How to Invest in China Stocks | Everything You Need to Know (2024)

China has been on investors’ horizons since the turn of the millennium. The country economy enjoyed exponential growth over the past two decades before the pandemic hit, outpacing other emerging markets. With annual gross domestic product (GDP) of $17.7tn in 2021, China is the world’s second- largest economy.

Like most equities, Chinese stocks have been hit by the deterioration in macroeconomic conditions in 2022. The reintroduction of lockdowns once again weighed on the performance of the Chinese stock market as government officials took strict measures to prevent the virus from spreading.

Yet despite recent headwinds, China remains the home to some of the world’s most valuable companies such as Tencent, ICBS and Alibaba (BABA), and continues to attract interest. How can retail investors gain exposure to the country’s equities, and what risks are associated with China? Here we take a look at how to invest in China stocks.

What is the Chinese stock market?

The Chinese stock market consists of three stock exchanges: Beijing Stock Exchange, which started operating in November 2021, and the veteran Shanghai Stock Exchange and Shenzhen Stock Exchange.

The Shanghai Shenzhen CSI 300 Index is a stock market benchmark made up of the common shares of the 300 largest companies by market capitalization. This index may be considered as a useful gauge of how equities as a whole have been performing in the country. It is owned and managed by the China Securities Index Company.

Data provided by BlackRock on iShares Core CSI 300 – an exchange traded fund (ETF) that mimics the performance of the CSI 300 – indicated that, as of 30 September, the financial sector was most prominent within the index, accounting for 20.4% of its weighted market capitalisation, followed by consumer staples (16.3%), industrials (15.7%) and information technology (14.2%).

As of late 27 October, the Shanghai Shenzhen CSI 300 Index has accumulated a 25.6% loss year-to-date (YTD) – more than twice as much as 12.62% that the Dow Jones Industrial Average (US30) has shed during that same period, yet slightly less than 29.63% loss by the tech-heavy Nasdaq 100 (US Tech 100).

In the past 10 years, the CSI 300 has underperformed its American peers, gaining 58% in value compared to 321% and 204% gains produced by the Nasdaq 100 and S&P 500 (US500), respectively, as of 27 October.

How to invest in China stocks?

There are many ways to get exposure to Chinese markets. The traditional instruments are individual stocks that are domiciled in China and exchange-traded funds (ETFs) that track Chinese stocks’ performance.

Stocks

As of 27 October, there were more than 2,000 stocks listed on the Shanghai Stock Exchange. There are three markets in which stocks can be listed:

• Main A: common shares of companies that are incorporated and listed in mainland China, denominated in Chinese yuan.

• Main B: also common shares of companies incorporated and listed in mainland China but denominated in Chinese yuan and foreign currencies. Also known as foreign investment shares.

• STAR: stocks of companies involved in scientific research or technological innovations. It’s the Chinese equivalent of the American Nasdaq Capital Market.

Retail investors that do not live in China can buy common shares of Chinese companies directly by registering with a Chinese authorised broker as long as they live in a country considered a partner of the China Securities Regulatory Commission (CSRC). Some of these countries include the US, UK, Brazil, Australia, Singapore, and Russia.

Many well established brokerage firms have operations in China and can facilitate the process of opening an investment account to trade Chinese securities. Opening a bank account in China is not required. However, investors should be aware that funding a Chinese brokerage account with money that comes from overseas can be costly.

Plus, a handful of Chinese companies listed their common shares on US-based stock exchanges via American Depositary Shares (ADS), making it more accessible for retail investors to get exposure to Chinese equities.

Exchange-traded funds (ETFs)

ETFs are investment vehicles that can provide exposure to a certain region, investment strategy, theme or asset class as they contain an ample basket of instruments that fit the fund’s scope and reach.

ETFs trade as regular stocks. Investors in them are entitled to receive dividends and capital gains corresponding to the number of shares of the fund that they own.

In the case of Chinese ETFs, there are plenty of options available that can provide exposure to the country’s stock market. They will typically aim to mimic the performance of a broad-market benchmark such as the above-mentioned CSI 300 index or FTSE China A50 Index (CN50) that consists of the 50 largest A share companies listed on the Shenzhen and Shanghai stock exchanges.

How to trade Chinese stocks via CFDs?

Contracts for difference (CFDs) are high risk financial derivatives that allow traders to take either a long or short position on the price direction of securities such as stocks, indices and commodities without owning the underlying asset.

Due to overnight fees, CFDs tend to be short-term in nature, which may offer an alternative to long-term investing in China stocks.

A CFD is an agreement between a broker and a trader to exchange the resulting price difference once the transaction is settled. CFDs involve using leverage, or trading on margin, which means traders can magnify the size of their position by borrowing assets from the broker.

Trade CN50 CFDs

For example, Capital.com offers 10:1 leverage, or 10% margin, on FTSE China 50 (CN50) CFDs, meaning that traders can open a position worth $1,000 with only $100. There are, however, risks associated with trading on margin as both profits and losses can be magnified. Because CFDs can carry a high level of risk they may not be appropriate or suitable for everyone.

To open a CFD position, a trader will need to fund a margin deposit and a maintenance margin, which is the minimum capital required in their account. If the market moves against the trader’s open position, there is a risk of a margin call - when the trader is asked to add more money in their account to keep the leveraged position open.

Risks associated with Chinese stocks

Before investing in Chinese stocks, it’s key to familiarise yourself with the risks that may contribute to the downturn in the value of Chinese equities. Learning about these variables could help investors in figuring out how to invest in China stocks.

Regulatory crackdown on tech

The Chinese government adopted a hostile attitude against companies in the tech space in 2021 amid concerns about their giant size and influence over the country’s economic performance.

The regulatory crackdown on big tech led to the imposition of large fines on companies like Alibaba (a $2.8bn fine for monopolistic behaviour) and Meituan (a $530m fine).

In addition, the US has been weighing the possibility of restricting certain Chinese companies from listing their shares on American stock exchanges. This would dramatically reduce the liquidity of Chinese equity instruments and may harm the valuation of businesses within the country.

Leadership reshuffle and Xi Jinping’s reelection

The political regime in China may prove a threat to the stability and growth of its domestic equity market as Xi Jinping – who has been reelected as president for a third term in late October – continues to grab more political power.

According to Lilian Co, portfolio manager of the Strategic China Panda Fund at Eric Sturdza Investments:

“Xi’s re-election as the Chinese Communist Party’s head is not a surprise. The market is clearly disappointed by the new seven men Politburo Standing Committee which is filled with Xi’s allies. Since Xi’s ideology has not been market-friendly in the last few years, a leadership team loyal to Xi means no change in policy direction as long as he is in power.”

Macroeconomic headwinds

Macroeconomic risks remain as central banks are hawkish to combat inflation. The leading example is the US Federal Reserve (Fed), which hiked its federal funds rate from 0.5% to 3.25% in 2022 and is expected to raise them further.

China’s economic recovery and growth is under threat from a spike in the number of Covid-19 cases in key cities, including Chengdu, Shenzhen and Shanghai. The government’s strict zero-Covid policy is seen by analysts as a risk for the economy.

In June 2022, the The World Bank lowered its forecast for the country’s GDP growth from 5.2% to 4.3% citing the “economic damage caused by Omicron outbreaks and the prolonged lockdowns in parts of China from March to May”. Martin Raiser, the World Bank’s Country Director for China, Mongolia and Korea commented:

“In the short term, China faces the dual challenge of balancing COVID-19 mitigation with supporting economic growth”, commented Martin Raiser, the World Bank’s Country Director for China, Mongolia and Korea.

He added: “While the government has stepped up macroeconomic policy easing, the dilemma facing decision-makers is how to make the policy stimulus effective, as long as mobility restrictions persist”.

Final thoughts

Note that analysts’ predictions can be wrong and should not be used as a substitute for your own research. If you decide to invest in China stocks, you’d need to conduct your own due diligence, looking at the latest news, technical and fundamental analysis. Remember that past performance does not guarantee future returns, and never trade money you cannot afford to lose.

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