Don’t go for direct China plays: bet around it instead

published 31 October 2005

Investing directly in China is probably not the best bet in the world at the moment. It's far from clear whether its government will end up lightly tempering China's soaraway GDP growth (the gentle slowdown the world is praying for), or inadvertently causing a crash. Chinese stockmarkets are relatively lightly regulated and dodgy accounting widespread. They're also exceptionally volatile. The Hong Kong-based H-share index of mainland companies almost doubled in 2003, but has plunged by 17% this year. Yet the long-term case for the world's third-largest economy remains fabulous. So what's an investor to do? Bet around it, not on it, according to BusinessWeek. This means either playing the growth story via commodities or funds concentrating on the Far East, or looking at shares in the Asian firms that have significant stakes in China.

Some of the best China plays, says BusinessWeek, are Japanese. Goldman Sachs favours Nippon Yusen KK, Japan's biggest shipping line, which doubled profits last year as Chinese demand fuelled a 25% jump in shipping rates. There's also Shiseido, which sells $170m of cosmetics to China's growing middle class and aims to quadruple this figure within five years. But beware capital-intensive stocks, such as earth-moving equipment maker Komatsu, which is heavily exposed to China's "hot but very brittle" construction sector.

Korea and Taiwan are worth exploring too. Taiwanese high-tech players enjoying "huge cost advantages" owing to their use of mainland production bases include Asustek Computer Inc, the world's biggest maker of motherboards, and Hon Hai, responsible for assembling Nokia mobile handsets in China. Sean Debow of UBS Asia expects both to benefit from China's burgeoning consumer market. Korea's Posco should keep profiting from brisk sales of high-end steel products to China.