China] are all very new," says Drummond Brodeur, global investment strategist with CI Investments Signature Global Advisors. "You don't have large institutional pools of capital invested in the market."

Mr. Brodeur says middle-class Chinese view stocks as an unstable, "Wild West" asset class, and prefer to put their savings into property and savings accounts.

There are good reasons for their skepticism. Part of Chinese investors' caution is blowback from the days of 2006 and 2007, when the market shot up 500 per cent to more than 6,000 points as investors poured their capital into the burgeoning economy. A year later, the Shanghai index had plunged to 1,700 points.

Nick Chamie, global head of emerging markets with RBC Dominion Securities, says Chinese investors are still dealing with "the bursting of the ridiculous mania that took place" during Shanghai's bubble. As the hype built, everyone who had cash to spend jumped into the equities market hoping for big returns, only to pull out in 2008 as the world was hit by the recession.

Mr. Brodeur says the wild swing has made domestic investors skittish despite the country's vast potential. The OECD projects China's GDP will grow 7.5 per cent this year – a modest number by China's standards, but far ahead of most other countries. The report projects growth of 8.5 per cent in 2013 and 8.9 per cent in 2014. Canadian investors looking for a low-cost taste of this economic growth without dipping into Shanghai's volatility should look at broad-based, indirect options, such as the Hang Seng composite index, which lists many Chinese companies.

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