Perhaps no investment opportunity has captured the minds of investors in recent years more than that of China. While the investment buzz surrounding China clearly 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 2012, 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 history, at 690 million people versus 656 million, respectively. China's urbanization is what has single-handedly led to the country's impressive economic growth over the past couple of decades. And China continues to urbanize. It's taken three 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 living an agrarian lifestyle to an urbanized one, a lot has to happen. Cities need to be built, which means growth in infrastructure, commerce and other services. Urbanization means economies shift from those where individuals transform themselves from self-sustainability to specialization. That specialization is the fuel capitalism needs to unleash its power. Specialization requires more education, and an educated society is typically a wealthier society. As per capita wealth improves, the quality of lives improve and humanity is better off. During this entire process, businesses sprout up, many of which offer tremendous wealth creation 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 people equals the population of two United States. Often one hears that China today (as of 2013) is what America was right before the industrial revolution. There are some fundamental differences between America then and China now (a democratic form of government vs. communism), but the essence of the comparison is accurate. Growth in the 21st century will belong to China, just as the 20th century belonged to the United States. That growth will create trillions of dollars in economic output in the coming years, so investors are wise to consider the investment 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 this 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.

First and foremost, understand that China is still a communist country. So despite all the free market principles that China has faithfully adopted, as a communist nation the rules that govern a public company in China are different than here 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 financial statements, have audits performed and meet other requirements of size and capitalization. Beyond that, the accounting rules differ, and that is where things 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 differences clearly remain. One common difference is the trading of company stock by insiders. 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 securities trading is not being manipulated by corporate insiders. China is taking a closer 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 opportunity. 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 the 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 here: the advantage of a U.S.-regulated, GAAP-adhering public company along with the profit growth potential coming from China. A great example of this has been Yum! Brands (NYSE:YUM), owner of the Pizza Hut, KFC and Taco Bell restaurant concepts. 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 Coca-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 ground 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 invest directly in Chinese companies, focus on the blue chip companies in China. These companies are readily established, have deep financial operations, a bigger shareholder base and thus offer investors greater safety in a region still characterized by uncertainty.

Many Chinese companies are listed directly on the U.S. stock exchanges. Many years ago, these companies were market darlings. In recent years, however, virtually all of them have come under intense scrutiny due to the inability of investors 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 attractive 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 housing market and attempts to curb lending. The key, according to many economists, now resides with the Chinese consumer who still saves a big chunk of each paycheck. Even the Chinese government realizes this and is trying to promote consumption 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 be plentiful. Investors should consider the pitfalls, understand the risks and rewards, focus on shareholder-friendly companies and stick to investments they understand.

Related Articles
  1. Stock Analysis

    The Top 5 Micro Cap Basic Material Stocks for 2016 (GURE,ODC)

    Learn about the factors that have dragged down basic materials sector performance over the past couple of years and where to find gains in the sector for 2016.
  2. Economics

    What Is An Emerging Market Economy?

    Emerging markets provide new investment opportunities, but there are risks - both to residents and foreign investors.
  3. Bonds & Fixed Income

    Getting Certificates of Deposit (CDs) in Emerging Markets: Risks and Rewards

    Learn about the risks and rewards associated with investing in a certificate of deposit (CD) offered by an emerging market and what to consider before buying.
  4. Markets

    How Global Entertainment Firms Break Into the Chinese Market (DIS)

    Learn how movie piracy in China affects companies such as Disney, and what these companies are doing to combat it, including co-productions in China.
  5. Stock Analysis

    Looking to Invest in China's Fast Food Industry? Try KFC (YUM)

    Read about the fast food industry in China, and learn what makes KFC the dominant brand in a market poised for years of high growth.
  6. Mutual Funds & ETFs

    The Risks Of Investing In Emerging Markets

    In a volatile market, domestic investing can be risky. Many investors choose to look overseas for diversification - but that strategy comes with its own unique threats.
  7. Mutual Funds & ETFs

    Should You Invest In Emerging Markets?

    Emerging markets are risky, but the rewards they can create make them a worthy addition to any portfolio.
  8. Fundamental Analysis

    Equity Valuation In Emerging Markets

    As nations like China, India and others continue to grow, valuing companies from these nations will be important for your portfolio.
  9. Personal Finance

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  10. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  1. What emerging markets are best suited for investing in the oil & gas drilling sector?

    Over the past decade, emerging markets have driven the demand and production for oil and natural gas to new heights. Rising ... Read Full Answer >>
  2. What are some of the most popular ETFs that track the Internet sector?

    While many tech investors are still leery of the Internet space since the great bust of 2000, others see an incredible new ... Read Full Answer >>
  3. How many multinational corporations operate in China?

    A very large group of multinational corporations operate in China, both Western and otherwise. China is one of the world's ... Read Full Answer >>
  4. Is China a developed country?

    Despite having the world's second-largest economy and third-largest military, China is still, as of 2015, not classified ... Read Full Answer >>
  5. Is Malaysia a developed country?

    Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
  6. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center