Fund Managers Investing in China via Neighboring Exchanges

Investors clearly want a piece of the China pie. And, they're rushing in to get it. The only difference is that they're now directly investing in Chinese companies listed on the exchanges in Hong Kong and Singapore, and the less-regulated exchanges in Shanghai and Shenzhen, according to The Wall Street Journal.

While this is a striking departure from the traditional method of investing in China through ADR's or Chinese stocks that trade on U.S. exchanges, investment giants such as Morgan Stanley and J.P. Morgan are putting their wealthy clients' money directly into Chinese companies or investment vehicles such as hedge funds.

Critics contend this move poses risks because of China's nascent, unstable stock market, its lax financial accounting standards and its restricted currency. Still, advocates say that these are exactly the uncertainties that investors faced a century ago when they put their money in a budding American stock market.

An array of options has opened up investors looking to expand into the China market. Mutual funds and ETFs offer investors diversity and a direct stake in some of China's most promising companies. Mutual funds such as Matthews China Fund and the Guinness Atkinson China & Hong Kong Fund have returned annualized gains of 16.2% and 18% respectively, over the last three years.

Investors are also flocking to buy ADRs and other U.S.-listed Chinese stocks that trade on the New York Stock Exchange and the NASDAQ stock market. This move is likely to mitigate the fears of investors who are not confident of the accounting standards of Chinese companies as companies listed on American stock exchanges are regulated closely and report earnings according to stricter reporting rules.

H shares and so-called Red Chips are another option for investors. These are Chinese companies whose stocks trade in Hong Kong. Overseas brokerage firms such as Kim Eng Securities in Singapore and SHK Financial Group in Hong Kong have started opening accounts, often online or via e-mail, for American investors. Romeo Dator, portfolio manager for U.S. Global Investors China Opportunity Fund, warns that only individuals who want to buy Chinese stocks on their own should be buying H shares and Red Chips in Hong Kong.

Apart from these choices, investors have relatively unhindered access to hedge funds that invest in Chinese companies. While some hedge funds, like the Jayhawk China Fund, are U.S.-based, others are based in Hong Kong and invest in publicly traded companies in both Hong Kong and mainland China.

B shares, which represent Shanghai- and Shenzhen-listed companies, are another way investors can get into the China market. While these shares are priced in Hong Kong and American dollars, they don't undergo the same amount of regulatory scrutiny that shares trading in Hong Kong and Singapore do. They do pose the risk of being loosely regulated but cover small entrepreneurial companies that are likely to be the first ones to benefit from China's explosive growth.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

to not have any currency funds has really been not a good thing," says Andrew Clark, an analyst at Lipper.

The falling dollar fund is pr