Emerging markets proved to be a great investment over the last few decades. Chief among them was China. From 2004 until its peak in 2007 the Hang Seng index rose 300% before crashing back down to its breakout level. Over the next 10 years, the market staged a similar rally to take out its old highs before falling off again. The Shanghai index rose nearly 600% into 2007, only to do a similar crash and rally 500%.
Many U.S. investors want to take part in the Chinese stock market but don’t know how. We’ll provide you with some of the basics so you can buy Chinese stocks.
What to know about the Chinese stock market
Chinese stocks operate on several stock exchanges and currencies. The Chinese government limits foreign investments in some types of stock.
Below is a table from Charles Schwab that lists out each of the categories.
Class A Shares can be accessed by foreign investors but only through funds and ETPs. MSCI made news in 2018 by including over 200 A shares in its emerging market index.
The expansion of the Stock Connect program increased flows between Hong Kong and China. Foreign investors encounter fewer restrictions investing in Hong Kong, which maintains a semi-independent government from China.
Pros and cons of Chinese stocks
Choosing to invest in Chinese stocks offers some unique benefits and significant risks.
Pros
- Access to one of the largest and fastest growing markets in the world.
- China’s central government increased access for foreign investors in recent years.
- Mainland China continues to export more to countries around the world, including the U.S.
- New ETPs offer investors ways to invest in Chinese stocks while limiting risks.
Cons
- The Chinese government still holds significant control over its stock market.
- Many investors fear a large “shadow banking” system is currently propping up the Chinese economy.
- Regulations on what and how Chinese companies report don’t give investors and apples to apples comparison.
- Trade tensions continue between the U.S. and China.
Ways to invest in Chinese stocks
Looking at the different types of Chinese stock classes, you may be wondering how to buy shares. Several options exist for U.S. investors:
1. Direct purchase
You can purchase shares of a Chinese company through a broker that operates on its exchanges. Undertaking this approach requires analyzing individual companies.
2. ETPs and index funds
Exchange-traded products and funds allow you to purchase a basket of Chinese stocks rather than picking one. This approach lets you focus more on the overall China story rather than individual companies.
3. Managed funds
Similar to ETPs, you can purchase an actively managed fund. Managed funds rely on the expertise of individual managers to select which companies to choose.
4. American Depository Receipt (ADR)
American Depository Receipts (ADRs) are shares issued by instructions that represent a portion of shares the bank holds in a trust. They offer investors a way to buy stock on the U.S. exchanges that contractually represent Chinese stock ownership.
5. Options contracts
U.S. investors can purchase options on ETPs, indexes, as well as ADR equities.
How to buy Chinese stocks
You can buy shares of Chinese stocks following some easy steps.
- Choose how you want to invest
Select one or more instruments to buy. You will need to decide between:
Direct investments or derivatives.
Owning one or a basket of stocks.
How the currency risk will be managed. - Size your investment for each choice
Determine how much you want to invest in each option. Use your analysis of each investment and your whole portfolio. Remember to account for exchange rates if you calculate a number of shares.
- Find a broker
Find a broker that is licensed to trade on the market you want to invest. Larger brokers will generally provide ways to buy Chinese shares through their foreign entities.
- Place an order
If you buy shares on a foreign exchange your stockbroker will take the information you have provided and place the order for you. Otherwise, you can buy the shares, contracts, or funds as you would any other on the U.S. exchanges.
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Chinese stock market future outlook
Since the peak in 2017, the Hang Seng market looks headed for bear market territory down almost 20%. The Shanghai Index peaked just above 5,000 CNY in 2015 and since fallen below 3,000 CNY.
Both markets remain under pressure with increased trade tensions along with a pivot in growth policy from the Chinese government. Investors can still expect markets to ease restrictions from foreign investors as China looks to replace its “shadow banking” system.
Final thoughts
Both the Hang Seng and Shanghai markets experience higher volatility than U.S. indexes. Sizing your investment becomes more important when stock prices whip around more.
Also, keep in mind that the Chinese government can and has directly manipulated their markets. This sometimes impacts individual companies. At other times it affects broad sectors of their economy. Consider these when investing in Chinese stocks.
Frequently Asked Questions
Can overseas investors buy Chinese stocks?
Foreign investors can buy Chinese A-shares for stocks trading on the Shenzhen and Shanghai exchanges.
What are the best ways to buy Chinese stocks?
You can buy them through ADRs, ETPs, index funds, or direct purchase.