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What China's volatility means for U.S. investors

A street becomes clogged with traffic in Shanghai, China.

Chinese Americans are on track to become the wealthiest group in America, according to recent data from the Federal Reserve. Although we don’t know exactly what share of Chinese Americans are investing specifically in the Chinese stock market, we wanted to know how the recent volatility there might be impacting these investors.

During a year that saw China’s market capitalization triple to $9.8 trillion — leaving analysts wondering not if but when the bubble would finally burst — Chinese markets finally tanked in July. Stocks plummeted 30% on the Shanghai Composite (SSE), a decline that was echoed on exchanges in Shenzhen and Hong Kong.

Whether Chinese or not, it’s easy for Americans to invest indirectly in international markets, even China, through international mutual funds — like T. Rowe Price’s Asia Opportunities Fund (TRAOX) and New Asia Fund (PRASX), both of which are heavily weighted in Chinese holdings. And workers saving in 401(k) plans might own some Chinese equities through target-date mutual funds, although the AP reports that the largest target-date funds have less than 3% of their portfolios invested in Chinese stocks.

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It’s harder to invest directly in China, however. Foreigners own just 1.5% of Chinese stocks, according to CNN Money. And outside investors have only been able to tap into the Chinese stock market since October, when Chinese regulators eased restrictions. These investors can only purchase stocks directly through Hong Kong’s exchange, the Hang Seng Index (^HSI), and require a special license. Hong Kong stocks were down 8% in early July, a significant drop but not nearly as dramatic as Shanghai’s 30% nosedive.

“There’s been a lot of headlines about the volatility [of] the markets but none of our clients -- and I would argue probably no one here in the U.S. -- owns any exposure to the market that has been most volatile [in mainland China],” says Dave Grecsek, Managing Director of Investment Strategy and Research at Aspiriant, an independent wealth management firm with over $8 billion in assets. “Most exposure comes through the Hong Kong market and that has been ... considerably less volatile.”

Robert Zhang, a 35-year-old Chinese-American portfolio analyst in New York City, says he invests personally and professionally in China stocks via the Hong Kong exchange. The dramatic market moves have given him “many sleepless nights,” he says. But on a professional level he knows the downturn could spell opportunity for short-term investors looking to buy into the market at a low point.

“Volatility creates opportunity, and this could be another March 2009 moment where [American] investors were rewarded tremendously had they put money into the market around that time,” he says.

As for his personal investments in China, he’s less optimistic.

“This wild rollercoaster ride in the Chinese market has made investing in that country a turn-off for me, at least for personal investing,” he says. “After this recovery, I plan to exit the market and go into real estate. This total market interference by the central government (both to keep the market from skyrocketing and free falling) will keep me from reentering the market for a while.”

The real concern for American investors should be how China’s overall economy will fare over the long term, given that many U.S. companies do business in the country.

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