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How to hitch on to a rising star

While it can be an elusive target for investors, there are ways to increase your exposure to the world's fastest-growing major economy, ROB CARRICK writes

Globe and Mail Update

To astute investors, the sound of China rising is the ka-ching of money being made.China's investing potential is such that some experts believe it's a must-have for your portfolio. As University of Toronto finance professor Eric Kirzner puts it: ''A decent-sized portfolio without any exposure to China, and India, is deficient.''

Now for the frustrating part. While China is the world's fastest-growing major economy, it's an elusive target for investors.

The problem is that China's stock market isn't as developed as its economy. There are as many as six different categories of publicly traded stocks, each with different rules on whether Chinese nationals or foreigners can buy them and which exchanges they trade on.

Investing in China is so exotic that there are only a small number of China-focused mutual funds available to Canadians, and few of them are ideal for getting true exposure to the country. A good alternative is a new exchange-traded fund that offers true exposure to China, but even here you'll encounter the idiosyncrasies of the Chinese market.

China's stock market at the end of 2003 was the eighth largest in the world, according to figures from money manager State Street Global Advisors. But the investable market -- the stocks in China, Hong Kong and Taiwan available to foreign investors -- is just 1.5 per cent of the global total.

So-called A shares are the ones that are off limits to all foreigners except qualified institutional investors. They've traded on the Shenzhen and Shanghai stock exchanges and priced in the local currency, called yuan. B shares are available to foreign investors -- they're traded on the same two exchanges, but quoted in Hong Kong dollars in Shenzhen and U.S. dollars in Shanghai.

Other stock categories include H shares, which are traded in Hong Kong and open to any investor, and Red Chips, which are unrestricted Hong Kong-listed companies controlled by the Chinese government.

The mix of government share ownership and restrictions on foreign investment explain why some money managers are leery of directly investing in China even through they believe the country's incredible economic growth will be a dominant investing theme.

"China, in my view, is the big strategy issue for the next 10 to 20 years," said Wilf Hahn, president of Hahn Investment Stewards & Co. and a onetime head of Royal Bank of Canada's global investing operations. "But I think it's really tough for the individual investor to get some decent leverage on China."

Mr. Hahn said one option is to look at sectors and companies in established markets that either do business in China or benefit from commodity prices that have been propped up by demand from Chinese industry. Sectors profiting from China include oil and gas and metals, while examples of individual companies active in China are Sino-Forest Corp., a forestry company with operations in Southern China, Ivanhoe Energy Inc., an oil and gas company with projects in China, and insurer Manulife Financial Corp.

An easy choice for investing in Chinese companies is the growing category of China-focused mutual funds. The database shows seven funds with "China" in their name, but only two of them have a track record of as long as three years.

The newest of these funds is Bank of Montreal's BMO Greater China Class, which began trading a week or so ago. It's the first China fund from a bank family, and a reflection of both BMO's long-standing interest in the area and the recognition of a market that can't be ignored.

"Here's a market that is the fastest-growing economy in the world and in the next decade will be probably the second-largest economy in the world," said Ed Legzdins, president of BMO Investments. "The ability to invest in an economy that is growing at this rate is unique."

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