Yes, Aussie punters can buy stocks in China, but it isn’t easy. The Chinese government restricts investment by foreigners but it is possible to trade some Chinese shares through accredited global brokers with offices in Shanghai and Shenzhen as well as via Hong Kong stockbrokers.

The mainland China markets have fallen over 40% since their peak last October but are widely expected to drop further as the government tightens monetary policy to control inflation, at 8.5% in April.

Financial stocks are out of favor due to concerns about the economy slowing, but Beijing-based fund manager Nolen Xu believes stocks such as Bank of China and ICBC (Industrial and Commercial Bank of China) are starting to look like good value.

“I would buy financial shares if I was investing for the long run, say two to three years. These are blue chip, relatively safe stocks,” he says. Xu also likes stocks which will benefit from the Olympics, such as Tsingtao Brewery, China’s largest brewer and a Games’ sponsor. Anheuser-Busch of the US owns 27% of Tsingtao.

ABN Amro has buy recommendations on ICBC, China Mobile, the integrated coal and electricity company China Shenhua Energy and Anhui Conch Cement. Head of China Research Wendy Liu says the global outlook is not favorable and further market correction is likely. She notes that China will continue to import inflation with higher commodity prices. Liu believes sectors such as telecom services, infrastructure, consumer staples and the large state banks will outperform through any correction.

China’s top listed companies usually issue A-shares in mainland China and these can only be traded by Chinese nationals and some foreign institutions. Foreign individuals are allowed to buy B shares, which are traded in US dollars for the Shanghai B market or Hong Kong dollars for the Shenzhen B market. Shenzhen offers 55 B shares while Shanghai has 54 B shares out of 904 listed companies.

Anyone wanting to invest in China cannot overlook the Hong Kong market, which offers shares in local companies with significant exposure to China, as well as in mainland-based companies. The latter fall into two categories: H shares, mainland China companies with listings in Hong Kong, and Red Chips, Hong Kong-incorporated companies but with most of their business in mainland China and ownership controlled there. All of the stock recommendations above can be bought as H-shares in Hong Kong except for China Mobile, which is a Red Chip. All of the H-share companies are major players in their industry and all fall within the top 200 Hong Kong stocks by market capitalization.

Red chips include oil company CNOOC, Lenovo (the owner of IBM) and China Netcom. Most are state-owned enterprises. Investors need to understand they are buying a share of a Hong Kong-incorporated company, not the China-based parent, and that the Chinese government considers industries such as telecommunications and oil as strategically important.

The mainland markets have their own peculiar features and often move independently of global markets and with greater volatility. It is common for the China markets to rise when Wall Street has fallen and dragged other Asian markets down with it and the Shanghai Composite Index, which measures A and B shares, often rises or falls 4% in a day even though trading in a stock is halted once its price moves 10%.

The China A market is currently at a premium of about 40% to the H-share market, reflecting the few investment choices available to mainland Chinese, who have flooded into property and stocks as inflation has eroded bank savings. Many analysts favor H shares over A shares in the same company, particularly with a forecast slow down in company earnings and economic growth this year.

Investors must also consider currency risk. The yuan is pegged to the US dollar and has been allowed to rise 5% this year, striking new highs this month. Chinese with access to hard currency can hold B shares and currency moves – or speculation about them – will affect B-share prices if investors switch between A and B markets. As more foreign institutions have been allowed to hold A shares and mainland companies have issued H shares, foreign interest in the B-share market has waned.

China has transformed within the past few years and its markets are still stgeloping. Transparency and accountability are improving but even China-based investors can find it hard to get information and many companies remain controlled by government entities. Chinese stocks can be influenced more by changes in government policy or rumors that a foreign company will buy equity than by their business operations. Quite often the first news of these comes from newspaper reports quoting unidentified sources which set off a wildfire of speculation and rumor which may jolt the mainland China markets.

Even though China’s economic growth is expected to slow this year it is still forecast to be around 10%, but investment in mainland China is complex and not for the faint hearted.