Investing in China can seem hard not to do these days. Whether through regional funds focused on
Asia Pacific, or Greater China funds including Hong Kong and Taiwan, or indirectly given the flows of goods and services between that country and the rest of the world. Buying, say, a North American fund may result in exposure given the amount of direct foreign investment in Chinese operations and assets held there by US companies.
Asset classes such as commodities and cash are increasingly seen as subject to Chinese influence - witness the debate about the replacement of the dollar as the world's reserve currency.
Pure China funds, like pure plays on other BRIC countries are a more recent phenomenon. For example, using the search tool to find "China" funds on
Trustnet throws up the following:
There is no doubt these types of China plays have outperformed the average return from many UK focused funds, but equally interestingly they exhibit heterogeneous characteristics: the Baring and Threadneedle funds are heavily exposed to financial stocks, while the Neptune fund’s biggest sector exposure is consumer discretionary.
Amidst the positives there is, however, a possibility that foreign investors could miss out on one of the biggest long-term opportunities locally, which is environmental technology. As
Bruce Jenkyn-Jones, manager of the
Impax Environmental Markets investment trust and the new Impax Asian environmental investment trust points out China "has pledged to increase renewable energy to 15 per cent of the energy mix by 2020." He expects the country to implement a nationwide solar power feed in tariff by the end of 2009.
Meeting these domestic demands, let alone global ones flowing from commitments on climate change, will require greater use of so-called rare earth metals, of which China itself currently accounts for up to 94 per cent of global output via just a few mines subject to strict export quotas. These are elements at the far end of the periodic table, which are used in technology for mobile phones, consumer electronics, batteries, magnets and elsewhere – elements such as terbium, neodymium, dysprosium.
It has been calculated that there could be up to several hundred kilograms of neodymium in the biggest permanent magnets used in large scale wind turbines. Without this element they would run less efficiently, pushing up the price of electricity generated - a big ask for countries such as the UK looking to such technology to meet climate change objectives.
Japan, still the world's second biggest economy, must import all the rare earth resources its industry needs, including for the batteries and electric motors intended to power the cars of the future; the magnets in earphones of every iPod player sold are said to contain rare earth metals.
The few known alternative sources in countries such as Canada and Australia are either not yet fully operational or themselves the target of acquisition attempts by Chinese companies, such as the bid for Australian company
Lynas, a deal being scrutinised by the Australia Foreign Investment Review Board.
All of this means that is is difficult if not impossible for UK investors to buy into this resources story – at least for now. Among the few non-China direct equity alternatives to consider are
Avalon Rare Metals, a junior mining stock listed on the Toronto Stock Exchange. which saw shares quadruple between June-September 2009, or Australia-based
Arafura Resources, with a share price that has gone from A$0.40 in May this year to A$1.20 recently.
For the fund investor determined to seek out both China and some sort of materials exposure, there are according to
Financial Express data up to 43 open ended funds worth considering.
Of these
Melchior Asian Opportunities returned 65 per cent over the year to 22 September.
Fidelity South East Asia did 46 per cent, while
Schroder Asian Alpha Plus offered 44.5 per cent.