How to invest in Chinese stocks: 5 ways to begin in 2024 (before the next bull market)
Despite surging towards all-time-highs in 2021, Chinese stocks have been out of favour for the majority of 2022 and 2023. But could 2024 be the year when the bulls return to China?
Many investors see immense opportunity to grab a bargain as high quality Chinese stocks trade at big discounts when compared to U.S. stocks.
So, how can you invest in Chinese stocks ahead of the next Chinese bull market and while they present very attractive value?
This guide breaks down the five easiest ways for anyone wanting to invest in Chinese stocks from the U.S, or other parts of the world.
Before reading on, you might also find these other stock market guides from the Asia Markets team useful:
- Investor’s guide to the Chinese stock market
- China H-Shares vs. China A-Shares
- What are the major Asia stock indexes?
- The complete guide to Chinese EV stocks
At first, investing in Chinese stocks might seem confusing, but it doesn’t have to be.
You’ll be able to gain exposure to the fastest growing region on the planet, very quickly (even within minutes if you decide to use a platform such as eToro) via any one of the five suggestions below.
How to invest in Chinese stocks
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
5) Invest in Chinese stock CFDs (if outside the United States)
Here, we examine each of these five 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 ordinary 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 North American investors, 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.
Etoro is another popular platform, known for what is calls “social trading”. Here, you can sign up and begin investing. You can even follow the trades of expert investors who use the platform.
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.
A final potentially negative factor to consider is the delisting of Chinese ADRs from U.S. exchanges which made news through 2021 and 2022. However, more recently concerns about this have eased significantly.
Invest in Chinese stocks via 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 in 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 institution 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 an underlying portfolio of many different stocks.
There are a number of ETF providers that specialise in Chinese equities. But you should be aware of the two main types of ETFs:
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 established 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.
Invest within minutes via Chinese stock CFDs (not available in the U.S.)
While U.S. residents are unable to trade CFDs, they are an option for people in the UK, Australia and many other parts of the world.
While not direct Chinese stock investments, a Contracts for Differences (referred to as a CFD) 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 listed companies. *eToro USA LLC does not offer CFDs in the U.S.
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.
You can also sign up to some great investing newsletters and stock investing insights services. One we recommend at Asia Markets is the Capitalist Exploits newsletter, written by prominent Hedge Fund Manager, Chris MacIntosh. Read more about its exceptional track record for picking stocks to buy here.
And 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.