The best way to buy into China's stock market recovery

There are signs that the Shanghai stock market is recovering after years of disappointing investors - but what's the best way to reap the benefits?

China's economic growth has hit 10% a year amid signs that the Shanghai stockmarket, which has been disappointing investors for years, could finally be emerging from a four-year slump. Indeed, over the past three years, it has fallen by 14%, compared to a gain of 164% for emerging markets in general.

But economic gains don't necessarily translate into stockmarket ones: while the Chinese economy has grown by an average of 9.7% since reforms began in the 1970s, its stockmarket has "consistently failed to live up to its economic promise", says Kathryn Cooper in The Sunday Times.

More recently, the Shanghai index has gained nearly 22% so far this year and "there have been tentative signs that Chinese shares are shaking off the four-year bear market". This has, in part, been thanks to an opening up of Chinese A-shares to foreign investors who have "piled in", hoping to "cash in on a further appreciation of the renminbi".

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Last summer, the Chinese government scrapped the peg on its currency's exchange rate with the dollar, instead letting it float within a small band. Now President Hu Jintao is under pressure to revalue the renminbi even more so after his visit to Washington last week. American politicians believe that the renminbi is undervalued by up to 40% against the dollar. This, some US protectionist politicians say, has hurt US exports and employment.

However, it is the overvaluation of the Chinese currency that has permitted the US to keep its low-inflation environment, says Gerard Baker in The Times. The surge in cheap goods from China has "helped keep the lid on price increases around the world".

Without the Chinese government retaining control, the currency would have risen years ago making Chinese goods and services more expensive elsewhere. Now that oil prices are on the up, inflation could again be a threat to world economies and more so if China is forced into becoming more expensive.

But if you do want to get a "piece of the action" from the Chinese growth story, says Russell Flannery in Forbes, look at Taiwanese companies with big stakes on the mainland. Taiwan has been setting up plants in China since the late 1980s when the long-term rivals "tore down some barriers for their mutual economic benefit".

That means that Taiwan, which is itself cheap by global standards, is taking advantage of even cheaper Chinese labour. By using Taiwan as a back door into China, "investors get the benefit of Taiwan's better corporate governance and accounting". And if the relationship between the two countries improves further, Taiwan will be an "exciting" market, Jim Rogers, one of the world's most successful fund managers, told the Taiwanese China Post.

But there are still health warnings. The Taiex has returned a "more than respectable" 8% so far this year mainly thanks to its largest company, Taiwan Semiconductor Manufacturing (TSMC), says Leslie Norton in Barron's. Nonetheless, Taiwan is "one of the cheaper markets around the world," says Donald Reed, president and CEO of Franklin Templeton Invesments.