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Investment: what is your Chinese new year resolution?

China’s economy is wavering, with warning signs for investors. So do the experts recommend getting out – or getting in?

As we enter the Chinese year of the dragon, confidence in the world’s second largest economy is wavering. While China undoubtedly offers sound opportunities for UK and global business, and is attractive enough to have lured chancellor George Osborne for a recent visit, there are warning signs galore for private investors.

Growth slowed in 2011 and China’s stock market struggled throughout much of the year – the Shanghai Composite Index fell by over 20%. The Chinese government has been fighting inflation, but its measures have damaged growth, while a boom in the housing market may well have come to an end. Analysts put China’s total economic growth for 2011 at just over 9% and many forecasts see it dipping below 8% in 2012, which would be its weakest expansion in more than a decade.

China’s manufacturing and export sector is partly dependent on the recession-hit US and European economies. There are also fears a slump in property prices in some Chinese cities could damage consumer confidence and banks’ balance  sheets.

Patrick Connolly of AWD Chase de Vere urges investors to tread with caution. “The region’s ongoing growth story is indisputable. However, strong economic growth doesn’t necessarily translate into strong stock market returns, as we saw in 2011 when China was the worst performing of all investment sectors. It is important that investors don’t get suckered into any hype and invest too heavily in the region.”

This was arguably demonstrated by the performance of Fidelity China Special Situations Investment Trust, which launched in 2010 and is managed by respected investment guru Anthony Bolton. It raised £430m, making it the biggest ever investment trust launch in the UK, but after rising by 20% in the first six months the fund nosedived. Those who invested at launch are sitting on losses of 30%.

But some analysts believe the sell-off of Chinese equities last year means the market is undervalued and alluring. Despite the negative data, China fund managers are lining up to sing the region’s praises.

Andreas Roemer, head of emerging markets at DWS Investments, says investors “should take a positive view”. And Bolton remains bullish, saying: “It will become apparent in the next 12 months that the house-of-cards view that many have of China is wrong. We won’t see a hard landing and we won’t see growth disappear and that will lead to a reassessment of international views on China.”

Howard Wang, manager of the JPMorgan Chinese Investment Trust is equally optimistic, stating: “very attractive opportunities exist” in the region.

Danny Cox of adviser Hargreaves Lansdown is also positive, despite “significant policy errors (or even civil unrest) disrupting economic growth and stock market returns”. He says: “I believe the Chinese growth story has much further to run in the longer term. Chinese companies are still growing their earnings strongly, and following 2011′s market falls I believe shares are looking good value.”

Social reform and transparency remain key issues for many would-be investors. But for those prepared to take the plunge, most financial advisers believe a pan-Asian or broad-based emerging markets fund is the least risky way to gain exposure to the region – few advocate a dedicated China fund.

Connolly recommends JPM Emerging Markets (which has 24% of its assets invested in China), Schroder Global Emerging Markets (21% in China) or Aberdeen Emerging Markets (16% in China).

Cox recommends Jupiter China. Even though it struggled in 2011, “this under-performance could well reverse if the Chinese market rallies”, Cox says. For broader exposure he suggests Aberdeen Emerging Markets and First State Global Emerging Market Leaders.

Darius McDermott of Chelsea Financial Services says risk-averse investors should look at the Allianz RCM BRIC fund, which has roughly 25% exposure to China, “but also to some of the other large, exciting emerging markets without diluting the opportunities too much”. For adventurous investors prepared to take on China single-handedly, he recommends the Henderson China Opportunities fund. “The manager has been running the fund for five years, knows the market inside out and has first quartile performance over that time.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds