For the long-term investor, China offers a compelling investment opportunity.
Already the world’s second-largest economy, China is one of the fastest-growing emerging markets in the world today, and with a population of a staggering 1.39 billion people, the country is expected to surpass the United States to become the world’s largest economy in the near future.
Urbanization across China has resulted in impressive economic growth in recent decades, however, with over 40% of the population still living a rural lifestyle, there could still be significant growth to come.
As China transitions from a capital expenditure-led economy to a consumer-led economy, and the wealth of the Chinese middle class increases, there will be an abundance of investment opportunities across sectors such as technology, leisure, travel and healthcare.
Can foreign investors capitalize on this unparalleled growth story? Absolutely. Here’s a look at how to invest in China.
Exchange Traded Funds
Perhaps the simplest way of gaining exposure to China is through exchange-traded funds (ETFs). An ETF is a security that tracks an index or basket of stocks, and can be bought and sold like a common stock. The key advantages of ETFs include low fees and strong diversification benefits.
Popular Chinese ETFs include:
iShares China Large-Cap ETF (ticker NYSE: FXI): This is the most popular Chinese ETF, offering exposure to 25 large-cap companies with a bias towards financials and energy.
iShares MSCI China ETF (ticker NASDAQ: MCHI): This ETF has a broad exposure to the Chinese equity market, holding significantly more stocks than FXI.
Guggenheim China Technology ETF (ticker NYSE: CQQQ) – This ETF tracks a basket of Chinese technology companies and is therefore ideal for the investor looking for technology exposure.
Mutual Funds
Investors could also consider mutual funds that focus on China, such as the Fidelity China Region fund.
This is a popular fund that invests in a portfolio of securities listed on the Hong Kong, Taiwanese and Chinese stock exchanges. With net assets of over $1bn, the fund has returned an annualized 8.2% over the last five years.
While mutual funds are also likely to offer strong diversification benefits, investors should be cognizant of the higher expenses associated with these kinds of funds, relative to ETFs.
American Depositary Receipts
American Depositary Receipts (ADRs) offer a more direct method of investing in Chinese securities. An ADR is a certificate that represents shares of a foreign stock owned and issued by a US bank. While the foreign shares are usually held in custody overseas, the certificates trade in the US.
Popular ADRs include:
PetroChina Company Limited (ticker NYSE: PTR)
China Mobile (ticker NYSE: CHL)
Baidu.com Inc (ticker NASDAQ: BIDU)
Direct Shares
Lastly, for those comfortable with taking an even more direct approach to investing in China, it is possible to purchase shares directly on the Hong Kong Stock Exchange. Many Chinese companies float their shares simultaneously on both the Hong Kong market and the Shanghai market. While the shares listed on the Shanghai index, referred to as ‘A-shares’, can only be purchased by domestic investors, stocks listed on the Hong Kong index, ‘H-shares’, can be purchased by foreign investors.
Given the inherent volatility of the Chinese share market, it’s a sensible idea to stick to larger, more established blue-chip companies, as these kinds of companies generally offer more stability due to their institutional shareholder bases.
Popular Chinese shares among foreign investors include technology giant Tencent Holdings Ltd (ticker HKG: 700), China Mobile Ltd (ticker HKG: 941), Bank of China Ltd (ticker HKG: 3988) and digital conglomerate Alibaba.com Limited (ticker HKG: 1688).
As always, it’s important to do your own research before investing, acknowledge the risks, and stick to investments that you understand.
