Investing in China: Many issues to consider

December 1, 2007

Investors look at investments in countries with emerging economies with hope that a historically poor economy may transform itself to one of sustained prosperity and steady growth.

Q It seems like everyone is talking about investing in China. Is there really growth potential there for U.S. investors?

When looking historically at various emerging economies, growth has resulted primarily from two major factors: labor and capital stock. Machinery and infrastructure are used to create output, so the key to acceleration of growth is simply increased productivity. While European countries increased their capital stock and productivity over a period of about 200 years, China, by taking advantage of foreign investment and using modern technology, has significantly reduced that development cycle.

Still, one of the greatest challenges facing China today involves the delicate balance of regulation and deregulation. The assumption that deregulation is preferable to regulation is not always correct. In a developing economy, each has a role in transforming from a closed to an open market environment. A certain amount of regulation is necessary, as evidenced by the chaos and corruption experienced in post-Soviet Russia, where there were no real rules to follow. As has been learned from the past, for an investment marketplace to operate efficiently, businesses must adhere to certain disclosure and accounting standards in order to gain the initial confidence of foreign investors and to keep their dollars flowing into that country.

Unfortunately, China's rapid rate of industrialization has caused many environmental issues, which the government must now deal with to prevent further polluting of its air and rivers. China has also come under scrutiny from the United States and other countries over product safety issues, both for products sold within China as well as its exports. That is why the role of regulation in a developing economy is crucial to gain the trust and confidence of its consumers, both domestically and abroad. Keep in mind that not all forms of regulation prove to be a positive for an economy. Certain regulations that protect monopolies and stifle competition can actually create major market inefficiencies. These inefficiencies may cause a short- and long-term drag on the economy, thus limiting growth.

To achieve true growth potential, there must be a flexible regulatory framework in place that allows markets to operate freely and efficiently. China's opening of markets to foreign investors is a good example of deregulation. After decades of self-reliance, China now seems to have found its place in the global marketplace, transforming the world's largest country.

There are risks. Non-democratic regimes can create some of the fastest growth rates, but at the risk of instability. As quickly as markets are evolving in the developing world, so, too, must the regulatory mechanisms to keep them under control.

Q Can a trust be named the beneficiary of an IRA? Does it make sense to do so?

A A separate trust may be named as the beneficiary of an individual retirement account (IRA), but with one caveat. Under current law, if you are married, anytime that you name a person or entity other than your spouse as the beneficiary of your IRA, that spouse will need to sign a waiver consenting to it.