The Ultimate Guide to Investing in China

Man looking out over cityscape of financial district in China

Oscar Wong / Getty Images

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, China'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 25% in 2015, making it one of the worst-performing markets in the world. 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 creating economic growth through the market, 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. While the communist country maintains many state-owned enterprises, overall it has shifted to a free-market policy, which has encouraged a large amount of foreign investment. Now, China faces a new challenge: to transition to a more sustainable consumer-driven economy.

There a many ways to measure the health of a nation's economy, with gross domestic product (GDP) being the gold standard. Consumer spending makes up a portion of a country's GDP, but many economists believe that a large consumer base is the most important feature in creating economic growth.

Throughout 2020, the Covid-19 pandemic affected China's economy in much the same way as the rest of the world. It saw a massive decline. However, that year aside, the general trend was one of increased growth. The country's 2019 economic statistics included:

  • Gross Domestic Product (PPP): $23.4 Trillion
  • GDP Real Growth Rate: 6.14%
  • GDP per Capita: $8,041
  • Unemployment Rate: 3.64%
  • Inflation Rate (CPI): 2.8%

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 25% in 2015, making it one of the worst performers in the world. As a result, international investors should be aware of the benefits and risks before investing in China.

Pros of Investing in China
  • Strong record of recent growth

  • Rising status on the world stage

Cons of Investing in China
  • Hard to rely on government effects

  • Social disparity and wealth gaps

  • Aging population

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 Predictability: 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 1 percent owned more than one-third of the total national household wealth, while the poorest 25 percent owned less than 2 percent. This wealth disparity could potentially lead to 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 China Large-Cap ETF (NYSE: FXI)
  • iShares MSCI China ETF (NYSE: MCHI)
  • SPDR S&P China ETF (NYSE: GXC)

Popular Chinses ADRs include:

  • PetroChina Company Limited (NYSE: PTR)
  • Baidu Inc. (NASDAQ: BIDU)
  • New Oriental Education & Technology Group Inc. (NYSE: EDU)
  • China Mobile Ltd. (NYSE: CHL)

Key Takeaways

  • 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 by using ETFs, but investors who are looking for more direct exposure can also look at ADRs or individual foreign stocks.