How to Trade Chinese Stocks and Invest in Chinese Companies
China opened up to foreign trade and implemented free-market reforms in 1979.
According to the Congressional Research Service, it experienced significant gains since then, with its gross domestic product (GDP) growing by 9.5% each year, on average, and lifting over 800 million people out of poverty.
China is the world’s largest manufacturer and is a major exporter of electronics, medical equipment, machinery, and vehicles.
As of the largest economies, some of the biggest companies in the world are headquartered in China.
Below are the ten largest companies in China based on market capitalization (as of 2019), including some household names:
- Alibaba (Conglomerate)
- Tencent (Conglomerate)
- Industrial and Commercial Bank of China (Banking)
- Ping An Insurance (Insurance)
- China Construction Bank (Banking)
- Agricultural Bank of China (Banking)
- Kweichow Moutai (Beverage)
- PetroChina (Oil & gas)
- Bank of China (Commercial Banking)
- China Merchants Bank (Commercial Banking)
If you’re looking to diversify your investments, investing in foreign stocks can be appealing, and there are a wide range of Chinese companies to choose from.
It’s not as easy as investing in domestic securities.
If you want to learn how to trade Chinese stocks, here’s what you need to know.
Ways to Invest in Chinese Stocks
If you want to invest in Chinese stocks, there are three ways to do so:
1. American Depository Receipts and Chinese A-shares
Some major Chinese companies are traded on major U.S. stock exchanges as American Depositary Receipts (ADRs).
Each ADR represents a share or fraction of a share of foreign stock.
According to the U.S.-China Economic and Security Review Commission, there were 156 Chinese companies listed on U.S. exchanges as of February 2019. Companies include:
- Alibiba Group Holdings (BABA)
- Weibo Corporation (WB)
- Concord Medical Services Holdings Limited (CCM)
- China Automotive Systems (CAAS)
- Acorn International, Inc (ATV)
You can also buy A-shares, meaning shares from companies from mainland China listed on the Shanghai and Shenzhen Stock Exchanges.
To invest in these companies, you can purchase shares of ADRs through a U.S. broker.
2. Invest through a market maker or affiliate firm
Not all Chinese companies trade on U.S. stock exchanges. The majority are only traded on Chinese exchanges instead.
The three major exchanges are:
- Hong Kong Stock Exchange: Over 2,400 companies are listed on the Hong Kong Stock Exchange, with a total market capitalization of over $38.2 trillion.
- Shanghai Stock Exchange: The Shanghai Stock Exchange was established, and is the second largest stock exchange in the world in terms of capital raised.
- Shenzhen Stock Exchange: Over 2,200 companies are listed on the Shenzhen Stock Exchange, and over 10,600 securities.
To purchase stocks on a foreign exchange, you have to contact your brokerage firm and see if they allow foreign investing.
If so, the firm will work with a market marker, also known as an affiliate firm.
The market maker is a firm located in the country where you want to invest that will facilitate the transaction.
3. Purchase shares of mutual funds or exchange-traded funds
Another way to invest in Chinese stocks is to invest in mutual funds or exchange-traded funds (ETFs) that track the Chinese stock exchanges.
By investing in mutual funds and ETFs, you can instantly diversify your portfolio while getting exposure to foreign companies, spreading out your investment across hundreds or even thousands of companies.
Mutual funds and ETFs don’t have to be actively managed, so they tend to have lower costs than other investments, and they have less risk than investing directly overseas.
When comparing funds, look for a mutual fund or ETF that tracks the Chinese indices. Some popular choices include:
- Shanghai Stock Exchange Composite Index: This index tracks the performance of all A-shares and B-shares on the Shanghai Stock Exchange.
- Shanghai Shenzhen CSI 300 Index: The Shanghai Shenzhen CSI 300 Index is made up of 300 of A-share stocks on the Shanghai or Shenzhen exchanges.
- Shenzhen Composite Index: This index tracks the performance of all A-shares and B-shares on the Shenzhen Stock Exchange.
How to Invest in Chinese stocks
To invest in one of the world’s largest economies, follow these four simple steps:
1. Open a brokerage account
Open a new brokerage account to get started. When deciding where to open an account, consider companies’ minimum investment requirements, fees, and the types of securities they offer.
2. Decide what type of security you want to purchase
Once your account is open, think about what type of security you want to purchase: stocks, mutual funds, or exchange-traded funds.
If you want to buy shares of individual companies, you want to purchase stocks.
If you want diversification and to be more passive, you want to purchase either mutual funds or ETFs that track an index.
Mutual funds can only be traded once per day after the market closes, while ETFs can be traded throughout the day.
3. Buy shares
When you’ve decided what security you want to buy, enter how many shares you want to purchase and complete the transaction.
You’re now a foreign investor.
If you want to keep the momentum going, you can set up recurring contributions so you can continue investing every week or every month.
If you’re not sure where to open an account, here are our picks for the best online brokerages for 2020.
Understand the Risks
Investing in foreign stocks can help diversify your portfolio and mitigate some of the risks associated with a U.S. investment portfolio.
As evidenced with China’s remarkable development, emerging markets can have strong opportunities for growth.
However, there are significant risks with investing abroad, as well.
Many parts of the world, including China, are going through immense change and political upheaval. How much you invest internationally will be dependent on your risk tolerance.
There are other downsides to consider when investing internationally:
International investing can be more expensive than investing in domestic companies.
Companies located outside of the United States don’t give investors the same information that domestic companies provide investors.
And, the information they do distribute may not be in English.
You often have to make investment decisions with less information.
Changes in currency exchange rates
When the exchange rate changes, your investment return can be impacted.
Some countries may impose foreign currency controls that restrict you from transferring currency, as well.
Political, economic, social events
Political, economic, and social events, such as elections or military actions abroad, can have significant impact on foreign economies and affect your investments.
Different levels of liquidity
Foreign markets may have different trading hours or trading volumes, limiting liquidity.