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Stock Strategist

Should Government Controls Keep You from Investing in China?

The pros and cons of state-owned enterprises.

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In 1992, China shifted its economy from being fully centrally planned to what the government calls a social market economy--an economy in which the government cedes some of its control over the allocation of economic resources to market forces. Since then, more and more state-owned enterprises (SOEs) have sold shares to the public in China, Hong Kong, and New York.

As the Chinese economy continues to grow 7%-10% per year, investors are eager to buy a piece of China to benefit from this economic growth. However, the fact that the Chinese government still controls more than 50%-90% of the shares of these companies, and appoints their executive managers, makes many investors nervous. How can the little guy be sure that the government will act in the best interests of all investors? In this article, we explore the pros and cons of investing in China's SOEs in order to determine whether the potential rewards outweigh the risks.

Bill Yan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.