Investing in China: What You Need to Know – The New York Times

If you want Chinese shares, you can bypass New York.

On the face of it, shares of Chinese internet giants traded in American markets through A.D.R.s might seem to be safer for Americans than shares sold in local markets like Shanghai, Shenzhen or even Hong Kong.

Yet in some respects, regulatory requirements for I.P.O.s in China can be more stringent than those imposed by American regulators, Mr. Hsu of Rayliant Global Advisors said.

One reason is that inexperienced investors in China who engage in “social gambling” move the local stock market even more than “meme traders” do in the United States, Mr. Hsu said. To calm the market, Chinese regulators require companies to have solid cash flow and earnings for listing on the domestic market, known as the A shares market.

That’s not needed for an I.P.O. in the more laissez-faire United States.

Furthermore, when Americans buy A.D.R.s of Chinese companies, they may not realize that instead of actual stock, they’re getting claims held through banks on exotic legal structures set up in tax havens like the Cayman Islands. Known as variable-interest entities, these structures enable the companies to minimize U.S. and Chinese taxes while meeting legal requirements. The arrangements benefit Chinese entrepreneurs, American investment banks, law firms and private equity funds. But for rank-and-file investors, it’s another story. Greater regulatory scrutiny seems warranted.

Domestically focused Chinese companies on Chinese exchanges are opaque, too, compared with publicly traded American companies. And the shareholder rights movement, which has been gaining strength in the United States, is far less developed.

Yet managers of stock-picking mutual funds say they are finding well-run firms in China that can flourish as consumer spending rises.

Andrew Mattock, a manager of two Matthews Asia China funds, said he favored Zhongsheng Group, a chain of car dealerships; Sinoma Science and Technology, which makes wind power blades; and Estun Automation, which makes industrial robots.

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