Best way to invest in China is indirectly


Your Money


I'm looking for mutual funds that invest in China, and I've seen a few mentioned in The Wall Street Journal, but they have very unusual names. Can you refer me to something more mainstream?

- J.V., Baltimore

Those unusual names should tip you off to the risks you'd be taking with a fund that invests exclusively in China.

It is an unusual investment in a country that operates very differently from European nations or much of Asia.

The Chinese government owns large pieces of companies and discloses little about how they operate or even how the economy is functioning. A poorly run firm in a growing economy can be a disaster, and fast-growing economies can stall or crash. Consider the Asian financial crisis of 1997-1998.

Consequently, even knowledgeable mutual fund managers - well-versed in Asia - are cautious about investing directly in China.

For example, Edmund Harriss of the Guinness Atkinson Asian Focused Fund tries to take advantage of the impact of China's growth in a safer way. He invests in companies in countries such as Singapore, Thailand, South Korea and Malaysia - countries profiting tremendously from selling products to China.

"Two-thirds of the regional exports are going to China," he said. "This is a very big theme. And many also have factories in China."

He invests only about 7 percent of the fund in China and deploys about 28 percent in Hong Kong. The largest and better-quality Chinese companies trade in Hong Kong, he said.

By going beyond China, he can invest in a broad range of companies from a wide range of industries. That's important because concentrating too heavily on a few companies, or one industry, means your fate is tied to a small slice of the economy. China itself, he said, is heavily focused on commodities.

Yet in South Korea, he can buy Samsung for electronics. In Singapore, he invests in companies that supply large firms such as Seagate Technology and Motorola Inc., as well as China.

Outside China, Harriss said, corporate governance has improved, and he feels relatively comfortable with the financial reports.

"I know how many widgets they sell and the cost and changes over time," he said.

That's crucial information that tells investors whether their money is being used wisely.

The unusual names you have seen for China investments might be iShares FTSE/Xinhua China fund and the PowerShares Golden Dragon Halter USX China portfolio. These are exchange-traded funds that focus exclusively on China. Because of that concentration, they are risky.

Morningstar Inc. rates FTSE/Xinhua as the riskiest because it invests in only 25 very large companies, which means little exposure to a wide range of industries.

The PowerShares fund invests in large-, mid- and small-size firms, which opens it up to a broader mix. For example, it has about 14 percent of its portfolio in technology companies, while the other fund is heavy in energy and financial companies.

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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