How to invest in Chinese stocks: 4 easy ways to get started in 2022
Want to know how to invest in Chinese stocks? Here are the four main ways in which anyone in the U.S can get started and gain exposure to the fastest growing region on the planet.
How to invest in Chinese stocks from the U.S.
1) Invest in Chinese stocks via listed American Depository Receipts (ADRs)
2) Use a broker that offers access to Hong Kong-listed and Chinese mainland-listed stocks
3) Invest in a U.S.-listed China Exchange Traded Fund (ETF)
4) Invest in an unlisted China Mutual Fund
In this Asia Markets guide, we’ll examine each of these four options in detail.
Invest in Chinese stocks via American Depository Receipts listed on a U.S. exchange
American Depository Receipts (ADRs) provide the simplest way to gain exposure to Chinese companies.
ADRs can be bought and sold like any other U.S.-listed stock and pay dividends like any other stock, however their underlying structure is unique.
As the name suggests, when you invest in an ADR you are investing in a Depository Receipt, which is a security that represents the stock of foreign company held by a U.S. bank.
An example of this is Alibaba Group (NYSE:BABA). The Chinese e-commerce giant is one of the most popular ADRs that trades in the U.S. Each ADR traded on the NYSE represents one Depository Share, held by Citi Group as Alibaba’s U.S. custodian bank.
The reason this investment structure was developed back in 1927, was to enable international companies to gain access to investors in the U.S., without having to grapple with the red tape that comes with a formal U.S. exchange listing. Due to regulatory differences across the world, some foreign companies would never be able to list in the U.S. without the ADR structure.
While this might sound complex, when investing in a Chinese ADR, you will notice very little difference between your ADR holding and regular U.S stock holdings.
Aside from Alibaba Group, other popular Chinese ADRs include, Baidu (NASDAQ: BIDU), Bilibili (BILI), China Petroleum & Chemical Corp (Sinopec) (NYSE: SNP), China Southern Airlines (NYSE: ZNH), Didi Global (NYSE: DIDI), JD.com (NASDAQ: JD), Pinduoduo (NASDAQ: PDD).
What are the pros and cons of Investing in Chinese stocks via American Depository Receipts?
ADRs are simple and convenient and often come with very low, or even free brokerage.
Robinhood is one zero-free trading app in which U.S. residents can invest in Chinese ADRs. It’s a great platform for anyone wanting a simple and cost effective way to invest in some of China’s fastest growing and most innovative businesses.
The downside of ADRs is that they can often trade at a small premium to shares of the same company listed in Hong Kong or a Chinese mainland exchange.
There are also only just over 150 Chinese companies with U.S. exchange-listed ADRs. Unfortunately many great Chinese businesses don’t have ADRs.
Use a broker that offers access to Hong Kong-listed & Chinese mainland-listed stocks
To get access to the myriad of Chinese companies that don’t have ADRs, you’ll need to sign up to a broker that provides access to stocks listed Hong Kong or mainland China exchanges – or both.
Often you might see the terms Chinese H-Shares and A-Shares used when referring to Chinese stocks.
In summary, China H-Shares are listed on the Stock Exchange of Hong Kong and trade in Hong Kong Dollars. A-Shares are listed on exchanges in mainland China and trade in Chinese yuan.
Up until recently it was very difficult for foreign retail investors to trade A-Shares.
Unlike H-Shares, trading A-Shares directly on the Shanghai and Shenzhen Stock Exchanges is only available to what’s know as Qualified Foreign Institutional Investors (QFII). For an insitution to become a QFII’s they must apply to China’s State Administration of Foreign Exchange and meet a range of requirements relating to factors such as the experience of the investment team and assets under management.
There are currently close to 500 QFII’s across the globe.
However, China loosened its grip on A-Shares trading restrictions in 2014, and now the majority (but not all) Chinese A-Shares are available to foreign retail investors through the Stock Exchange of Honk Kong’s Stock Connect platforms. These are known as Shanghai Stock Connect and Shenzhen Stock Connect.
So when looking for a broker to buy Chinese stocks, you’ll see the majority offer only Hong Kong-listed H-Shares, while a smaller but growing number of brokers offer access to the Hong Kong Stock Connect Platforms.
Interactive Brokers is an online platform that enables U.S. residents to invest in Hong Kong Listed stocks, along with A-Shares via the Shanghai Hong Kong Stock Connect platform.
What are the pros and cons of using a broker to invest directly into Hong Kong and stock connect?
The main advantage is the wide range of Chinese companies available – many aren’t listed as U.S. ADRs.
Investors may also find the Hong Kong or Chinese mainland-listed shares of many Chinese companies, trade cheaper than their equivalent U.S-listed ADRs.
The main downside is there are usually slightly elevated fees attached to international share trading.
Invest in a U.S.-listed China-focussed Exchange Traded Fund (ETF)
Investors can purchase units in U.S.-listed Exchange Traded Funds (ETFs) just like any stock. But when you invest in an ETF, you invest in underlying portfolio of many different stocks.
There are a number of ETF providers that specialise in Chinese equities. There are two main types:
Passive ETFs track an underlying index, meaning the portfolio you invest in is constructed passively in order to mirror that index, for example the biggest stock in the index will have the biggest weighting in the ETF’s portfolio.
Examples of Chinese passive ETFs in include the iShares MSCI China A ETF, which tracks the MSCI China A Inclusion Index. This provides investors broad exposure to A-Shares listed on the Shanghai and Shenzhen Stock Exchanges.
Another more niche example is the KraneShares MSCI Clean technology Index ETF which tracks the performance of the MSCI China IMI Environment 10/40 Index. This is an index of Chinese companies that derive at least 50% of revenue from the development of environmentally-friendly technology such as alternative energy, sustainable water, pollution prevention and energy efficiency.
The Best Chinese ETFs are regularly covered by the Asia Markets team.
Active-ETFs differ to passive ETFs, as their underlying portfolios are actively managed by professional fund managers, as opposed to passive ETFs which just track an index.
A great example is the Global X China Innovator Active ETF, which invests in what the manger deems as ‘innovative’ Chinese businesses with are headquarter or incorporated in mainland China, Hong Kong or Macau.
What are the pros and cons of investing in China ETFs?
ETFs a very simple to buy and platforms such as Robinhood offer fee-free ETF purchases.
Unlike investing directly into stocks, ETFs generally charge a small management fee that comes out of the portfolio’s profits. These fees are usually quite low for passive ETFs, and slightly higher for active-ETFs. Some may also have performance fees.
When investing in active or passive ETFs, you don’t have any say in what stocks the ETF invests in.
Invest in an unlisted China-focussed Mutual Fund
The fourth option for anyone asking how to invest in Chinese stocks, is Mutual Funds.
Mutual Funds are unlisted investment products, which you can purchase units in via some online investment platforms, your financial adviser, or directly via an application with the fund manager.
Like ETFs, Mutual Funds offer investors exposure to an underlying professionally managed portfolio of stocks. Some also use derivatives to take short positions. Most are designed to meet the specific needs or objectives of certain investors and aim to outperform an index or benchmark.
There are a number of Mutual Fund in the U.S. which specialise in Chinese stocks. Matthews Asia is one establish China-focussed investment manager which offers a range of Mutual Funds composed of H-Shares and A-Shares.
Many large global asset managers also offer China-focussed U.S. Mutual Funds such as Aberdeen Asset Management, Fidelity and Goldman Sachs.
What are the pros and cons of investing in a China-focussed Mutual Fund
Because Mutual Funds are usually managed by highly experienced specialist investors, they can provide a safer option as opposed to direct investing, especially for individual investors who aren’t experienced in investing in a region such as China. Mutual Funds are also highly regulated, meaning investor funds have a high level of protection and many fund managers have stringent risk management and stock selection processes.
On the downside, most Mutual Funds charge higher management fees than ETFs and also come with performance fees. They also have high minimum initial investments, usually above $50,000.
Like ETFs, investors don’t have any input into what stocks the Mutual Fund invests in.
While not direct Chinese stock investments, CFDs can provide a quick and easy way to gain exposure to the price movements of many of the most popular Chinese companies.
When you open a CFD position in stock such as Alibaba you don’t get ownership rights to the company, however the trading platform you use purchases the stock and providing you exposure to the underlying price movements. Buyers of CFD can choose to ‘BUY’ or ‘SELL’. When ‘buying’ the investor will profit as the price of the underlying stock moves up. When ‘selling’ the investor will profit as the price falls.
One of the most popular CFD trading platforms globally is eToro. On eToro you’ll find many of the most popular Chinese companies listed in the U.S. and in Hong Kong.
Still not sure how to invest in Chinese stocks?
Everyones’ circumstances are different, so before getting started investors should do their research and consider seeking professional advice. Also it’s worth keep up to date with news and analysis on websites such as Asia Markets. You can subscribe for exclusive news and analysis here.
Finally, while Chinese stocks have been very rewarding for long term investors, particularly over the past decade, you should always consider the risks and volatility that comes with investing in global equities.