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Invest in China Stocks through ADR’s

If an investor is interested in the Chinese market and evaluating available options for consideration, one of the oldest investment options is the ADR, or American Depository Receipt. An ADR is a negotiable certificate that is issued by a US bank in a foreign stock, traded on the US exchange. An ADR is negotiated in US currency. Also, the underlying security that was issued is held by a US financial institution overseas.

One thing that is important to note about ADRs is that there are 3 levels, including:

• Level 1 - These ADRs are considered to be the most basic form of an ADR. These are found on the over the counter (OTC) markets and are an inexpensive way for foreign companies to have their securities listed on the North American exchanges, and are also great for those foreign companies who do not either qualify or who don’t want to go through the hassle of having their security listed as the requirements for this level of ADR are the most lenient.

• Level 2 - ADRs that are considered to be Level 2 are listed or quoted on the NASDAQ exchange. In general, this level of ADR listing has slightly higher requirements, but these ADR’s may have a higher visibility than those that are listed as a Level 1.

• Level 3 - This level of ADR is considered to be the most prestigious and it is also the most challenging to be issued for foreign companies. This level of ADR involves the floating of a public offering within the US securities market and gives the issuer the most visibility of the 3 levels.

Why are ADR’s Attractive?

There are several advantages to an investor who purchases an ADR including:

• ADR’s can work to reduce administration costs associated with investing and with duty costs. Also, foreign taxation can generally be eliminated or reduced by investing in this fashion.

• Foreign investors like to purchase ADRs as they are gaining exposure in international markets without some of the hassles or restrictions.

ADR Investment Risks

With any investment type, there are associated investment risks. Some of the risks associated with ADRs include:

• Exchange Rate Risk - Generally considered to be the most substantial risk, this form of risk refers to the possible instability of a foreign currency. ADR shares are issued in the home currency, so if the home currency becomes devalued, this will affect the value of your ADR. And, this form of risk can affect the value of your ADR even if the underlying security is performing at or above the expected return rate.

• Inflation Risk - The risk of inflation affects virtually every kind of investment. Inflation refers to the purchasing power of someone’s capital.

• Political Risk - As ADRs are dealing in a foreign investment and foreign currency, the instability or stability of the political system of that country can affect the valuation of its securities, and ultimately the value of an investor’s ADR.