Ways for Investors to Potentially Gain Exposure to Chinese and Hong Kong Stock Markets

Views 496 Oct 16, 2024

Key takeaways

American investors can gain exposure to Chinese and Hong Kong stock markets in several ways. These methods allow for varying levels of risk, sector exposure, and investment approaches depending on an investor's goals. To invest in the Chinese stock market, investors can consider:

American Depositary Receipts (ADRs): U.S.-listed shares of Chinese companies like Alibaba (BABA) and Baidu (BIDU).
Exchange-Traded Funds (ETFs): ETFs like the iShares China Large-Cap ETF (FXI) provide diversified exposure.
Mutual funds: China-focused funds managed by U.S. financial institutions.
Direct trading: Through international brokerage accounts, investors can directly trade Hong Kong-listed stocks or A shares via programs like Stock Connect.
China-focused REITs or venture funds: Exposure to Chinese real estate or private companies.

Introduction

In 2024, China introduced a stimulus package aimed at boosting its sluggish economy. The package targeted key areas like consumer spending, real estate, and infrastructure investment to reignite growth. These measures helped lift market sentiment, leading to a resurgence in the Hong Kong Stock Exchange and the Shanghai/Shenzhen markets.

The Hang Seng Index surged, hitting a 32-month high, after being in a prolonged slump, supported by expectations of improving liquidity, economic recovery, and more investor-friendly policies. Despite this, concerns remain about whether the stimulus will have lasting effects and investors may ask, "Is it time to invest in the Chinese stock market?"

Financial news websites: Sites like Bloomberg, Reuters, and CNBC provide regular updates on Chinese markets.
Brokerage platforms: Allow trading of Hong Kong stocks, ADRs, and provide research tools. Investors can access insights, news, and trade Chinese and Hong Kong stocks and ADRs through several platforms and resources, including through the moomoo app.
Stock connect programs: Enable direct trading of Chinese A-shares.
Market data providers: Services like Yahoo Finance or TradingView offer real-time data and news.
Research reports: Major banks like Goldman Sachs and Morgan Stanley offer reports on Chinese equities.

Chinese markets: Major indexes investors should know

HSIMAIN HSI Futures: Refers to futures contracts based on the Hang Seng Index (HSI), which tracks the performance of the largest and most liquid companies listed on the Hong Kong Stock Exchange (HKEX). It also tends to also be used as a proxy for the onshore Chinese markets. These futures allow traders to speculate on or hedge against the future movements of the HSI. By using these contracts, investors can gain exposure to the Hong Kong stock market without directly buying the underlying stocks. The HSIMAIN HSI Futures are widely used by institutions and traders to manage risk and leverage market positions. This is up nearly 20%*.

CSI 300 Index: A stock market index that tracks the top 300 stocks traded on the Shanghai and Shenzhen Stock Exchanges. It is considered one of the key benchmarks for the performance of the mainland Chinese stock market. The index includes large-cap and mid-cap stocks, providing a broad representation of the Chinese economy, particularly in sectors such as financials, industrials, and consumer goods. It is widely used by investors to gain exposure to China's A-share market and is a reference for various financial products like ETFs and futures. This is up 21%*.

Shanghai Composite Index: A major stock market index that tracks all stocks (A-shares and B-shares) listed on the Shanghai Stock Exchange (SSE). It is widely used as a benchmark to measure the overall performance of the mainland Chinese stock market. The index includes a variety of companies from different sectors, including financials, energy, and consumer goods, making it reflective of China's economic landscape. It is influenced by domestic factors such as government policy, market sentiment, and economic growth. This is up 17.5%*

Shenzhen Component index: A major stock market index that tracks the performance of the top 500 stocks listed on the Shenzhen Stock Exchange (SZSE). It is a key benchmark for investors to gauge the overall health of the Shenzhen market, which is home to many growth-oriented and tech-focused companies. The index includes a variety of sectors, such as technology, consumer goods, healthcare, and financials, making it representative of China's evolving economy, particularly in high-growth and innovative industries. This is up 26.8%*

CNMAIN FTSE China A50 Index Futures: Refers to futures contracts based on the FTSE China A50 Index, which tracks the 50 largest A-share companies listed on the Shanghai and Shenzhen Stock Exchanges. These futures allow investors to speculate on or hedge against the performance of China's top large-cap companies. The "OCT4" refers to the specific contract with an expiration date in October 2024. These futures are popular among investors seeking exposure to China's A-share market without directly buying individual stocks. This is up 20%.

*Increases were valid as of September 30, 2024.

As you can see, investors have different investing alternatives. Remember to conduct your own research, base your decisions on your risk appetite, and adjust your exposure accordingly.

Main ways to invest in Chinese and Hong Kong stocks

Investing in Chinese and Hong Kong stocks presents several logistical challenges vs investing in American stocks. This can include regulatory differences, market hours, currency risks, limited access, and a lack of information transparency. But there are ways to invest in Chinese and Hong Kong stocks. Take a look.

H shares

H shares refer to the shares of companies incorporated in mainland China, but listed on the Hong Kong Stock Exchange (HKEX). These shares are traded in Hong Kong dollars (HKD) and are open to both international and local investors. H shares provide a way for foreign investors to invest in Chinese companies without having to deal with the complexities of mainland China's stock markets.

A shares

A shares are shares of companies incorporated in mainland China that are traded on the Shanghai and Shenzhen Stock Exchanges. These shares are denominated in Chinese yuan (RMB) and were historically only available to domestic Chinese investors, though access for foreign investors has gradually expanded through specific programs.

ADRs

American Depositary Receipts (ADRs) are certificates issued by U.S. banks that represent shares of foreign companies. These allow American investors to buy Chinese and Hong Kong stocks without directly trading on foreign exchanges.

Many major Chinese companies, such as Alibaba (BABA) and Baidu (BIDU), are listed as ADRs on U.S. exchanges like the New York Stock Exchange (NYSE) or Nasdaq and sit in the top 5 ADRs by volume. Additional top volume ADRs include Ambow Education, Color Star Technology Co., JinkoSolar and Huazhu.

Potential pros and cons of investing in H shares, A shares, and ADRs

Potential Pros of H shares:

Access to Chinese growth through exposure to large Chinese companies.
Regulated market and transparent environment.
Traded in Hong Kong dollars (HKD), making currency exchange easier for investors who are not familiar with the Chinese yuan (CNY).
Tend to be more liquid than A shares (which are listed on mainland Chinese exchanges) because they are open to global investors.
Can sometimes be traded at a discount compared to their counterparts on mainland exchanges, offering value opportunities for investors.
The Hong Kong Stock Exchange allows for easier capital flow and fewer restrictions, compared to mainland China's capital controls.

Potential Cons of H shares:

Many Chinese companies are dual-listed, meaning they are traded both as A shares in China and as H shares in Hong Kong. The prices of A and H shares often diverge, which can create valuation confusion for investors.
Traded in Hong Kong dollars, but the companies themselves generate revenues primarily in Chinese yuan (CNY). Currency fluctuations between the HKD and CNY can affect the value of the shares.
Can be affected by tensions between China and foreign governments, especially given the political situation between Hong Kong and the mainland, as well as U.S.-China trade tensions.
Might not be accessible to some retail investors in mainland China, which could limit liquidity from local participants.
Like any emerging market asset, H shares can be more volatile, influenced by changes in China’s economic policy, regulatory changes, and shifts in investor sentiment regarding China’s economy.
Despite being listed in Hong Kong, Chinese companies are still subject to mainland regulations and policies, which can sometimes lead to uncertainties and affect investor confidence.

Potential Pros of A shares:

Access to China’s domestic market.
Growth potential through China's rapid economic development and increasing consumer demand.
Government support for market development or farm subsidies.
Offer diversification benefits, allowing exposure to an economy with different drivers compared to Western markets.

Potential Cons of A shares:

Despite opening up through programs like Stock Connect, access to A-shares is still somewhat restricted for foreign investors. Additionally, regulatory changes may affect investment ease.
Known for its volatility, with significant price swings caused by speculative trading, government intervention, and market sentiment shifts.
Subject to fluctuations in the Chinese yuan (CNY) exchange rate.
China's regulatory environment can be unpredictable, and concerns about corporate governance, financial transparency, and state influence over companies remain significant risks for investors.
Compared to U.S. or Hong Kong-listed shares, some A-shares may suffer from lower liquidity, making it harder to buy or sell large amounts without affecting the stock price.

Potential Pros of ADRs:

Access to international markets.
Convenient trading on U.S. exchanges like the NYSE and NASDAQ.
Often simplify the tax process for U.S. investors.
Any dividends earned are paid in U.S. Dollars.
While there's still some exposure to currency fluctuations, the risk is somewhat reduced because ADRs trade in U.S. dollars.
Tend to have more liquidity compared to directly buying shares on some foreign markets. This means tighter spreads, easier trading, and lower transaction costs.
ADRs listed on U.S. exchanges must comply with U.S. regulatory standards, including financial reporting rules under the Securities and Exchange Commission (SEC).

Potential Cons of ADRs:

Often come with administrative fees (called ADR fees or "custodial fees") charged by the banks that facilitate them. These fees, while small, can erode returns over time and are not present in direct ownership of foreign shares.
Although traded in U.S. dollars, the underlying asset is still denominated in a foreign currency. Currency fluctuations between the U.S. dollar and the foreign company's home currency can still impact the performance of the ADR.
In many cases, ADR holders have limited or no voting rights on corporate matters, unlike direct shareholders who own the foreign company’s stock.
ADRs are still subject to the economic, political, and market risks of the issuing company’s home country.
While ADRs generally have good liquidity on major U.S. exchanges, some less popular ADRs can have lower trading volumes, resulting .wider spreads and difficulty executing large trades without impacting the price.
Not all foreign companies issue ADRs, so U.S. investors may have a more limited selection of international stocks to choose from compared to investing directly in foreign markets.
Some foreign countries impose withholding taxes on dividends paid to foreign investors, including ADR holders. While investors can often claim a foreign tax credit on their U.S. taxes, this process can complicate tax filings.
Come in different forms (Level I, II, and III), with varying levels of reporting requirements and exchange listings. Level I ADRs trade over-the-counter (OTC) and may have lower liquidity and transparency compared to Level II or III ADRs listed on major U.S. exchanges.

The 5 biggest declines in Chinese stocks of 2024

In 2024 several Chinese stocks have experienced significant declines due to various economic challenges and market conditions. Here are five of the biggest decliners as of October 9, 2024:

NIO Inc (NIO): Down 30%
Alibaba Group Holding Ltd (BABA): Down approximately 21%.
Baidu Inc (BIDU): Down approximately 25%
JD.com Inc (JD): Down about 18%
Pinduoduo Inc (PDD): Down around 23%

The 5 biggest increases in Chinese stocks of 2024

As of 2024, Chinese stocks have shown notable gains, driven by a combination of factors including government stimulus, recovery in key sectors like technology, and global interest in China's rapid economic growth. Here are some of the biggest increases in Chinese stocks as of October 9, 2024:

Futu Holdings Ltd. (FUTU): Up 120.65%
Tencent Music Entertainment (TME): Up 119.93%
Qifu Technology (QFIN): Up 111.28%
GDS Holdings (GDS): Up 109.06%
Lufax Holding (LU): Up 108.65%

Conclusion

U.S. investors are increasingly drawn to Chinese stocks for a number of reasons, whether it's geographic diversification, discounted valuations or potentially strong returns in key sectors. Investors may wonder if you should buy Chinese stocks in the U.S now. This will depend on a variety of factors, including market conditions, geopolitical risks, and an investor's personal goals and risk tolerance.