China may be in the midst of a downturn with deal volumes and values falling by around a third from their 2011 height, but analysts are predicting an imminent improvement. As a result, many investors are again looking at the market. Experian’s data shows that transactions actually stabilised in the second half of 2012 and, with China set to overtake the US as the world’s largest economy in the next 10-20 years, the country has the potential to deliver decent long-term returns.
Here's how to make sure you don't miss the gravy train:
Tip 1: Immerse yourself
It’s critical for a first-time investor to gain knowledge of their prospective area and plan a strategy. Remember that China’s economy and economic growth trajectory does not always directly mirror that of the West. Any investments should be judged against China’s own economic cycle.
Tip 2: Only fools rush in
Slowly nurture existing connections as the Chinese value face-to-face contact and long-term relationships. Do not go for big profits on your first contact.
Tip 3: Select your sector with care
China is not all about manufacturing. Since 2009, China has been the biggest investor in renewable energy in the world and privatisation is increasing all the time. Don’t dismiss the SME market in China as this carries the greatest potential for high returns.
Tip 4: Walk before you can run
Market novices could consider the shares of Chinese companies listed abroad, also known as Global Depository Receipts. For more experienced investors, the highest returns come from domestic firms who know the market before their public listing on a mainland exchange. This is a strategy that requires a higher level of research, co-operation and commitment.
Tip 5: Understand the restrictions
It is important for the first time investor to know that on the mainland you can only buy shares directly intended for foreign ownership, called B-Shares. A-Shares are for Chinese investors and institutions only. Be wary of state intervention, heavy regulation and direct ownership constraints.
Tip 6: Think about a minority stake
Investors should aim to acquire minority stakes in SMEs looking to realise an exit from the Shenzhen Stock Exchange in order to see the biggest returns. Alternatively, minority stakes can be acquired within Chinese private equity firms and investors themselves. Since October 2009, private equity firms under limited partnership can become shareholders of limited companies.
Tip 7: Plan long-term
Stay for the medium to long-term. The China Securities Regulatory Commission (CSRC) often looks negatively upon those foreign firms out for a ‘quick buck’ and favours those firms with a long-term interest in China.
Tip 8: Future-proof yourself
Make sure any investments are inflation-protected, particularly going forward, and avoid property investments in the core cities as the outlook on property prices in Mainland China looks uncertain.
Tip 9: Stay above board
If you are concerned about political and accountancy practices, Hong Kong, Macau and Taiwan are viable stepping stones into the region.
Tip 10: Know your exit
As it is rare for full takeovers of Chinese companies by foreign firms to be approved by CSRC, it is best to aim for a sector where the highest returns on minority stakes are likely (e.g. consumer goods). Often state-owned corporations can buy back stakes in joint ventures from foreign ownership, often at an increased return on the original investment.
Click here for a more detailed report from Experian.