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How to Be a Better Investor in China

Jason Stipp

Jason Stipp: Your colleague Mark Headley wrote a piece earlier this year called "In China's Shoes" that really aimed to let investors in the Western world or in the United States really have a sense for where China is coming from and where policy may be coming from, so that investors could better understand some of the decisions that are made in China. I thought it was a really interesting piece. Our readers on Morningstar really thought it was interesting perspective.

If you had to pull out some key themes that investors in the U.S. should think about when they're investing in China, some context or some perspectives that they should have, what would you pull out as what is important to keep in mind when you're thinking about your investments in China, and the decisions that are made there on the government level. How can you be a better investor in China?

Richard Gao: Yeah, I think that's a very, very good question there, and I think, average Americans, when I talk to people and when they talk about China, what they really think is still about communism, about dictatorship, about the Cultural Revolution; that's something that they still remember, and most of the American people, they don't have a chance to visit China. So I think, there are lot of misconception about China today.

And if you go to China, you actually see that this is a country that has been undergone a lot of changes. The economic growth has been growing for the past 30 years. This is 30 years ago when Chinese leader Deng Xiaoping opened up the economy to the outside world. This is the time when China started its reform process and opened it up, and this is the time when China started strong growth. So right now it is still a socialist economy, but a lot of positive changes have been happening.

We are talking not just the government, which is still playing a lot of influence in China, but we care more about the individual companies, the private sector economies. If you have a chance to go to China and visit some of the listed companies there, you will find not just the ordinary kind of state-owned enterprises, the old type of socialist companies that are running in an old fashioned way, but you're also finding a lot of companies that are run by private entrepreneurs. And as a matter of fact, private enterprises already account for more than 50% of the total economic output of China. So it is quite amazing to see that China is a communist-socialist country, but as a matter of fact, more than half of the output – economic output – are from the private sector economy.

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And we are able to find lot of good investment opportunities in those private sector enterprises, and not just in those private sector enterprises, but we are also finding a lot of good investment in the state-owned enterprises, because the state-owned enterprises concept today is quite different than the state-owned enterprises when I was back in China 15 years ago. The kind of the enterprises are totally different now.

So China is a country that has been undergoing a lot of good changes, but that said, I think there are still lot of risk and volatility in the whole economy. So I think for average investors in the U.S. to invest into China, you have to bear in mind that this is a country where you are seeing very strong growth, but you also see some volatility in the economy just for one thing for example, government force, it's still very dominant in a lot of industries.

There's quite often that in some industry, for example, like the telecom industry and financial industries, it'll be a lot of the cases that government will have huge influence. Any changes in the policies in those areas will affect the company performance.

So I think, you should bear in mind that the investment in stock market will be quite volatile, but if you have a long-term investment horizon, five years, 10 years investment horizon, I think, China is definitely on the right track in terms of their reform process and bringing up the consumption power of the country.

Stipp: Richard, thanks so much for your insights and for joining us today.

Gao: Thank you very much.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.