By Mark Jewell -- AP Personal Finance Writer
BOSTON (AP) — If you've been watching the headlines, you might think you've missed a big opportunity in China. But is it time to invest abroad?

BOSTON (AP) — If you've been watching the headlines, you might think you've missed a big opportunity in China. But is it time to invest abroad?

China's stock market is up about 22 percent so far this year. News accounts have spotlighted the recent bullishness of China's Shanghai Composite Index in what is now the "Year of the Ox" on the Asian lunar calendar.

Here in the U.S., the Standard & Poor's 500 remains down about 8 percent. A recent spurt of optimism hasn't yet offset the U.S. markets' lousy start this year.

But don't worry — the boat you missed to China wouldn't have made you rich. U.S. investors' main access to China's market is through mutual funds that invest there. And the funds with the heaviest China stakes are largely breaking even. The average year-to-date loss is less than 1 percent for the 34 U.S. mutual funds that either have "China" in their name, or keep at least 20 percent of their stock holdings in China, according to Morningstar Inc.

So how come you're merely breaking even at the same time China's domestic market is up 22 percent? Because, as a foreign investor in China, the Chinese stocks your fund holds are traded in Hong Kong or on other exchanges. And caution has reigned outside China lately about the country's ability to weather the global recession and a slump in international trade.

That's in contrast to the optimism in China's speculative domestic market. Stocks traded on Chinese exchanges — including those that make up the Shanghai Composite — remain largely off-limits to foreigners.

"Chinese markets tend to go their own sweet way," said Edmund Harriss, who's spent the past 11 years managing the Guinness Atkinson China & Hong Kong Fund (ICHKX), which is down about 2 percent this year.

That difference in market thinking is just one reason why emerging nations' domestic markets can perform so differently than mutual funds investing in those stocks. The resulting confusion can lead investors to latch onto whatever overseas market is booming — even if the news headlines may be out of synch with their potential fund returns.

"People get caught up in the emerging markets flavor of the month," said Bill Rocco, a Morningstar fund analyst who follows emerging markets.

Anyone pondering investing overseas should know that each country's situation is unique, and be aware that emerging markets by their very nature grow in fits and starts.

China -- the focus of at least nine specific-market funds launched in the past three years alone — offers lessons that can apply to many countries whose economies and markets are maturing. Here are some reasons why you shouldn't expect an investment in a China fund to match the performance of China's domestic market:

• MARKET ACCESS: The communist government's reforms to encourage more foreign investing still give foreigners very limited access to China's domestic market — known as its "A share" market. But for most of us, investing in China means buying mutual funds that are traded on exchanges outside China, like Hong Kong's. You can also buy shares of Chinese companies with stocks listed on overseas exchanges, but there are only a few.
• MARKET THINKING: Some Chinese stocks are traded both domestically and on foreign exchanges. In some instances this year, Chinese investors trading on their domestic exchanges have valued the same company 40 percent greater than foreign investors in Hong Kong, Harris said.

The Chinese government's stimulus efforts have boosted Chinese investors' confidence in their domestic market. But outside China, investors aren't so sure the government can insulate China's economy from problems overseas that are sapping demand for its exports.

• MARKET MATURITY: U.S. markets' recent volatility raises legitimate questions about how big a role speculation plays in driving stock prices. But speculation is even more pervasive in China's still-maturing market. That means Chinese companies' domestic market stock prices can vary widely from their prices on overseas exchanges.

China's market "is a very volatile, rumor-driven market," said Richard Gao, manager of the Matthews China Fund (MCHFX), which is up nearly 3 percent this year.

The amount of money that average Chinese investors have put in their stock market is relatively small, and that small pool means volatility is more likely than in a huge market like in the U.S., Harriss said.

The Chinese domestic market "doesn't really act as a good barometer of economic performance," he said. "From a retail investor perspective, there isn't a lot of understanding of how equities work, and what drives stock valuations."

So what's a foreign investor interested in getting a piece of emerging market action to do? China — and all emerging markets — can offer good prospects if you're looking to build a retirement nest egg for the long haul. But expect a rough ride along the way.

"With China, you're buying into a growing and developing consumer market, and that is the underlying story," Harriss said. "Don't buy too much of the hoopla, and don't buy into the doom-mongering either. It's an emerging market, and of course there are stresses and strains with a developing economy."
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Questions? E-mail AP at investorinsight@ap.org.

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