Chinese tech startup DiDi Global Inc. raised more than $4 billion preparing for a U.S. initial public offering (IPO), only for Beijing to yank the transportation provider’s app off the marketplace and initiate a cybersecurity review. While this may seem unreasonable to those unfamiliar with Chinese equities, experienced investors understand this is just another day in paradise when dealing with one of the world’s most unpredictable markets. That's why investors need to understand Chinese stocks.
Chinese stocks carry all the same risks as U.S. stocks. Add in the ever-present threat of an authoritarian regime and a touch of misinformation, and you create a very tricky environment for investing. Of course, that hasn’t stopped all Chinese firms from becoming household names — especially those in the booming tech sector. Investing in China will always be nerve-racking, and Beijing has no issues completely changing the rules on the fly. However, opportunity still exists with Chinese firms. Here are a few to keep an eye on.
Quick Look at the Best Chinese Stocks:
Overview: Chinese Stocks
The Chinese stock market is still in its infancy compared to the U.S. stock market. While trading equities occurred in Shanghai as early as 1860, the communist regime shut down capital markets after assuming power, and stock exchanges in Shanghai and Shenzhen weren’t reopened until 1990.
Today, the Shanghai and Shenzhen stock exchanges have a combined market cap of more than $12 trillion. Thousands of different companies can be traded in China now, but investors are still beholden to the machinations of the Communist government, a regime known for changing the rules without informing the players of the game.
Many Chinese stocks are available to trade on U.S. exchanges like the New York Stock Exchange and the Nasdaq Stock Market as American Depository Receipts (ADRs). An ADR functions pretty much exactly like a share of stock, but it isn’t actually issued by the company itself. ADRs are issued by U.S. banks and act as a claim on foreign shares. U.S. investors use ADRs as a proxy to access equities held outside U.S. borders. One downside of ADRs is the possible addition of foreign taxes and currency conversion fees. Make sure you understand all the costs involved with an international trade before placing your order.
Best Online Brokers for Chinese Stocks
Because many Chinese stocks trade over-the-counter (OTC) or as ADRs in the U.S., picking the right broker is crucial. An OTC stock like Tencent might not be available for all clients at the brokerage either, so make sure you can actually trade the stocks you want before signing up.
Features to Look for in Chinese Stock
- Global footprint: The best Chinese stocks will have an international vision. Not only does this expand their customer base, but it allows them to participate in much less restrictive markets than they’d find on home soil.
- A good relationship with the Chinese government: Doing business in China requires playing the cat-and-mouse game with the oppressive Communist regime. Let’s not mince words: This government is responsible for a number of atrocities and prefers to rule with an iron grip. However, to run a business in China, you need to play nice and concede to the government’s demands. Investing in China will always be riskier than in most other countries because of the threat of government interference.
- Revenue growth: A company still needs to make money, right? Once you get through the regulatory hoops, the best Chinese stocks share the same characteristics as the best stocks in any nation: manageable debt, good margins and expanding revenue growth.
Chinese Stocks to Watch for This Year
The business environment in China has gotten murky, and investors should be cautious when buying Chinese shares. Between the DiDi Global incident and the cryptocurrency crackdown, Beijing has a target on the finance industry. You’ll want to stick with established names that have experience dealing with the current government.
Alibaba is a tech conglomerate best known for its online wholesale and retail businesses. Alibaba.com and AliExpress.com are 2 of the most successful international marketplaces on the planet, and the company has ventures in a number of other industries, including healthcare and entertainment.
Alibaba was founded by Jack Ma and several associates in 1999, and the company helped Ma become one of the richest men in the world. The company currently has more than 250,000 full-time employees and a market cap approaching $600 billion. Alibaba posted more than $500 billion in revenue last year and expects to top $700 billion in revenue in 2021.
One of Alibaba’s main competitors in China is the e-commerce firm JD.com Inc., which owns the titular JD.com online retail site. Like Amazon in the U.S., JD.com users can find thousands of products on their marketplace ranging from electronics and clothing to food and medicine. Operating out of downtown Beijing, the firm employs more than 300,000 full-time workers and has 900 warehouses spread across China.
The parent company of JD.com was founded by Chinese entrepreneur Liu Qiangdong in 1998 and has been going head-to-head with Alibaba for nearly its entire existence. The company boasts a $120 billion market cap and earned over $700 billion in revenue in 2020.
If JD.com is the Amazon of China, then Baidu Inc. is the Google. Baidu considers itself a technology firm with applications in artificial intelligence (AI), online marketing and other internet services, but the core business is search. It’s estimated that Baidu has more than 75% of the Chinese market share for search, giving it unprecedented access to the world’s largest population.
Baidu operates out of Beijing and has 41,000 full-time employees. The current market cap hovers around $65 billion, and the company reported more than $107 billion in revenue for 2020. Baidu also has a 8.62 price to earnings ration trailing 12 months (P/E TTM), which is considerably lower than its peers on this list.
Tencent is one of the largest firms in China with a market cap close to $700 billion. However, it doesn’t trade on any major U.S. exchange, so investors will have to dip into the pink sheets to get shares. Not all brokers will offer over-the-counter stocks, so be sure your broker has TCEHY shares before signing up.
Tencent is another technology company with its hand in a number of cookie jars: internet services, social media, fintech, AI and more. Tencent owns the popular WeChat app and is one of the world’s largest sellers of video games and online music. The company has investments with hundreds of successful ventures, including Riot Games, Frontier Developments and Skydance Media. The company has nearly 90,000 full-time employees and posted more than $480 billion in revenue in 2020.
NIO Inc operates in China's premium electric vehicle market. The company designs and jointly manufactures, and sells smart and connected premium electric vehicles, driving innovations in next-generation technologies in connectivity, autonomous driving, and artificial intelligence. Its model includes EP9 supercar, ES8, ES6, and EC6. The company sells vehicles through its own sales network, including NIO Houses, NIO Spaces, and their mobile application. With electric vehicles stealing the spotlight from traditional manufacturers, this is an excellent stock to watch as it slowly grows alongside other EV assets. The majority of the revenue is earned from selling vehicles.
Investing in China Always Carries Unique Risks
Chinese investments have plenty of potential, but you’ll need to be cautious and take heed of any warning signs. Investing in China is always a battle — not just against competing firms but with the oppressive government, too. Many investors simply throw their hands up and forgo investing in China because the environment is too unpredictable. But if you want to diversify into Chinese equities, consider the ones on this list or purchase shares of an ETF focused on Chinese stocks.
Frequently Asked Questions
Should I invest in Chinese stocks?
Investing in Chinese stocks can be a good investment if you sufficient research before investing.
Which brokers trade Chinese stocks?
You can find a list of brokers that trade in Chinese stocks on the list above.
What are the best Chinese stocks?
Benzinga provides a list of the best Chinese stocks in the article above.