China represents a part of the global investor marketplace known as the “emerging markets,” or countries that are headed toward first-world status and undergoing a period of rapid growth. China has the second largest economy in the world and is rapidly growing. Economists estimate that the country will overtake the USA to become the largest economy in the years to come.
Some prominent macro investors have expressed positive sentiments about emerging market opportunities. In spite of the potential opportunities, investing in foreign stocks can be confusing, scary, and in some cases impossible. Here are some facts about investing in Chinese stocks.
Can You Invest in Chinese Stocks?
The short answer is yes, investors located in the US and elsewhere do generally have the capability of trading international stocks, including investing in Chinese stocks. The details aren’t always so simple, though.
The majority of Chinese stocks can only be traded on Chinese exchanges, including the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange.
There are ways for foreigners to participate in these markets, either directly or through various types of investment vehicles or intermediaries. For the most part, buying Chinese stocks is not unlike buying US stocks. Investors may only need to search for specific securities or utilize a special intermediary firm in addition to their standard brokerage.
What are the Best Chinese Stocks to Buy?
For US investors, choices may be limited. If there are a limited number of Chinese stocks that can be purchased directly on a stock exchange, then it’s just a matter of evaluating stocks on the list choosing whichever ones seem most attractive.
How Can Foreigners Invest in the Chinese Stock Market?
To buy and sell stocks on foreign exchanges, investors often have to contact their brokerage firms and ask if they allow participation in foreign markets. If the answer is yes, the firm could then consult with a market maker, known as an affiliate firm. Affiliate firms, which are located in the country where foreign investors want to buy stocks, help facilitate these types of transactions.
The easiest way for many investors to gain exposure to the Chinese stock market might be to purchase shares in an emerging markets mutual fund or exchange-traded funds (ETFs) that includes some stocks from publicly-traded companies based in China.
To do this, investors can look for funds that track a Chinese index. Some examples include:
• Shenzhen Composite Index, which tracks the Shenzhen Stock Exchange
• Shanghai Shenzen CSI 300 Index, which tracks parts of the Shanghai and Shenzhen exchanges
• Shanghai Stock Exchange Composite Index, which tracks the Shanghai Stock Exchange
As far as the actual process of buying Chinese stocks is concerned, doing so will look like buying any other stock. This holds especially true for those buying an ETF or mutual fund. Buying individual Chinese securities may involve an extra step with an affiliate firm, as mentioned earlier.
In either case, investors have to first open a brokerage account, decide which securities they would like to own, then create appropriate buy orders.
Pros & Cons of Buying Chinese Stocks
While the decision ultimately lies with an individual investor, there are both pros and cons of global investments, including Chinese stocks. Here, we will explore both perspectives.
Pros of Buying Chinese Stocks
Factors like a long-term outlook, China’s response to the recent health crisis, and international diversification can make Chinese stocks appealing to some investors.
Long-term Time Horizon
Some investors believe that Chinese investments have a positive long-term outlook— regardless of any short-term political concerns (more on that in Cons of Buying Chinese Stocks, below). China has been growing fast and could continue to do so, making the country an ideal place to invest for the long haul.
China’s Response to the COVID-19 Pandemic
After the COVID-19 pandemic shut down most major economies in the world for an extended period of time, many areas saw contracting economic growth and continued to struggle. China, on the other hand, responded quickly and was able to reopen its economy sooner than many others, marking the country as a champion of growth throughout the pandemic and beyond.
International Diversification
Some investors choose to invest in the stocks of different countries as a way to further diversify their portfolios. The rationale: An investor could be diversified within and across different industries, but if something were to negatively affect the economy of the country those industries are in, it might not matter.
Cons of Buying Chinese Stocks
There are a few reasons why some investors might choose to avoid Chinese stocks.
Delisting of Some Chinese Companies
In recent times, executive orders have removed some Chinese stocks from American stock exchanges, including a Chinese oil firm named Cnooc (CEO) and China Mobile (CHL).
Growth Limits
Even though China has been growing rapidly, some believe the nature of the Chinese government could stifle innovation going forward. Which industries survive and which ones don’t can sometimes be determined by a simple forced government decision. One perspective is that China’s best growth days are behind it.
Are Chinese Stocks Undervalued?
It is impossible to say for certain. From a long-term perspective, if someone assumes that China will keep growing at a similar pace as it has in the past, then Chinese stocks in general could be undervalued. But there could also be some sectors that are currently overvalued, some stocks more undervalued than others, and so on.
The Takeaway
China is considered to be one of the strongest emerging market economies, leading some investors to see potential for great returns there. Foreign investors have several options if they want to invest in Chinese stocks. Doing so may not be any different than buying stocks in one’s home country. And because of its large economy, there may be other stocks affected by China as well, even if they aren’t Chinese stocks.
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