China has been a remarkable growth story and over the long term is expected to maintain its momentum. However, the advent of the Year of the Snake is a good opportunity to remind investors that buying Chinese stocks is no guarantee of impressive returns. Those who had invested in the MSCI China Index at inception would have lost money by the end of last year.

The key to making good returns in China, or indeed anywhere else, is to do your homework on a company level. After all, we are investing in real businesses and not stocks per se. As long-term investors, this translates into two things – quality and value. By quality, we mean businesses with strong competitive positions, robust balance sheets, experienced management and attractive growth prospects.

How do Chinese firms fare in this regard? Quite poorly, unfortunately. China is a classic case of “good macro, bad micro”. Most companies are state-owned, which means they are not necessarily run in favour of shareholders.