Investing In China August 26 2013| Filed Under China, Emerging Markets, Foreign Investment, Interna tional Markets Perhaps

s no investment opportunity has captured the minds of investors in recent years more than that of China. While the investment buzz surrounding China clear ly includes some hype, the undeniable facts about China easily explain why China deserves all the attention it is getting. According to the World Bank, as of 20 12, China held 1.3 billion of the world's 7.1 billion people. Almost 20 percent of the world's population resides in China. Where the excitement kicks in is the makeup of this 20 percent. According to the National Bureau of Economic Statistics, in 2011 China's urban population exceeded its rural population for the first time in the country's his tory, at 690 million people versus 656 million, respectively. China's urbanizati on is what has single-handedly led to the country's impressive economic growth o ver the past couple of decades. And China continues to urbanize. It's taken thre e decades for China's population to be more urban than rural, and it's expected that China has another 20 years or more of urbanization ahead of it. What's So Special About China and Urbanization In a word, urbanization equals growth and lots of it. As people shift from livi ng an agrarian lifestyle to an urbanized one, a lot has to happen. Cities need t o be built, which means growth in infrastructure, commerce and other services. U rbanization means economies shift from those where individuals transform themsel ves from self-sustainability to specialization. That specialization is the fuel capitalism needs to unleash its power. Specialization requires more education, a nd an educated society is typically a wealthier society. As per capita wealth im proves, the quality of lives improve and humanity is better off. During this ent ire process, businesses sprout up, many of which offer tremendous wealth creatio n for shareholders. If you think about the fact that China still has over 600 million people living a rural lifestyle, a majority of which are likely to become urbanized over the coming decades, the investment opportunity is huge. This group of 656 million pe ople equals the population of two United States. Often one hears that China toda y (as of 2013) is what America was right before the industrial revolution. There are some fundamental differences between America then and China now (a democrat ic form of government vs. communism), but the essence of the comparison is accur ate. Growth in the 21st century will belong to China, just as the 20th century b elonged to the United States. That growth will create trillions of dollars in ec onomic output in the coming years, so investors are wise to consider the investm ent opportunities in China. Understand the Risk and Reward The investment rewards in China will undoubtedly be huge, but to make the most of them, any intelligent investor should have a clear understanding of the risks involved. A detailed analysis of the China risk is well beyond the scope of thi s article, but understanding the basic layout provides a solid foundation. Also understand that risks should not deter investment - the U.S. was quite risky in 1900. Instead, risk should be understood so it can be properly accounted for. Which penny stocks can help you turn $1k to $10k? First and foremost, understand that China is still a communist country. So desp ite all the free market principles that China has faithfully adopted, as a commu

nist nation the rules that govern a public company in China are different than h ere in the U.S. Chinese stocks trade on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Both of these exchanges have similar listing requirements that you would see in U.S. stock exchanges. Companies have to report timely fina ncial statements, have audits performed and meet other requirements of size and capitalization. Beyond that, the accounting rules differ, and that is where thin gs can get murky. To be sure, attempts are being made to bring Chinese accounting standards more in line with U.S. generally accepted accounting principles (GAAP), but differenc es clearly remain. One common difference is the trading of company stock by insi ders. In the U.S., insider trading is regulated intensively for obvious reasons: the entire integrity of a market-based system rests on the premise that securit ies trading is not being manipulated by corporate insiders. China is taking a cl oser look at executive trading but still has a way to go. A Mosaic of Options Given the popularity of the China investment story, an abundance of investment products are readily available for investors eager to own a piece of this opport unity. As would be expected, some options are much better than others, and some options should be avoided altogether or left to the most sophisticated investors . That being said, investors today have various prudent ways to participate in t he Asian miracle. The best and perhaps safest way is to stick with what you know - U.S. companies that are doing a growing business in China. You get the best of both worlds her e: the advantage of a U.S.-regulated, GAAP-adhering public company along with th e profit growth potential coming from China. A great example of this has been Yu m! Brands (NYSE:YUM), owner of the Pizza Hut, KFC and Taco Bell restaurant conce pts. The Chinese are going gaga over these chains, and Yum! has been generating more and more profit thanks to China. Other names that fit this bill include Coc a-Cola (NYSE:KO) and Apple (Nasdaq:AAPL). Next up would be professionally managed funds that focus on China. Here you get professional investment firms, many of which have analysts and people on the gr ound in China, doing the legwork. The drawback can be huge fund expense ratios, and those need to be considered before deciding to jump in. If you want to inves t directly in Chinese companies, focus on the blue chip companies in China. Thes e companies are readily established, have deep financial operations, a bigger sh areholder base and thus offer investors greater safety in a region still charact erized by uncertainty. Many Chinese companies are listed directly on the U.S. stock exchanges. Many ye ars ago, these companies were market darlings. In recent years, however, virtual ly all of them have come under intense scrutiny due to the inability of investor s to trust the financial statements. Unable to regain investor confidence, many U.S.-listed Chinese companies' share prices decreased significantly. Still, this category provides disciplined investors with an opportunity to find some attrac tive opportunities that are easier to research and trade. The Bottom Line There's no denying that China's economy will be the one to watch in the coming decades. Recently, China's economic growth has retreated some due to a cooling h ousing market and attempts to curb lending. The key, according to many economist

s, now resides with the Chinese consumer who still saves a big chunk of each pay check. Even the Chinese government realizes this and is trying to promote consum ption growth. Inevitably, China will have its hiccups as it proceeds to lead the global growth of the economy. But grow it will, and opportunities will surely b e plentiful. Investors should consider the pitfalls, understand the risks and re wards, focus on shareholder-friendly companies and stick to investments they und erstand.