We will pay especially close attention to the “paper wealth” dimension because the proverbial West has had to learn the hard way that no, money cannot buy anything. The problem with the West’s handling of the COVID-19 pandemic was most definitely not one of improper financing. On the contrary, wealthy entities such as the United States and European Union countries had all of the “fiat currency” in the world at their disposal and have manifested a clear desire to throw as much money as necessary at the problem. What they didn’t have was masks, medical equipment and other “real world” goods that all of a sudden became unavailable.

Money buys everything… until it doesn’t.

Until enough of a game-changer occurs for major supply chain disruptions to occur, to put it differently.

In our case, these disruptions involved exporters of much-needed medical equipment such as China and India deciding to disallow exports temporarily for national security reasons (in order to satisfy their internal needs) and once exports were eventually allowed, it was too late on the one hand (with the peak being close in many Western nations) and on the other hand, bottleneck issues emerged as soon as exports were back on the table (too much demand, not enough supply nor adequate enough scaling options).

The COVID-19 situation was enough to expose the many fundamental weaknesses of our economic status quo: supply chain complexity issues, inadequate resilience and, we might add, an improper understanding of what “wealth” truly means. In our increasingly complex economic and financial landscape, the basics tend to be buried under ever-increasing layers of complex products.

To illustrate this, let us assume that we have a Chinese factory that produces precisely what we have discussed: medical equipment. This can be considered let’s say a primary form of wealth: a company that has the ability to produce essential equipment.

Things are going reasonably well and it gets listed on a US exchange, with US investors buying shares because they believe in the business model of the company in question. There we have it, a new form of wealth is created on top of primary wealth, let’s call these shares a form of secondary wealth.

It does not end here, however. US investors are not content with simply buying and selling these shares in traditional fashion. As such, ultra-complex derivatives are created on top of these shares, through which “investors” essentially bet on a wide range of different outcomes, with options being the most obvious examples.

Once again, however… there’s more.

We also have hedging requirements, with even more sophisticated investors being interested in “insurance policies” that are created on top of tertiary wealth, insurance options through which they can hedge accordingly. We will, of course, call this quaternary wealth.

As can be seen and as crazy as it may seem, a LOT of let us call it “paper wealth” has been created on top of the “real world” Chinese factory we have mentioned and when times are good, all stakeholders seem content. The factory in question is chugging along nicely, shareholders are happy, derivatives speculators are also content with the wide range of options they have at their disposal and sophisticated hedging enthusiasts share their excitement.

Then a crisis such as the COVID-19 one comes along and all parties involved end up understanding all too well that there is a deep disconnect between primary wealth and the various other forms of wealth that exist. To put it differently, what would US shareholders have done when exports were disallowed in China so as to get much-needed equipment to the US? What about those who traded options associated with the shares in question or hedging enthusiasts?

The short answer is this: absolutely nothing.

The same principle is valid when it comes to other examples of primary wealth, anything from arable land to commodities.

This brings us to the elephant in the room in terms of questions: are those who have their net worth tied up exclusively in secondary wealth actually… well, wealthy? What about tertiary or quaternary wealth holders?

In our view, the key to tackling these questions lies in a meaningful understanding of “realized” as opposed to “unrealized” gains. Imagine that you are currently holding a trading position, for example longing Asset X. The position in question may currently be very profitable but until you close it and book profits, the numbers you see on the screen can be misleading. For example, Asset X can be only one crash away from wiping out all of your unrealized gains.

The same principle is valid when it comes to our discussion surrounding the many different forms of wealth. As such, the ChinaFund.com team would strongly recommend never forgetting the importance of also acquiring primary wealth every now and then, even if only in an effort to “book” profits or if you will, transition from “paper” wealth to “real world” wealth.

No matter what your investing or trading strategies may be and no matter which asset(s) you specialize in, it ultimately all boils down to one word time and time again: diversification. Therein lies the essence of the conclusion we are trying to articulate: please do not make the mistake of considering primary wealth too “old school” for your strategy because we can all but assure you that you will end up regretting the attitude in question down the road. By all means, take advantage of all the other forms of wealth that are available to the best of your ability but never underestimate the importance of “booking” profits in terms of primary wealth. The ChinaFund.com team will, of course, gladly provide assistance with just that.

Furthermore, do keep in mind that not all tangible assets are correlated. For example, real estate tends to do well when the overall economy is booming, whereas gold can be and frequently is used as a hedge or if you will, insurance policy. Therefore, just like diversification in general makes sense, the tangible asset dimension of your portfolio must be properly diversified as well.

However, from real estate to precious metals, all tangible assets have one characteristic in common, one which represents a selling point which cannot and should not be ignored in the context of 2020’s unprecedented stimulus on all fronts (both monetary and fiscal): the fact that they cannot simply be willed into existence.

Yes, it is true that for example mining-related technological advances could pop up which result in an above-average increase in supply (anything from asteroid mining to output improvements here on Earth). For example, discoveries on the American continent have resulted in such a supply surge in Spain in the distant past that the very monetary and economic system was shaken. As such, yes, problematic increases can occur as far as precious metals are concerned. The same principle is valid when it comes to other tangible assets as well, for example excessive construction that results in an increase in housing supply far beyond what demand dictates.

However, there is a world of difference between such scenarios and what is currently happening with pretty much all currencies. While supply shocks can exist, have existed and will most likely re-emerge at one point or another with tangible assets, the elephant in the room in terms of nuance and differences is represented by the fact that they cannot be created out of thin air. The same cannot be stated about unbacked fiat currencies.

Why should 2020’s developments worry investors to enough of a degree that they end up increasing their exposure to tangible assets?

Haven’t measures which were considered inflationary by many economists also been implemented in the aftermath of the Great Recession, with inflation nowhere to be seen?

While it is true that 2020 is hardly the only year during which central banks and governments have engaged in aggressive stimulus initiatives, this doesn’t mean inflation can never possibly become a threat again just because it hasn’t done so in the relatively recent past. As any investors worth his salt will tell you, it occasionally makes sense to zoom out.

Furthermore, it is important to pay attention to the structure of 2020’s stimulus measures when compared to the Great Recession or even Dot-Com Bubble days. As explained on other occasions as well here at ChinaFund.com, the likelihood of newly-created currency finding its way to the “real” economy more so at this point than in the past is quite high.

Why?

For reasons such as:

1. The increase in aggressiveness by all central banks and governments compared to the Great Recession days, with pretty much no political actors questioning the viability of these methods and on the contrary, right-wing and left-wing politicians out-bidding one another in terms of stimulus: more business-oriented stimulus on the right compared to more individual-oriented stimulus on the left, of course, but out-bidding is still out-bidding
2. The ubiquity of it all, with even countries which were considered extremely conservative such as Germany jumping on board and throwing hundreds of billions of EUR at the problem right from the beginning
3. On a similar note, yes, the “speed” element deserves to represent a stand-alone reason, with the fact that central banks and governments from all around the world quickly resorted to unprecedentedly aggressive methods speaking for itself
4. The fact that this time around, far more attention is being paid to the fiscal stimulus dimension than in the aftermath of the Great Recession. Therefore, unlike the post-GR currency creation initiatives which led to money finding its way more so to the banking system reserve dimension than to Main Street, it is far more likely that the real economy will also be on the receiving end this time around, which dramatically increases the likelihood of us also seeing consumer price inflation rather than merely asset price inflation at best
5. The political landscape being remarkably different, in light of the fact that in the aftermath of the Great Recession, populist leaders were exceptions. Nowadays, populism is seeing worrying “critical mass” numbers and from Brazil to the United States, a populist status quo is no longer a figment of the imagination of those writing scripts for B-rated movies but actually firmly in reality territory

These five reasons represent the most obvious choices but the list is by no means definitive. The bottom line is this: there have been few junctures throughout history which painted a more compelling picture in favor of embracing tangible assets than the 2020 developments. Does this mean impressive returns are guaranteed? Most definitely not, as it can oftentimes take the market remarkably long to make up its mind. This much is pretty much certain, however: the probability of tangible assets ultimately doing very well is so high at this stage in the game that Chinese asset investors and pretty much everyone else would be doing themselves a great disservice by not tweaking their portfolios accordingly. This doesn’t, of course, mean going all-in by proverbially betting the farm on tangible assets, it simply means treating them far more seriously than in the past. Fair enough?

A lot of investors who live by leverage… well, die by leverage.

More specifically, leverage comes with its share of trade-offs, with them for the most part revolving around the idea that while profits are or better stated can be amplified via leverage, the exact same principle is valid with respect to losses. The icing on the cake, in the most negative sense imaginable, is the fact that unlike with simply buying and holding, leveraged trading comes with the very real and palpable risk of liquidation.

Let us assume an investor buys one of the several NASDAQ-listed Chinese company shares without leverage. Is losing everything he invested possible in the scenario in question? Yes, but it represents a remarkably low-probability event. Of course it can happen if let’s say the company in question goes bankrupt but in the absence of a genuinely “end of the world as we know it” scenario for the company in question, losing it all is quite unlikely.

This leads to many “rags to riches” success stories. For example, back in the day, Amazon shares went from $100 during the peak of the Dot-Com Bubble to around $7 each after it burst. In other words, an investor who bought at the absolute worst possible moment during the bubble and was equally unlucky when selling would have only received 7% of the money he allocated back. Those who didn’t sell because they believed in the long-term potential of the company, however, didn’t realize any losses and on the contrary, even the unluckiest of investors when it came to the acquisition timing dimension (buying during the top of the Dot-Com Bubble, for example) did remarkably well if they held up until this point.

That changes dramatically when using leverage.

To remain in Amazon territory, the person in our example, who bought shares at the worst possible time, would have been liquidated even with ultra-low 2x leverage well before the $7 price was hit. Let’s not even talk about those who engage in leveraged trading we can consider in gambling territory and who are liquidated by movements in the opposite direction of even 1% or less.

Isn’t it true that those who backed up the truck and bought at $7 were on the receiving end of novel-worthy gains? Of course, just like those who bought bitcoin for literally pennies ended up becoming extremely wealthy or just like those who “invested” in a lottery ticket and won did the same. But such scenarios are such extreme low-probability events that taking them into consideration when making choices that pertain to your career as a trader is anything but recommended. To put it differently, examples involving individuals who “invested” their one-month earnings in lottery tickets or equivalents and won surely exist. Does that mean investing your one-month earnings that way represents a strategy worth taking into consideration? Of course not.

How much leverage, if any, you use should depend on the volatility of the asset in question. Those who trade “boring” forex pairs are far safer when using leverage than those trading let’s say cryptocurrencies. For example, even the proverbial king of cryptocurrencies, bitcoin, ended up going up by 40% within roughly 24 hours as of the 27th of October 2019. The same way, it collapsed by more than 50% within the same 24-hour period as of the 20th of March 2020. Needless to say, using serious leverage when trading even the “safest” of cryptocurrencies tends to be closer to gambling than investing.

The volatility differences from asset class to asset class and asset to asset can be so wild that the ChinaFund.com team can most definitely not provide a “one size fits all” answer with respect to questions involving how much leverage should be used or even if leverage should be used at all. It ultimately all depends on the nature of the asset(s) you are interested in trading as well as on your risk appetite as a trader.

Are Chinese assets volatile?

Once again, the answer is that… well, it depends.

First and foremost, it depends on which Chinese asset you are referring to, as they tend to let’s say come in all shapes and sizes. As such, a Chinese asset that trades on a legitimate exchange such as the NASDAQ will likely be less volatile than one you buy/sell via obscure OTC exchanges. Furthermore, a lot also depends on your frame of reference or, if you will, what you are comparing the Chinese asset you are interested in to. Compare the overwhelming majority of Chinese assets to one of the literally thousands upon thousands of random low-liquidity altcoins (bitcoin alternatives, as the name suggests) that exist and the Chinese assets in question will most likely seem like the epitome of safety. Compare them to “the best of the best” in terms of US safe haven assets and the exact opposite conclusion will be drawn. Again, it all depends on your frame of reference.

As a conclusion, leverage is yet another example of something that is neither good nor bad, just like a knife isn’t inherently good/bad either. It is simply a tool and as such, it all depends on how it is used. A knife can be used by a surgeon to save a life or by a criminal to take one and the exact principle is valid with respect to leverage. Is it worth having in your arsenal as a Chinese asset trader? Most definitely but “prudence” is the operative word!

To help give you a few potential starting points, we’ve gone ahead and selected our three favorite Chinese investments as well as a few reasons why we like them. Each investment will feature a few qualitative reasons why we like them (such as industry or consumer trends) as well as quantitative reasons (numbers pulled from their annual reports).

Without further ado, let us move on to our three favorite Chinese investments.

NOTE: This article is for informational purposes only and is not meant to act as financial advice.

JD.Com

It’s no secret that the world has been transitioning toward eCommerce for years now.

First, there is a very well documented decline when it comes to traditional retail businesses (formally known as the retail-pocalypse). While not all of these bankruptcies are 100% attributable to the rise of eCommerce, that has definitely played a major role. By “retail-pocalpyse” we just mean that consumers have been shifting toward online shopping. They like to buy products from the same store online or from a site like Amazon as opposed to actually going to the physical location and buying things.

Companies that don’t have a seamless online shopping experience have been falling behind or closing up shop altogether.

Some of the most recent store closures have been from:

➢ Neiman Marcus
➢ Diesel
➢ Toys R Us
➢ Forever 21
➢ J Crew

Click here to read a more exhaustive list.

An important question arises: if most or even all of the retail businesses are (eventually) closing, does that mean that people aren’t buying as much stuff anymore? Or does it mean that people are still buying stuff, just that they’re buying it online?

As common sense most likely dictates, people are still buying (at least) the same amount of goods, they’ve just been transitioning to eCommerce for the bulk of their purchases. Some people have even started to order things like their weekly groceries online and get them delivered straight to their homes.

Let’s take a look at a few stats behind eCommerce:

1. The global eCommerce rate for 2020 is expected to come in at 19%, to bring total eCommerce sales to around $4.206 trillion globally
2. ECommerce market share of total retail transactions is expected to double from 10.4% in 2017 to 20% in 2023
3. Over 15% of all sales are expected to take place online over the next year

Not only are these numbers impressive from a global standpoint but the best part is that Asia-Pacific is by far the largest region for eCommerce (according to Oberlo.com).

If you think eCommerce is popular in the U.S., it should represent great news for you that it’s far more popular in Asian countries.

Additionally, with the introduction of the Coronavirus earlier this year, this trend toward online buying/selling will only be accelerated over the coming years. People are being forced to stay home and quarantine themselves while businesses (which aren’t considered essential) are forced to shut their doors down. This means that for lots of people and businesses, there is no alternative except resorting to doing things online! It’s the only way that they’ll be able to continue functioning.

Companies that have been holding out on transitioning to eCommerce will be forced to adapt in order to stay relevant.

For just these reasons alone, any company that dominates in eCommerce could be considered a solid investment. With that being stated, let’s take a look at one of the top players in China when it comes to eCommerce: JD.com.

JD.com is a leading technology-driven e-commerce company that wants to become the number one supply chain based technology and service provider. They’re the second-largest eCommerce company in China (after Alibaba) and pride themselves on their cutting-edge retail infrastructure that offers what they call Retail-as-a-Service (offering to let other companies use their platform to sell products). They’re currently the largest retailer in China and a member of the NASDAQ100 as well as Fortune Global 500.

After taking a quick look at their 2019 Annual Report:

➢ Net revenues have been steadily increasing since 2015
➢ 2019 was the first year that they operated at a profit
➢ They’ve been investing heavily in research and development

At a glance, JD.com is a company that could be poised to drastically grow their business over the coming decade. They’ve been making more and more money each year, have the capacity to earn a profit and are investing money back into their business.

Our next company is another eCommerce player:

Pinduoduo

We feel so strongly about the rise of eCommerce that our second company is another eCommerce sector entity. The reason why we have decided to put two companies in the same industry in the spotlight primarily revolves around the coronavirus. Over the next couple of months/years, late adopters of eCommerce will be forced to make the jump. This will be good for companies such Pinduoduo which help other companies sell online.

The same information from the previous section is going to apply to this one.

However, Pinduoduo has a distinct advantage built into their platform, which is why we like them as opposed to other companies.

Competitive Advantage: Pinduoduo’s platform encourages users to invite their friends to purchase the same products. In this sense, they encourage “group buying”. This is a huge advantage when it comes to driving growth because people want to do what their friends are doing. This same mentality is what helped companies like Facebook and TikTok achieve their amazing growth.

Let’s take a look at their 2019 annual report.

Key takeaways:

➢ Their revenues are growing exponentially (growing by 6 times in just 4 years)
➢ Their top expense by far is marketing. This is a good thing because they’re putting a lot of money into gaining customers over competitors and this expense can be cut at any time

Additionally, highlighted in their annual report were the following advantages:

➢ The ability to attract and retain merchants
➢ The ability to seamlessly connect with social media networks
➢ The fun and interactive shopping experience of their platform

Just like JD.com, Pinduoduo is an exciting company in a rising industry that is poised to take advantage of what should be a fruitful decade for their company. We wouldn’t be surprised if they dethrone Alibaba or JD.com to become the region’s top eCommerce player over the next few years.

iQiyi

IQiyi is a leader in streaming content online and has often been referred to as “the Netflix of China”. They’re poised to take advantage of the growing trend among consumers to stream content from home as opposed to going out to theaters. This is another trend that will likely be accelerated because of the closing down of traditional theaters due to the coronavirus.

Although this trend is already pretty mature in the United States, it still stands to grow because people are being forced to stay home due to the pandemic. This could lead to more people picking up streaming when they were previously holding out.

In fact, you could argue that streaming was already becoming more popular over the past couple of years with companies such as Disney and Amazon launching their own services fairly recently. Media companies have seen how popular it has become and want to lure users to their own platform. What we are seeing now is a battle for popular content.

We took a look at their annual report from 2019 and here are a few takeaways:

➢ 100.5 million users
➢ $1.1 billion in revenue
➢ Membership increased 21% year over year
➢ Looking to expand out over SE Asia

IQiyi is currently operating at a loss but much of that is attributable to its expenses in creating new content and attracting new users. Creating new content, just like the current streaming wars in the United States, will ultimately be one of the deciding factors of who succeeds in this market. Netflix realized this early on when Disney reported that they will be launching their own streaming service (and taking content/users away from Netflix). IQiyi seems to be doing the same thing.

In Summary

If you’re looking to invest in China but aren’t sure where to start, a good starting point is to pick industries that you’re already familiar with. ECommerce and streaming are two of the fastest-growing industries in the United States, so it makes sense that they would be growing in China as well. Additionally, these industries will not be negatively impacted by the effects of COVID-19 and, if anything, their businesses will be better off.

We’ve looked at 3 stocks:

1. JD.com – The 2nd largest eCommerce platform in China
2. Pinduoduo – One of the stickiest eCommerce platforms in China
3. IQiyi – One of the fastest-growing streaming services in China

Your investment decisions are your own but if you need a good jumping-off point, we’d recommend taking a closer look at these three companies!

We hope that you’ve found this article valuable when it comes to understanding 3 Chinese investments that you could potentially take advantage of. If you’re interested in reading more, please check out our blog as well as the “New Here” section of ChinaFund.com.

1. On the one hand, the option of entering a trade and setting clear price points at which you will exit (stop-loss orders through which you set price points at which you exit if trades go against you or take-profit orders through which you set price points at which you exit a trade so as to book profits, options we’ve mentioned a fair bit in our trading-related articles). Think of this extreme as the ideal option for those who want to make decisions with a cool head rather than during the heat of (price action) battle, with them creating and implementing their plan right from the beginning of the trade
2. On the other hand, there is the option of being extremely aggressive so as to try to make the most out of each trade by not setting take-profit (because you want to ride the wave in question to its fullest) and stop-loss orders (because you do not want to be forced to exit a trade by what you suspect might be nothing more than slightly more aggressive short-term noise). When it comes to the latter, there are indeed traders who believe that hanging on to trades until liquidation makes sense

To elaborate a bit when it comes to #2… what is liquidation anyway?

In a nutshell, it is simply a price at which your entire trade is wiped out (the price at which you lose everything) and the liquidation level depends on whether or not you have borrowed money from your broker so as to trade with a larger position size than you can afford (using leverage, in other words) as well as how much you have borrowed.

To once again explain through extreme examples, you are only “liquidated” if the price of your asset goes to zero if you do not use leverage (if you let’s say buy a Chinese share). On the opposite end of the spectrum, there are brokers who even offer leverage options well north of 100x and as such, you can even get liquidated if the price moves less than 1% against you in instances where you are over-leveraged.

Needless say, riding a position until liquidation is risky.

Should you do it?

In most cases… no, not really.

There are instances such as let’s say trading already-volatile assets such as cryptocurrencies using leverage where it sometimes makes sense to ride positions until liquidations but for the overwhelming majority of assets (including Chinese assets), that is usually a sub-optimal option for a wide range of reasons, such as:

1. The fact that when riding a position until liquidation, you tend to get emotionally attached to the position in question and proverbially getting married to a position is perhaps the number one mistake you can make as a trader. Why? Simply because this tends to inhibit your rational decision-making process and emotions take over… let’s just say that traders who make primarily emotional decisions don’t exactly have staying power (longevity)
2. The fact that the very action of setting a stop-loss in no way means you will be out of position at the slightest price fluctuations… it’s all up to you. There are indeed traders who use tight stop-losses because their models warrant it but that doesn’t have to be the norm. You can set stop-loss orders as aggressive as you deem necessary so as to create a cushion for yourself that is as generous as you believe it needs to be. Therefore, if you are afraid of being wiped out by “noise” (prices only briefly going against you), why not simply set more aggressive stop-loss orders rather than ride your trade until liquidation?
3. The fact that there is unfortunately a very blurry line between trading and gambling, with many so-called traders crossing it without realizing that this occurred. Riding positions until liquidation tends to align with a gambling mindset more so than with a trading one and as such, once again whether or not you realize this, it could mark your transition from trader to gambler. As mentioned with reason #1, gamblers don’t tend to stick around as traders all that long
4. The fact that riding positions until liquidation can actually keep you from extracting the most out of the trade in question. Many market participants make the mistake of assuming that just because your stop-loss order was triggered and you have exited the trade, you need to stay out for good. Nothing could be more wrong and, instead, many successful traders actually do the exact opposite by using stop-loss orders to exit trades before they go against them too aggressively, with the intention of getting back in at a better price point

All in all, when it comes to Chinese assets at least, the answer to the question which constitutes the title of this article tends to be negative. More often than not, riding positions until liquidation is too aggressive as a strategy and as strange as it may sound, it isn’t even necessarily conducive to maximizing results if things do eventually end up going well for you, as illustrated though reason #4.

As such, the ChinaFund.com team recommends taking advantage of stop-loss and take-profit functionalities offered by pretty much any half-decent broker. The reasons behind our recommendation primarily revolve around the fact that through articles such as this one as well as one-to-one with our clients, the ChinaFund.com experts always recommend approaches based on reason and a meaningful understanding of the scientific method rather than emotion. Should you be interested in the latter, a one-to-one consulting session with a ChinaFund.com expert, we are of course only a quick message away.

That being stated, before jumping on the train, you should still ensure you’re making the best decision possible for yourself and/or your organization when deciding to invest in China. To help you with just that, we’ve put together this list.

These are 10 things to consider before investing in China:

10) Why Are You Investing?

This is a good general question to ask yourself before investing anywhere. By ‘why’, we mean that it’s important to create firm goals as to why you want to invest your money. This will help you down the road when it comes time to making more detailed decisions. A good analogy here is that you would want to decide how much weight you want to lose before starting a new diet. In the same sense, you want to know what your investment goals are before investing.

First, decide why you’re investing your money in the first place. Then, decide why you want to invest your money in Chinese companies.

Here are a few good questions to ask yourself when tackling the ‘why’ dimension:

● Are you investing for growth, income or both?
● How much capital do you have available to invest?
● What is your risk tolerance?
● What measures will you take to protect your money while still optimizing your reward?
● What is your time horizon?

This last one is so important that we’re actually going to break it down a little bit further.

9) What Is Your Time Horizon?

Time horizon and risk capacity are the two top questions that you’ll need to answer when making investment decisions:

● Time horizon is defined as the period of time one expects to hold an investment to reach a specific goal. The younger the investor, the longer they have to keep money invested and let it collect compound interest

● Risk capacity is defined as the amount of risk an investor must take to reach his or her investment goals. A general rule of thumb is that the greater the amount of risk you take, the higher the potential reward is. On the other hand, investments that are incredibly safe will yield smaller rewards

It’s important to note that patience is a critical part of investing. If you’re constantly putting money in and pulling it out of investments, then you can miss out on long periods of sustained growth. This is particularly true for an opportunity such as China.

China has been growing consistently since 1979 and is projected to become the world’s largest economy by 2030. Please understand that it may take a few years to realize your gains and have the patience it takes to ensure that your investment will pay off.

8) In What Capacity Do You Want to Invest?

We believe there are a few different ways to capitalize on the growth presented by China. First, you can invest in U.S. companies that already have a good footing in the Chinese business-scape and benefit from their growth. In this way, you’ll be indirectly benefiting from the growth of the Chinese economy through U.S. companies.

A few examples of American companies popular in China are:

● Nike
● KFC
● Walmart

The second manner in which you can invest in China is probably the first one that you thought of. This is by just simply buying stock in Chinese companies. This method of investing in China is relatively straightforward. You can either identify Chinese companies that are listed on U.S. exchanges or try to find a brokerage company that allows you to invest internationally.

Last but not least, you can open a physical business in China. This option is by far the most involved one but also has the potential to generate the highest return. If this is something that you’re actively considering, we’d recommend reaching out.

7) Have You Examined the Risks and Rewards?

Before making decisions in any capacity on whether or not you should invest in China, it’s important to make sure that you’re measuring the risks and rewards involved. This is a good practice before making an investment anywhere. First, let’s take a look at some of the stronger rewards associated with investing in China:

● Strong economic growth – This is a hallmark of China today. The Chinese economy has been growing consistently for the better part of the last 40 years. They also have the world’s largest population (at 1.4 billion people) which presents a massive opportunity for companies

● Rising status on the world stage – To complement their growth, China has been rising on the world stage. They also hold a significant amount of U.S. debt and are a decade or so away from becoming the largest economy in the world. This means that they will become even more influential in global politics

Now let’s take a look at some of the risks involved with investing in China:

● Predictability – The Chinese government has proven to be less predictable than democratic governments. They are also much less transparent and numbers they release often come under scrutiny

● Social instability – Although there are reports that the middle class is growing stronger, China’s richest citizens still pull in almost 25x more than its least wealthy. This could lead to social instability within the country

● Changing demographics – A lot of China’s success has been built on the backs of a cheap and young workforce. However, those demographic trends might be changing due to its aging population

6) Make Sure You Understand Chinese Accounting Principles

Due to the fact that China just recently embraced a market-driven economy, its accounting principles are not as developed as those of other nations. In fact, up until the early 2000s, their accounting was still based on a socialist model. A few of the major differences between Chinese accounting and international models are:

1. Valuation methods for fixed assets
2. Detailed rules in the CAS
3. Delayed implementation of the IFRS

To read about them in greater detail, click here.

5) You’ll Be Dealing With a Communist Country

On this same note, it’s important to remember that you will be dealing with a Communist country. This isn’t as bad as it may seem, you’ll just need to be cognizant of some of the differences between doing business in China versus a country like the United States.

This mostly means that the government has much more control over what they can ask businesses to do for them. This will be a bigger issue if you’re looking to start a physical business in China but can also impact your investments in other ways. For example, you never know when the Chinese government might ask a tech company to violate the digital privacy rights of their users.

4) You Can Invest in Chinese Growth Indirectly, Through American Companies

As mentioned previously, one way to invest in China is to do it indirectly through American companies which are already in a solid position. Instead of buying stock in Chinese companies, you’d buy stock in American companies which either already have a large presence in China or are looking to expand there. If this sounds like a route you’d like to explore, these companies represent good places to start:

● Yum Brands (KFC)
● Starbucks
● Walmart
● Nike
● Boeing
● Apple
● Coke

NOTE: Apart from Apple, we’d recommend staying away from any tech companies at this point in time.

3) You Can Invest in China Through Mutual Funds

Another way that you can get started investing in China is through mutual funds or ETFs. A mutual fund is just a collection of securities or stocks. In this sense, other people have already decided which Chinese companies to invest in for you and then you’re able to just invest in their fund so as to generate the same return. A few of the most popular Chinese funds are:

● iShares China Large-Cap ETF
● iShares MSCI China Index Fund
● SPDR S&P China ETF

This method is also a little bit easier than trying to invest in these companies yourself (since this may require an international brokerage account). Additionally, many money managers that offer China-centric funds have analysts in China who visit and vet companies before investing in them. This takes out a lot of the guesswork for you.

2) Beware of Currency Risk

If this is your first time investing in a foreign country, then you’ll need to remember to be wary of currency risk.

Currency risk is the risk of losing money to due unfavorable moves in exchange rates between two different currencies.

If you invest in a mutual fund or ETF then the fund most likely already hedges their yuan (or renminbi) exposure back to the U.S. dollar (which will reduce your risk). However, if you’re investing on your own, then currency risk is a good topic to research before you start.

1) China Is the Epicenter of the Coronavirus

We’re sure that by this point, the coronavirus is not exactly news to you. However, it’s worth repeating that China is different than other countries because the virus is widely believed to have originated in Wuhan, China. This means that China is the global epicenter of the virus.

Although it appears as though they’ve done a good job of containing the virus, there is always the risk of a second wave. If this happens, it will have lasting repercussions of the Chinese economy and could throw them back into a recession.

We hope that you’ve found this article valuable when it comes to understanding a few things to consider before investing in China. If you’re interested in reading more, please visit our “New Here” section or, of course, get in touch with us directly through the Contact page of ChinaFund.com.

As a bit of a “cliff notes” version of the previously mentioned article, let’s just say that volatility is not inherently good or bad. It is merely a “tool” for lack of a better metaphor and just like any other tool, it all depends on how you use it. Needless to say, a more than meaningful understanding of the asset(s) you are investing in or especially trading is required so as to leverage (sic) volatility properly.

Aside from that, however, there is another elephant in the room: discipline.

Time and time again, investors and traders with high expectations embrace Chinese assets, thinking that generation-defining riches are just around the corner. To put it differently, they embrace this asset class with a “get rich quick” attitude and are treating the entire endeavor as a sprint rather than a marathon. Unfortunately for them, their “I came, I saw, I conquered” approach quickly turns into “I came, I entered an over-leveraged position thinking I’d get rich, I got liquidated” and the individuals in question end up abandoning this asset class with an emptier bank account and an a more than bitter aftertaste.

Furthermore, most of them do not even treat the entire experience as a learning opportunity, an opportunity to understand themselves better and avoid the mistakes they’ve made in the future… what mistakes? In their view, they made the right choices but ended up losing their money because the entire space is manipulated, because the Chinese authorities are quick to over-regulate and the list of reasons could go on and on… reasons which, needless to say, usually don’t involve looking in the mirror.

The (painful) truth is oftentimes different: they lost and gave up because they lacked discipline.

Let us make ourselves perfectly clear: if you greedily up the leverage, you lack discipline. If you lost money on a trade and quickly initiate another one so as to “break even” then, once again, you lack discipline and are closer to a gambler than an investor/trader. If you “double up” not because you have rational reasons to do so but because you “feel” it’s the right thing to do, you are yet again in gambling territory rather than that of discipline.

Time and time again, whether we are referring to investors and traders or pretty much any other profession, perhaps the most easily identifiable common denominator among those who do well in the long run is represented by discipline. Of course, the manifestations of discipline vary on a case by case basis and as such, it all depends on what your activity is.

In our view, discipline when investing in China and Chinese assets revolves around:

1. Being thorough and not shying away from reading everything related to China that you can get your hands on. There is a reason why we have turned the “New Here” section of our website into an actual encyclopedia by covering anything from economics-oriented topics to culture-related ones such as Confucianism, Daoism, Buddhism and so on. It’s not because we enjoy reading our work (although we do) or hearing ourselves speak (we might) but rather because… well there is no other way and a superficial understanding of “all things China” will yield mediocre long-term results at best and lead to ruin at worst
2. Embracing patience or, in other words, understanding that even if you are “right” when it comes to your baseline hypothesis, it oftentimes takes frustratingly long until the market catches up with you. Yet again, a reason to keep leverage to a minimum and allow for ample wiggle room, especially for Chinese assets and let’s say generally speaking, other assets that can get volatile
3. Humility or, in other words, understanding that, as painful as it may be, your baseline hypothesis was wrong. While waiting for the market to catch up with you within reason makes sense, it’s equally important not to get married to a position once you have valid reasons to believe that your hypothesis has been invalidated. As such, always have a clear invalidation scenario in mind and should it occur, don’t hesitate to pull the proverbial plug, cut your losses and re-assess
4. Having a long-term plan and including even your shorter-term trades in a framework that revolves around the long-term plan in question. Internalizing why you are here, what your long-term goals are with respect to Chinese assets and how short-term actions can help you get closer to them in a “step by step” manner is a must and needless to say, most strategies are unfortunately severely lacking in the consistency department
5. Implementing strict and clear risk as well as money management strategies. Time and time again, the difference between traders who do well and traders who do not is represented not necessarily by how frequently they “got it right” but rather by how disciplined they were when it came to booking profits, re-sizing positions and generally speaking, sticking with their risk and money management strategies

As can be seen, discipline comes a lot closer to involving simple common sense than to being in the realm of rocket science, yet very few investors/traders meaningfully internalize the concept and actually put it to good use. Whether we are referring to Chinese assets or anything else, there is a world of difference between “kind of, sort of” understanding why discipline is paramount and actually making it a core pillar of your long-term strategy. Here at ChinaFund.com, we are more than happy to help readers and especially clients with the latter.

Is volatility good or bad?

For the most part, neither.

Investors and especially traders have a bit of a love-hate relationship with volatility because on the one hand, wild price swings enable savvy economic actors to position themselves properly and do very well if the market moves in the direction they had anticipated.

Let us start with investors. As far as they are concerned, volatility makes it possible to snag bargains by pulling the proverbial trigger when everyone else is panicking on the one hand and on the other hand, the same volatility enables them to exit the market when they notice what Schiller/Greenspan would call irrational exuberance.

What about traders?

Take everything that has been stated about investors and add leverage to the mix. Leverage which can, of course, make it possible for said traders to increase their profits if they are on the right side of a certain trade but the same way, it can get the very same traders into margin call and ultimately forced position liquidation territory if they are not.

To take things to the extreme, an investor who simply buys and holds without using leverage can theoretically ride a position indefinitely and as long as the price of the asset in question doesn’t go all the way to zero, the investor cannot be liquidated. As such, especially when it comes to extremely (even compared to Chinese assets) volatile assets such as bitcoin, there have been investors who let’s say bought at the very worst possible time back in 2013 (at $1,000, for example) and held through a depressing downturn that saw prices flirt with the $200 zone but survived, with prices then moving strongly north, all the way to the $20,000 area in 2017. Even if they didn’t sell anything at $20,000 and even if prices are still quite a bit south of $20,000, any investor who bought the proverbial top back in 2013 is still sitting on career-defining profits.

On the other end of the spectrum, pretty much any leveraged trader who bought the same top in 2013 would have been liquidated well before prices came even close to the $200 area and therein lies the difference one needs to understand with respect to leverage.

The exact same principle is valid with Chinese assets.

Volatility can be great if your bullish or bearish hypothesis ends up being proven right but it is crucial to ask yourself what were to happen if things unfold in an unfavorable manner? Deploying prudence when choosing how much leverage to deploy or even when deciding whether to use leverage at all is the operative attitude, especially when it comes to assets that can be quite volatile… such as yes, Chinese assets. Even if we are not exactly in cryptocurrency-level volatility territory, being prudent so as to protect your capital represents a more than necessary first step.

Does this mean one should not use leverage at all for volatile assets?

Of course not.

It simply means that, more so than when investing in “safer” assets, it makes sense to tone it down a notch when deciding what your leverage-facilitated profit expectations are. Otherwise, and this happens time and time again, it will matter little that you were right and that your vision ultimately materializes in the long run if you ended up being liquidated before that happened.

Remember: it is one of the most common misconceptions in the investment world that by being right, you will automatically be profitable. Time and time again, overly-ambitious investors who were indeed right with their underlying hypothesis were completely wiped out due to the fact that greed got the best of them. To put it differently, they had so much in the way of conviction that they went overboard and chose to trade in an over-leveraged manner… a scenario that rarely ends well.

At the end of the day, the conclusion is a fairly straightforward one: in light of the fact that Chinese assets aren’t exactly the least volatile option in the world, it makes sense to be even more prudent when handling the leverage bar than with other assets. Being ambitions can be excellent in the right dose but the same way, it can bury your career as an investor and especially trader far sooner than one might think.

Therefore, always understand that capital preservation needs to be your number one priority. The more investing/trading books you read and the more successful investors and/or traders you follow, the more you will be exposed to the idea that being humble is the way to go. It is precisely humility which will enable you to keep your expectations in check and it is precisely humility which should compel you to see the big picture: the fact that you do not have to generate retirement-facilitating profits through this one trade exclusively and on the contrary, that there will be far more equally juicy trades where the current one came from.

Yes, it is a metaphor so overly-used that is almost lost any and all meaning but it bears repeating in this one instance: especially when investing in or trading volatile assets, understand that you’re in a “marathon” rather than “race” situation and that capital preservation is a goal that is pretty much always worth the price (in missed opportunities), especially in the long run. Your career is measured in years or even downright decades, most certainly not merely in days or months and with that stated, we wish you the best of luck and are at your disposal should you be interested in our help with your investing and/or trading career.

Before continuing with this article, we would recommend reading our black swan-related one by clicking HERE and as a brief introduction, black swans are essentially unexpected events which risk turning the world upside-down. Think of them as the opposite of the Brexit situation, one discussed over and over (and over, and over!) again to such a degree that the likelihood of being taken by surprise by something Brexit-related is rather low.

What about white swans?

Right off the bat, we want to make it clear that the Brexit example is a bit exaggerated and should be considered a somewhat extreme white swan example. Broadly speaking, let’s just say white swans are events that are on the radar of pretty much any (at least somewhat informed) market participant and as such, the market will most likely not be taken by surprise by white swan-related developments.

Does this mean white swans are not dangerous?

Most definitely not!

In fact, therein lies the misconception we want to debunk, the idea that just because certain situations represent known factors, they shouldn’t be perceived as threats. Yes, the market had time to wrap its head around white swans and perhaps even price them in to a significant degree but:

1. This doesn’t mean the situations themselves any less dangerous
2. Markets aren’t always amazingly efficient with respect to quantifying risks right away and occasionally, they are proven wrong… even brutally so in certain instances

As a general idea, you can imagine a high-speed collision between two sports cars and use that as a metaphor for black swan events on the one hand and on the other hand, you can imagine a slow-motion train wreck and use that as a metaphor for white swan events. While it is true that the two are remarkably different, this fact alone doesn’t provide any guarantees as to one scenario being deadlier than the other. The same way, the sudden onset of an illness can be considered a black swan event (with you and your family caught completely off-guard), whereas the debt-fueled gambling and drug abuse habits of someone you know can be considered a white swan scenario.

Categorizing events in this matter says little about the final outcome. For example, the suddenly-appeared illness might go away just as quickly if treated properly, with the black swan event ultimately turning into a “happily ever after” situation. Or, the same way, your friend with bad habits might ultimately have an “Aha!” moment and turn things around. Then again, the exact opposite might happen… we just don’t know: perhaps both situations will result in long-term disaster, maybe one will have a negative ending and the other a positive ending or, of course, perhaps both of them will have a positive outcome.

As such, a compelling case could be made that black and white swan events deserve to be treated just as seriously, with a few examples when it comes to China being:

1. The heavily talked-about trade tensions with the United States
2. The coronavirus/covid-19 situations and its possible long-term effects
3. China’s role in a potential hot war between the United States and Iran, a topic covered through a dedicated article
4. China’s role in a potential cold war between Russia and the United States
5. China’s GDP growth rate slowdown and the effects it might have on its economic as well as socio-political trajectory
6. The potential economic (and otherwise) effects of China’s demographic problems
7. A possible escalation of endogenous issues in Hong Kong and/or Taiwan-related ones
8. A possible escalation of exogenous issues such as South China Sea-related ones
9. China’s worryingly high debt levels, especially on the corporate debt front (even if it is hardly the proverbial number one game in town in terms of debt)
10. The seemingly chronic under-performance of China’s domestic share market, one dominated by less than sophisticated retail investors to a lesser degree than in other jurisdictions
11. Yes, climate and pollution-related issues, with the many ramifications they risk bringing about

Needless to say, it isn’t all that difficult to think of white swans as far as China or pretty much any other nation is concerned, with the previously mentioned list being by no means definitive. However, please understand that our goal here isn’t getting you as a reader of this article to panic. On the contrary, we have explained time and time again that whether we are referring to black or white swan events, panic is always a sub-optimal reaction.

Instead, we have one goal and one goal only: convincing our readers to allocate at least a tiny bit of brainpower toward thinking about scenarios involving white swans. This is most certainly not something we would recommend obsessing over, nor is it an endeavor which is meant to occupy the bulk of your day. Even a few minutes spent researching and “worrying” about white swans each day automatically puts you miles ahead of the average market participant.

The same principle is valid when it comes to the idea of (in our case financial) preparedness in general. Most people allocate pretty much zero energy in this direction and as such, let’s just say the bar is not set remarkably high. In many cases, all it takes is showing up or to be more specific, all it takes is putting in a little bit of effort for you to be much better-positioned than the average individual and/or organization. As always, the ChinaFund.com team will happily put its experience as well as “brain power” at your disposal so as to enable you to do just that, with us only being a quick message away.

Investing in China is one of the best ideas a budding investor can leverage. They are a nation poised for growth that will yield huge dividends for those who take advantage of the various opportunities that are out there. The bigger problem is this: how does one actually go about getting started? Where do you go and what do you look for? It can definitely be a little overwhelming if you’ve never invested outside of the U.S. before. To help you out, we’ve put together this guide.

Without further ado, this is how to start investing in China:

Why You Should Start

There are plenty of reasons to start investing in China. They’re the world’s second-biggest economy, have the world’s largest population and only began decentralizing their economy about 40 years ago. Since the 1980s, the Chinese economy has doubled roughly every 8 years and they still have plenty of growing left to do.

Additionally, lots of investors in the U.S still don’t make Chinese companies a staple of their portfolios. This means that there is still plenty of room to become an early adopter. Even though it may feel like you’ve missed the boat (40 years of growth sounds like a lot), it’s important to keep your timeline in perspective. You shouldn’t invest with plans to sell out in the next month. Instead, think about where your investments will take you 10-20 years down the road.

Imagine if someone had assumed that the U.S. economy was done growing in the year 1980 because it had been expanding for so long. They would have missed out on tremendous opportunities presented by an entirely new class of stocks (Internet stocks). If you’re investing in China, we think you’ll be surprised how much room there is to grow.

➢ China (whose population up until relatively recently relied on the bicycle as their main form of transportation) is now the world’s largest car market
➢ They’re also the world’s leading smartphone market and are set to surpass the U.S. as the top retail market
➢ Furthermore, China is also set to overtake the U.S. as the world’s #1 economy by 2030

If you read through annual reports of global companies, almost all of them highlight foreign markets as a focus. For most of these companies, China is the foreign market to focus on.

You may think that this doesn’t apply to you because you don’t sell cars or smartphones but that doesn’t mean that you can’t still cash in on the opportunity. There are still ways that you as an investor can take advantage of the amazing growth potential that China still presents. The way to do this is by buying stock in companies that are set to dominate the Chinese business landscape over the next 5,10 and 20 years.

So what do you need to get started?

Major Stock Markets in China

Before you ever started investing, you probably had to do some background research on basic topics. Before you bought a stock you first needed to learn what a share was, where you can buy them, what stock market indexes are, etc. When you’re investing in a new market, it would be wise to do the same thing. Chinese markets are not overly complicated, however, they are definitely different than their U.S. counterparts.

A stock market exchange is where stocks can be bought, traded, and sold. Listed below are the main stock market exchanges in China.

Shangai Stock Market – This is considered the main stock market in China and represents the largest stock market in the mainland. It currently sits at fourth in the world in terms of total market cap for equity exchanges (behind the NYSE, Nasdaq, and Tokyo Stock Exchange).

Shenzhen Stock Exchange – This is the other stock exchange located in mainland China. The Shenzhen Stock Exchange has a bigger focus on technology stocks whereas the Shanghai Market is more versatile (in this sense, the Shenzen is similar to the NASDAQ and the Shanghai is similar to the NYSE).

Hong Kong Exchange – The Hong Kong exchange is Asia’s third-largest in terms of market capitalization (behind Tokyo and Shanghai). Its benchmark index is known as the Hang Seng Index

Major Indexes in China

A stock market index is a portfolio of investment holdings that tracks a specific segment of financial markets. In the U.S., the major indexes are the S&P 500, Dow Jones, and NASDAQ. These are some of the main stock market indexes in China:

Hang Seng Index – Equivalent of the United States Dow Jones. This index tracks the largest companies that are listed on the Hong Kong Exchange. It’s specifically indicative of market trends and companies that are located in Hong Kong. It tracks mainly blue-chip stocks and also includes four sub-sector indexes that are industry, finance, utilities, and REIT’s (real estate investment trusts).

Shanghai Stock Exchange (SSE) Composite Index – This is an index that tracks all stocks that are traded on the Shanghai Stock Exchange.

Shanghai Shenzhen CSI 300 Index – This index tracks the performance of the top 300 stocks listed on the Shanghai and Shenzhen stock exchanges (similar to the S&P 500 in the U.S.).

SZSE Composite Index – This is an index of 500 stocks that are traded at the Shenzhen Stock Exchange. It is the main stock market index of the Shenzhen Stock Exchange.

Additionally, when it comes to investing in Chinese stocks, there are three classes of stock that you’ll need to know about. In the U.S., different classes of stocks are usually based around the needs of the company and they usually come with different voting rights. In China, different shares are generally based around who the government has made them available to.

• A Shares – These shares are also known as domestic shares and are from mainland China-based companies. They’re traditionally not open to foreign investment. These shares are denominated in the renminbi (the official currency of China, which has been covered through a dedicated article).
• B Shares – These shares are available to both domestic and foreign investors. These securities of Chinese incorporated companies trade on either the Shanghai or Shenzhen stock exchanges. B Shares will usually be quoted in U.S. dollars.
• H Shares – These shares are also available to foreign investment and are listed on Hong Kong exchanges.

Tools to Get Started

Once you’ve made the decision to start investing in Chinese stocks and are familiar with the basics of Chinese exchanges and how they work, then it’s time to start buying stock.

NOTE: It’s important to note that generally accepting investing principles still apply when investing in China. Make sure you properly research each investment to the best of your ability and ensure that it’s on par with your investing timeline and goals. Additionally, be aware of currency risk. If you’re unfamiliar, currency risk represents the risk of losing money due to changes in the exchange rate between two currencies.

Here are a few ways that you can go about buying Chinese stocks.

1) Explore mutual funds that track Chinese growth

Mutual funds (or exchange-traded funds) are collections of securities that track entire markets or sectors. By purchasing shares in a mutual fund that tracks Chinese stocks, you can take advantage of their collective growth. This will be significantly easier than trying to buy individual stocks but you will not get the flexibility to purchase exactly what you want. A few good ETFs to start with are the iShares China Large-Cap ETF, iShares MSCI China ETF and SPDR S&P China ETF.

2) Check with your brokerage to see if you’ll be able to purchase Chinese securities through their platform

Ideally, you’d be able to purchase securities directly through the brokerage you already use. However, many brokers don’t allow foreign investment on their platform. If this is the case, you’ll need to open up a new brokerage account. Do some research to find brokerages that offer Chinese investing and choose the one that’s best for you. A few options are Interactive Brokers, TD Ameritrade, Tradestation, Swissquote, and XTB. Any of these will let you buy/sell foreign stock.

3) Look into opening a brokerage account in China

This process will be a little more involved but once it’s set up, will probably be your best option as there will be little in the way of restrictions on what you can/can’t purchase.

4) Invest in Chinese stocks that are listed on U.S. exchanges

You can always take advantage of Chinese stocks that are already listed on U.S. exchanges. The pro of doing this is that it will be much easier and quicker. The downside is that these opportunities are also available to all of the other foreign investors. A few examples of Chinese stocks that are listed on U.S. exchanges are Alibaba, JD.com, NetEase, and ZTO Express. We know that it may seem confusing at first and probably makes you question if all the upfront research is worth it. However, other investors are asking themselves the same question and many of them will answer ‘no’. This means that those who are able to slice through the bureaucracy will gain access to the Goliath market with superb long-term prospects that is China. We hope that you’ve found this article valuable when it comes to understanding how you can start investing in China. Should you be interested in learning more, we would strongly recommend staying tuned and, of course, reaching out to our team for a more personalized experience.