The intended audience for Burton Malkiel and Patricia Taylor’s book is clear from the title. The book starts with a brief review of China’s history. The authors argue that to understand China’s outlook, and to devise a strategy for investing there, you have to understand four past influences: confucianism, colonialism, communism and capitalism. There follows a section on the economy’s transformation since Deng Xiaoping became leader and on its future prospects. Having assessed each of the main risks to future growth, Malkiel and Taylor conclude: “Setbacks will arise and the growth path in the future is unlikely to be smooth. Nevertheless, we are convinced that with a practical government devoted to the market system, and with an ambitious, educated, and entrepreneurial population, China is likely to enjoy many more years of rapid growth.” 
The second half of the book is devoted to China’s capital markets, and in particular to choosing an investment strategy in those markets. The authors point out that “China’s future depends to a large extent on its attempts to create a well-functioning financial market.” 
It seems, however, that China’s financial markets do not function very well at present. Since the book was completed, the Shanghai stock market has fallen over 50%. This is perhaps not surprising given that, as the authors acknowledge, the Chinese market in A shares (ie, those available to local investors) fails tests of market efficiency. Inside information appears to play an unduly large role in determining investment success in China. Part of the problem is down to fraud – a 1999 Ministry of Finance study found that 89% of Chinese listed companies had cooked their books! Part is down to a lack of rigorous accounting standards. Chinese companies are belatedly adopting IFRS, but a shortage of accountants – a legacy of the cultural revolution – is slowing the transition. And part of the problem is the large number of state-owned enterprises listed on the Chinese stockmarket: the behaviour of companies accounting for a major part of the index is not always profit-driven and is thus more unpredictable. Finally, the market suffers a high level of government and regulatory interference. 
The odds would seemingly be stacked against foreign investors. But Malkiel and Taylor argue that no well-diversified investment strategy can afford to ignore the opportunities that China offers and put forward a number of strategies for investment in Chinese bonds, real estate, art and equities. In a short review it would be impossible to do justice to their recommendations. This is a very well written book, full of interesting facts, stories and observations. It is entertaining enough to read by anyone, including those with no plans to invest in China. I strongly recommend it.

Patrick Foley

Director, Group Strategy & Corporate Development, Lloyds TSB