China’s economy, the world’s most populous and a rising global superpower, has grown exponentially over the last century and, barring any long-term consequences from COVID-19, is poised to continue its growth trajectory over the next 10 to 20 years.
However, its stock market remains a source of concern for many retail investors, and for good reason. It could always be due to the lack of familiarity with foreign stocks and companies.
It could also be a language barrier, as many (if not most) Chinese publicly traded companies issue announcements or financial reports in Mandarin. It’s also possible that we’re still haunted by the numerous scandals involving Chinese stocks.
The world’s second-largest economy.
• On the track to overtake the USA as the world’s largest economy.
• Consumption growth (much more sustainable) than trade growth One of the highest
GDP growth rates in history, at 9.5 percent
China’s Capital Markets are Being Opened
• Restriction on foreign ownership is gradually being lifted.
• China has the world’s second-largest stock and bond markets.
• Shares are beginning to be included in global indices.
• Many pricing inefficiencies because of a nascent stock market
Chinese Companies’ Growing Global Dominance
• Haidilao, Alibaba, Xiaomi, Tencent, Baidu, Byte dance, and Zoom are some of the world’s most popular and valuable companies.
• There are a lot of opportunities to catch multibaggers.
Understanding China as a Potential Investor
The Geographical Situation
China has 1.4 billion people, making it the world’s most populous country. This vast Asian country is divided into 34 parts, the majority of which are provinces.
While it is not necessary to be familiar with each province and city in detail, you should be aware that the coastal provinces (located in the east of China) are much more urbanised, wealthy, and population-dense than the inner Western parts of China.
Tier 1 cities (and provinces) are China’s most developed areas. Many consumers with a load of spending power live here, as do many businesses and MNCs. Cities such as Shanghai, Guangzhou, and Beijing can be found here.
The One Party Rule
Despite the fact that the Chinese government is known as the Communist Party of China (CPC) and has its roots in communism, modern China has evolved significantly in terms of ideology and government control.
It’s vital for investors to understand how the CPC works and what President Xi believes. Chinese companies are, in some way, controlled by the CPC, and it makes sense to be aware of the CPC’s plans or initiatives… as this can effectively predict a company’s level of growth or even survival.
For example, we at Dr Wealth have long recognised that environmental protection has been one of CPC’s primary focus areas over the last five years.
The People of China
Mandarin is the language of the Chinese people (Putonghua). However, if you travel to different parts of China, you will notice that they speak different Chinese dialects and have very different customs and cultures.
This is another critical factor that could make or break Chinese companies’ expansion into new cities. As a result, it is clear that for a company to grow even within China… the outcomes may be very uncertain.
China’s population, like that of many other developed countries, is rapidly ageing. On the other hand, there are opportunities for investors to consider, particularly in the healthcare and medical sectors.
The Chinese growth Story
It is critical to comprehend how China grew to become the global superpower that it is today. We have identified four key drivers that we believe have contributed significantly to China’s growth – and that we believe will continue to do so over the next decade or two:
Belt and Road initiative
BRI is a global infrastructure project that aims to improve China’s connectivity along key trade routes as well as its international cooperation.
Without a doubt, the Belt and Road Initiative has provided enormous benefits to China (aside from its beneficiary countries). Domestic construction demand, as well as lending activity, has increased at this stage of development.
Consumption Upgrades & A Rising Middle Class
Since opening its economy roughly 40 years ago, China has experienced rapid industrialization and urbanisation, resulting in many Chinese obtaining higher-paying, higher-skilled jobs… and rapid growth in middle-class household incomes.
Spending habits become more sophisticated as disposable income grows. Chinese parents, for example, would be in a better position to focus on their children’s education and spend more money on extracurricular activities such as piano lessons or dance classes. In China, this is referred to as “consumption upgrades.” Retail spending among China’s younger consumers has increased (and is expected to continue at more than a 10 percent growth rate).
Liberalization of Financial and Capital Markets
China has the world’s SECOND-largest bond and the stock market, worth US$20 trillion, but it is still almost entirely financed by domestic investors.
China has accelerated capital market opening in the last five years, with the most notable example being the inclusion of A-shares in global indices such as the S& P DJIA, MSCI, and FTSE Russell in 2016.
Right now, retail investors (90 percent) continue to dominate China’s stock market. Investing in Chinese stocks that are under-appreciated and undervalued, but have high growth potential, now allows investors to take advantage of market inefficiencies and earn a respectable alpha on their holdings as the market matures.
How to invest in Chinese Shares
The Chinese Stock Market
In China, there are only two domestic stock exchanges: the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SSE) (SZSE).
The majority of Chinese stocks (65%) are traded on these exchanges.
Companies incorporated in China can issue three types of shares (A, B, and H)…however, the majority of Chinese stocks (65%) are A-shares and are quoted in the domestic currency, CNY.
B-shares are comparable to A-shares. They are traded on the SSE or SZSE but are denominated in a foreign currency (i.e. USD or HKD). We won’t be looking at these for the majority of the time.
The stock market in China is not as developed as stock markets in the United States or the United Kingdom.
4 Ways to Invest in China
- Direct Buying A-shares: To purchase A-shares directly, you must either check with your existing broker to see if they have an SZSE or SSE service set up for you to trade, or open a domestic brokerage account in China or Hong Kong. We recommend opening with a broker in Hong Kong because the process is relatively simple, with everything written in English. As a result of the Shenzhen-Shanghai-Hong Kong stock connect initiative, you can trade A-shares through a Hong Kong broker’s platform. It is important to note that with most brokerages, you will not hold the shares in your name, but rather in a custodial account managed by your broker.
2. Indirect Buying H-shares through Hong Kong: Some well-known Chinese companies have chosen to list on the Hong Kong stock exchange rather than the SSE and SZSE. Alibaba (HKSE: 9988) and Xiaomi are two examples (HKSE: 1810). To make matters even more complicated, some Chinese companies may be listed on both the Chinese and Hong Kong exchanges, with slight price differences.
PetroChina and the Bank of China are two examples. If you only want to invest in Chinese stocks listed on the Hong Kong stock exchange, you have a wider range of brokers to choose from, including TD Ameritrade/Charles Schwab, Fidelity, and E*Trade.
3. Buying Chinese ADRs on US Exchanges: Some Chinese companies may list on foreign exchanges as ADRs (American Depository Receipts) or GDRs (Global Depositary Receipts), for example, in the United States or the United Kingdom (Global Depository Receipts). Alibaba (NYSE: BABA) and NetEase are two examples (NASDAQ: NTES). Granted, these Depository Receipts (DRs) make it simple for foreign investors to invest in the Chinese market… As a result, DR holders do not have the same rights as traditional shareholders and are unable to vote in meetings. I generally do not advise investors to own an ADR or GDR because it adds risk and complexity to the equation. If you have the option, you should try to own shares of the underlying company directly.
4. Buying Chinese ETFs (Exchange-Traded Funds): This is the most convenient method of all because there is no stock picking involved and China-focused ETFs are available on most exchanges. If you want to start somewhere, we’ve compiled a list of the Best China ETFs. The ETF that best represents the overall China market is XT MSCHINA, which tracks all large and mid-cap Chinese companies (including H shares, B shares, Red Chips, P Chips and foreign listings). There are many more options available if you are a foreign investor or have access to other markets. Popular market ETFs include the iShares China Large-Cap ETF (NYSEARCA: FXI), Vanguard Total China Index ETF (HKSE: 3169), and iShares MSCI China ETF (NASDAQ: FXI).
Chinese Companies aren’t As Dangerous As They Once Were
Many investors have a deep mistrust of Chinese companies as a result of the scandals involving corporate mis-governance that occurred in 2000. There were many cases of asset misappropriation, fraudulent accounting, taking advantage of minority shareholders, reverse mergers, and so on back then.
However, it has been 20 years, and we believe China has cleaned up its act and implemented financial reforms with strict regulations on par with those of international organisations.
Reliable Investing Resources for Chinese Companies
If you are investing in a Chinese company for the first time, you may be unsure of where to look for specific pieces of information, such as the Annual Report or company news. We’ve found this site Sina Finance to be extremely helpful in our research over the years. AAstocks is another excellent resource.
These websites offer a wealth of information (financial statements, ratio analysis, research, corporate announcements, stock-related news, and so on) on Chinese and Hong Kong stocks, but they are only available in Chinese. However, if you use Google Chrome, the page will be automatically translated to your preferred language. It’s not very accurate and it doesn’t translate into proper (or coherent) English sentences. But if you can get the gist of what the text is trying to say, that’s all that matters.
No check-and-balance system can guarantee that all fraudulent businesses are eliminated. They should, however, provide us with enough information to avoid investing in things like Hyflux or the most recent Luckin Coffee exposé.
Whatever your motivation, the Chinese stock market remains a relatively undiscovered goldmine – and with their economy and stock markets beginning to open up, I believe now is the best time to learn more about the Chinese market and its companies.