If you want to follow billionaire Ray Dalio’s advice and take a gamble on China, you’d better be ready to hang on to your hat.

Dalio, the founder of hedge fund behemoth Bridgewater Associates, has been a bull on China for a long time. He stepped into the current maelstrom to reiterate his case. “Would you have not wanted to invest with the Dutch in the Dutch empire?” he asked recently in an interview on YouTube

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“Would you have not wanted to invest in the industrial revolution and the British empire? Would you not want to invest in the United States and the United States empire?”

China today, he said, is “comparable.”

Fair enough.

Dalio is a brilliant investor. Forbes says he’s made about $20 billion, and presumably not all of it came from charging fees on other people’s money.

Investing in empires

Stocks are long-term plays, and you can usually only buy them cheaply in a crisis. There is clearly value there. FactSet’s broad index of Chinese mainland stocks trades for only 13 times next year’s forecast earnings, and its index of Hong Kong stocks a paltry 10 times.

The U.S., by contrast: 17 times.

By some other measures, China looks even cheaper. When you compare stock values to corporate revenues, for example, mainland China is about a third cheaper than the U.S.

And this is for a country where economic growth, despite the recent slowdown, is forecast to be more than twice as fast as America’s this year.

‘Investors who buy individual Chinese stocks may be gambling on a poker hand without seeing all the cards.’

China is already the largest economy in the world in raw output, and is expected to be the largest in U.S. dollars terms within a decade or so, the International Monetary Fund says.

When the Chinese Communists cracked down on the protests in Tiananmen Square in 1989, the Hong Kong stock market crashed nearly 40% in a few weeks, records show. The Hang Seng plunged from 3,310 to 2,094 points between mid-May and early June, with most of the fall in the last couple of days.

Oh, and that was Hong Kong’s reaction to a protest taking place in Beijing … at a time when the two countries were completely separate. (There is little reliable data on mainland Chinese stocks from the Tiananmen period.)

Investors who buy individual Chinese stocks may be gambling on a poker hand without seeing all the cards. “Corporate accounts here should all begin with the words, ‘Once upon a time,’ ” a Western businessman at a prominent Chinese company tells me. He describes occasions where managers in business meetings had, in effect, offered to make financial data whatever he wanted them to be.

‘Are the figures real?’

Legendary London investor Anthony Bolton, who managed the Fidelity Special Situations

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 fund there very successfully for almost 30 years, went to China and was quickly defeated.

“When I went out to China, I thought corporate governance was about whether the chairman and the chief executive were the same, or whether the board had a majority of independent directors,” he said when he wound up the fund in 2014. “I found that corporate governance is a euphemism for ‘Are the figures real and is the management lying?’ ” Many managers there, he alleged, “are great liars.”

(It was much the same in the U.S., when it, too, was an emerging market, before the creation of the Securities and Exchange Commission in 1934 introduced at least some level of accountability. Cynics wonder, with all the stock options and stock bonuses being handed out these days, whether it’s that different.)

‘Chinese debt bomb’

Oh, and then there’s this gigantic “Chinese debt bomb” that everyone keeps talking about but which hasn’t, yet, apparently exploded. They typically end up either not exploding at all, or they only explode when everyone has given up waiting.

Investing specifically in Hong Kong right now seems like betting your house on a flip of a coin. It’s either going to look really smart down the road or really foolish. The mainland Chinese markets offer a different bet. There you’re betting on a gigantic economy that is still growing quickly and where there are enormous opportunities.

When it comes to investment vehicles, those who want to gamble on China aren’t spoiled for choice. The biggest exchange traded fund, the $4.7 billion iShares China Large-Cap ETF

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charges a hefty 0.74% in fees a year. The slightly smaller $3.6 billion iShares MSCI China ETF

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which invests in middle-sized companies as well as large ones, is a bit cheaper at 0.59%. The Franklin FTSE China ETF

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charges only 0.19%. But the fund is tiny and trading volume is thin.

Among sector bets, the KraneShares CSI China Internet ETF

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looks intriguing. It’s exposed to a volatile but fast-growing sector of the Chinese economy, including a lot of household names like Tencent

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TCEHY, -1.45%,

Alibaba

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 and Baidu

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It’s down nearly 40% from the peak early last year. Whether you see that as an opportunity or a portent of doom is up to you.

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2019-08-28