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What You Need to Know About the Chinese Stock Market Before Investing

China is now the second largest economy in the world and rising rapidly with a star. Predictions are that it will be the world’s biggest economy within 10 – 20 years, surpassing even the United States. How can you benefit from this amazing growth?

Invest in China

Good advice, perhaps, but not as simple as it sounds.

There are many differences, when compared to the major American and European stock markets, that you need understand if you want to participate in China’s record setting economic expansion.

Chinese Stock Exchanges

The two largest Chinese stock exchanges are the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Most large public Chinese companies are represented on one of these exchanges. In each case, the financial regulations require two classes of stock shares; Class A and Class B. Class A shares are priced in the local currency – the Renminbi and can only be purchased by Chinese nationals. Class B shares are designed for purchase by foreigners and are priced in US dollars.

China is not only a different country, it is a different culture. With different financial regulations and a private sector that until recently was all government owned. This impacts the way financial information is reported, the way loans are made, and the way deals among companies are done.

All of these factors in turn influence the stock price. Financial disclosure rules are not as strict as those investors have become accustomed to in more established stock markets.

It is always a good idea to have professional guidance with your investments, and even more important when investing in emerging markets like China. The best advice will likely come from an organization that has investment savvy and is familiar with the nuances of the Chinese stock market. This is an area where it pays to do your homework.

One thing to keep in mind is that while the economy of China has grown incredibly fast in the last decade, averaging 10% per year by some estimates, the Chinese stock market – like all stock markets – still goes up and down. It is very possible for the Chinese stocks you pick to go down considerably while the Chinese economy roars ahead. Another reason for professional guidance.

China is an export based economy. Its growth depends upon selling its manufactured goods to the rest of the world – mostly Europe and the United States. Last year, the European Union was China’s biggest trading partner, with the United states right behind. China has grown so rapidly by taking market share away from many other manufacturers in other countries. However, for its continued growth, it is very dependent on the state of the economies in its two largest customers. Chinese consumer demand, while growing rapidly, cannot support all of China’s growth, at least, not yet. With its rapid growth, China also faces the prospect of inflation, which will require the Chinese banks to increase interest rates on loans and can act to slow growth.

Taking into account all of the above factors, the Chinese stock market can still be an excellent investment.