Are you excited about the upside potential of China but can’t pull the trigger because of the significant downside risk? Here is a way to invest in China growth and still sleep at night.

China has been the largest economy in the world for eighteen of the past twenty centuries and it is clearly determined to regain its role as the hegemonic power in Asia and then challenge U.S. global leadership. Will it be able to sustain its 10% economic growth rate, quell rural discontent, build a sound market-based financial system, privatize dominant state-owned enterprises and move towards openness and democracy? This is a tall order and you can put me in the skeptic column.

Nevertheless, China’s raw industrial power, momentum and the palpable ambition of the Chinese people could realistically yield a huge return. I advise my clients to go ahead and invest in China but emphasize that this is a speculative investment. It is smart to protect against the considerable downside risk.

Here is a simple plan you might want to execute to capture the upside while cutting your losses if the Chinese economy hits a speed bump.

First, you could take a broad stake in China through investing in the China iShare exchange-traded fund (FXI) that is comprised of 25 of the largest and most liquid China names. All of the 25 stocks included in the China iShare are listed on the Hong Kong Stock Exchange. Some of them are incorporated in mainland China (H shares) and some of them are incorporated in Hong Kong (red chips). The China iShare has been picking up steam in the last few months and is up just over 12% so far this year.
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