A Back-Door Approach To China (PEK, CAF)

A massive credit expansion has left the Chinese economy with a potentially precarious overabundance of liquidity. Inflation is high and the Chinese property market is red-hot. The Beijing government has already taken steps to cool the economy, but many investors are worried about the nation's prospects in 2011. Despite all this, China is still a great place to invest.

One of the more interesting ways to participate in China's growth is through the nations A-Shares. These securities, which can only be accessed by certain international investors under the China Qualified Foreign Institutional Investors [QFII] regulations, provide the purest China plays.

The Morgan Stanley China A Share Fund (NYSE: CAF) currently holds about 40 different Chinese A-Share companies and is currently trading at a slight discount to its net asset value. Expenses run at 1.78% annually, but for the hard to access asset class it could be worth it.

Using swaps and derivatives to invest in A shares, the newly minted Market Vectors China ETF (NYSE: PEK) tries to replicate the performance of the CSI 300 Index, a benchmark of 300 different A-Share stocks listed on the Shenzhen or Shanghai Stock Exchanges. Expenses are cheaper than CAF (0.72%), but there is added counterparty risk via the swaps.

Either way, both funds offer a backdoor into the growing Chinese market.