From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy

Citation

Wong, A. (2009), "From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy", Journal of Chinese Economic and Foreign Trade Studies, Vol. 2 No. 3, pp. 229-230. https://doi.org/10.1108/17544400910994779

Since the economic reform in 1978, China economic growth has been miraculous, attracting the attention of foreign investors around the world. More recently, many foreign investors have been proactively studying the Chinese stock market because they hope to share the potential economic gains.

Stock investing in China has never been easy for foreign investors for two reasons. First, the Chinese stock market is not completely open to foreigners. Specifically, general foreign investors are not allowed to trade the A shares listed in Shanghai and Shenzhen. They can only trade the B shares and other offshore listed shares. Second, like many other emerging markets, the Chinese stock market is more volatile than the other developed stock markets.

Therefore, a strong team of industrial specialists and finance academics from the USA and China have written this book to guide general foreign investors in how to invest in the Chinese stock market. Professor Burton G. Malkiel is the Chemical Bank Chairman's Professor at Princeton University. Professor Jian‐Ping Mei is a finance professor who has taught in New York University and China Cheung Kong Graduate School of Business. Rui Yang is a mutual fund manager at Bosera Fund Management in China and Patricia Taylor is a writer.

This book consists of three sections. In section I, the past, present and future of the Chinese economy are discussed, in chapters 1‐3, respectively. Section II introduces the Chinese stock market and other investment alternatives. Chapter 4 introduces the Chinese Stock Market, the latest securities regulations as well as the unique ownership structure of Chinese listed corporations. In chapter 5, the authors discuss the efficiency of the Chinese stock market and conclude that the Shanghai and Shenzhen A‐share markets tend to be inefficient. There is evidence that some actively managed mutual funds consistently outperform the benchmark index on a risk‐adjusted basis in China. On the other hand, the authors argue that the offshore H‐share markets tend to be more efficient. Chapter 6 is about the valuation of the Chinese stock market over the past years and the authors elaborate upon why the latest valuation is attractive and the potential diversification benefits exist. Chapter 7 briefly goes through other investment alternatives including real estate, art and bonds in China.

Section III suggests a mixed investment strategy designed to capture the long‐term growth of the Chinese economy. In chapter 8, the authors suggest how readers can prepare themselves before actual investments. Chapter 9 introduces some open‐end funds, closed‐end mutual funds and other exchange‐traded funds available to general foreign investors. Chapter 10 suggests several practical indirect investment strategies whose payoffs are largely determined by the economic condition of China. These strategies invest in those raw‐materials companies, Asia Pacific companies, US and European companies with substantial China exposure. For those risk‐taking investors, chapter 11 provides a strategy that invests in individual Chinese corporations. Finally, chapter 12 integrates the previous strategies to form a diversified portfolio with direct and indirect investments in China. Moreover, the authors recommend several model portfolios with different sizes.

I highly recommend this book because of the following reasons. First, the authors provide a comprehensive and up‐to‐date introduction to the Chinese economy and Chinese stock market in sections I and II. Second, the authors thoroughly discuss the unique ownership structure of Chinese listed corporations. The book explores the A shares, B shares, H shares, L shares, N shares, S shares and T shares. A shares and B shares are shares listed in the Shanghai Stock Exchange and Shenzhen Stock Exchange. H shares, L shares, N shares' S shares and T shares are offshore listed in Hong Kong, London, New York, Singapore and Tokyo, respectively. General foreign investors cannot trade the A shares. They can only trade the B shares listed in the Shanghai and Shenzhen Stock Exchanges and other offshore‐listed shares (H shares, L shares, N shares, S shares and T shares). In addition, the authors explore other investment instruments including the open‐end funds, the American Depository Receipts (ADRs), closed‐end funds and exchanged‐traded funds. Overall, the book provides a lot of practical details.

Personally, I believe the best part is chapter 12 that introduces a mixed investment strategy for foreign investors. The authors recommend a diversified portfolio with the investment vehicles:

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  Portfolio of Chinese securities (including the B shares, H shares, N shares, open‐end mutual funds, closed‐end funds and exchange‐trade funds).

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  Commodities and their producers.

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  Stocks that incorporated in China's major trading partners (including Taiwan, South Korea, Malaysia and Japan).

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  US corporations that trade or invest extensively in China.

The authors argue that the Chinese trading partners will benefit from the Chinese economic growth, so they recommend those stocks of Asian and US companies with China exposure. They also recommend commodities because China is likely to import a lot of commodities for further development and this demand supports the commodities' prices.

I believe this strategy is up‐to‐date, practical and consistent with the latest research findings. The strategy utilizes all investment alternatives available and forms a diversified portfolio with natural resources and stocks in China, Asia and the USA. As we know, the Chinese stock market tends to be more volatile than other developed stock markets, so the mixed investment strategy substantially reduces the overall investment risk. In other words, the suggested portfolio should be less volatile than a portfolio that only contains the Chinese stocks.

However, after finishing the book, I have still a long‐time unanswered question in my mind. Chinese stock investment makes sense only if the past remarkable economic growth continues in the future. My question is whether the high economic growth of China is sustainable in the coming years? Although, the authors briefly go through this critical question, I expect a more comprehensive analysis in a future edition.

Overall, I recommend this book without reservation.