Investors can reduce the amount of risk by investing in global companies that are already active in the Chinese economy, writes Patrick Lawless.

Chuc Mung Nam Moi (happy New Year), as they say in China, but will China, whose billion-plus population celebrates New Year this week, provide happy returns for investors?

China has been the cornerstone of Asia's growth. With relatively low inflation, most commentators expect high single-digit growth for 2005 as the authorities continue to transform its economy from command to capitalist (the state still owns some 60 per cent of China's assets).

The growth in the Chinese economy has been driven by a large, cheap labour force, attractive tax incentives and massive capital investment by domestic and foreign companies. But although the economy has slowed to a soft landing, inflation remains a background threat.

Inflation is of particular concern to the Chinese authorities as a result of the possible social unrest aligned with the reduction of consumers' purchasing power and value of their savings. In the view of some commentators, this rapid growth has created asset bubbles, particularly in the property market.

However, the Chinese economy has recorded exceptional growth in recent years, but is this growth sustainable?

The China story includes an almost faustian bargain between China and the US. With manufacturing centres moving from the US to China, the Chinese economy has grown substantially and has been able to satisfy the almost insatiable consumer demand from the United States.

But Americans are consuming too much and are saving too little. The US savings ratio, which traditionally has been around 6 per cent, has fallen to 0.2 per cent. In return, the Chinese have used their US dollars to become the biggest investor in the US treasury bond market. In essence, they have been funding the twin deficits of the US but this faustian bargain could come to a painful end.

Economic tensions between the two countries surfaced at the recent G7 meeting where China told the US to get its house in order by tackling its budget deficits. In return, the US said that the Chinese yuan should be re-valued and some believe the dollar must fall further to allow the US to become more competitive and adjust its trade gap. However, it is the yuan's peg to the dollar that has helped China become the global provider of cheap goods.

This massive transformation of the Chinese economy is not being executed without teething problems. The recent scandal in China Aviation Oil, where $550 million (€427 million) was lost by its chief executive on aviation fuel derivatives, calls into question the level of corporate governance applied to operate large organisations. It appears that investors and banks have been asked to write off more than 60 cents in the dollar in relation to China Aviation Oil.

There is also a question mark over accounting policies. There are few international financial reporting standards adhered to and accounting for goodwill seems to be on an almost ad-hoc basis.

Emerging markets have always had shocks over time due to political uncertainty, economic uncertainty or corporate governance. China may be no different.

Rather than investing directly in China, perhaps private investors should consider lower-risk ways of investing in these markets such as investing in a blue-chip European company with exposure to China.

On the home front, Kerry Group, the Republic's largest food company, has bought Lanli Food Industry in China. Kerry will invest €20 million to build a multi-processing manufacturing facility and technical centre.

Investing in any developing economy, especially one growing at the rate of the Chinese economy, carries an element of risk. But indirect investment through global firms already active in China is a low-risk entry point.

Patrick Lawless is managing director of Appian Wealth Management.