China ETFs On Sale, But Worth the Risk?

The country’s economic outlook, like the rest of the globe, is a puzzle.

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Much of the world is watching China's improved but vulnerable financial system. "China's banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities," says Jonathan Fiechter, deputy director of the IMF's Monetary and Capital Markets Department, part of his team's first Financial Sector Assessment Program (FSAP) review of China, which was carried out jointly with the World Bank. China is among the 25 nations that agreed to such testing at least once every five years.

"While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed, the better," Fiechter said.

[See 5 Reasons to Stop Fearing China.]

The stock market is reflecting the uncertainty. Actively traded stocks, including Dangdang and Youku, reported third-quarter losses recently, and Baidu's stock has tread water for much of this year.

For sure, a liquid, relatively easily accessed exchange-traded fund is a good way to get exposure to China and other pockets of the globe that may lead the next international growth spurt, particularly as the developed world whittles down its debt load at the expense of risk-taking expansion.

Some economists predict that China will become the world's largest economy in 15 years. But for now, investing in China through ETFs requires some careful consideration with attention on inflation levels and the resolution of Europe's debt crisis. The bottom line: Investors will be well-served to familiarize themselves with the more heavily-traded China ETF options so that they're ready to move when steady growth signals emerge for this emerging-market engine.

Here's a look at the U.S. News Best Fit China-Region Funds:

1. SPDR S&P China ETF (GXC)

2. iShares MSCI Taiwan Index Fund (EWT)

3. iShares MSCI Hong Kong Index Fund (EWH)