The siren song of Chinese equities has proved too hard to resist. The initial public offering of Industrial and Commercial Bank of China (ICBC) last week was the world's largest to date and nearly 20 times oversubscribed. With such euphoric demand for anything Chinese, it's worth revisiting why investing in the country is not the panacea many make it out to be.
The investment thesis goes something like this: China's economy is growing at 10% a year. Companies, especially banks which in large part fund the growth, will benefit as long as the economic growth continues. But this reasoning ignores an important distinction. There is a difference between China's economy and its stock market.
By all measures, China's economic growth story has been impressive. But until this year, the Chinese stock market has not followed suit. From 2002 to 2005, the economy grew nearly 14% a year on a nominal basis. The stock market, however, fell 22% a year.
Here are some other reasons to be wary:
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