If you’ve been looking for new markets to tap into to broaden your investing horizon, then you’ve probably landed on China. If you haven’t contemplated starting yet, take a few minutes and scan a few other articles we’ve written, with most of them being displayed over at our New Here page in a logical as well as chronological (sic) order. If we were to pick just one post as a starting point, we would recommend reading the “Why It’s Time to Give Investing in China a Second Look” one that we have published in late May.
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.