Investing in China is tempting. The economy has grown at a stunning rate since the 80s and plenty of pundits thinks China can maintain strong growth in the medium term. What’s more, Chinese firms like Baidu, Alibaba and JD.com have been strong stock market performers in recent years.
China isn’t a one-way bet, however. The country’s stock market had a major wobble in 2015 over concerns about debt and those concerns haven’t completely gone away. By the end of 2016, China’s total debt had growth to $28 trillion, up from $6 trillion at the end of the financial crisis, according to the Bank of International Settlements. That’s a fast growth rate for debt.
There are also worries about a large shadow banking sector which is at least partly supported by retail investment products offered by banks and large internet companies. Bears worry that Chinese savers and investors wrongly see these products as risk-free.
Corporate governance is another issue – it’s relatively weak, and you might also be put off by the fact that the government is Communist, at least in name, and certainly isn’t democratic. Remember also that China’s demographics aren’t good. A big part of the initial China growth story in the 90s was that there was plenty of cheap labour for manufacturers. However, the ‘one child’ policy means that the population is now ageing. If you’re looking for cheap labour, India is a more attractive country to set up shop in.
On the other hand, the government is very focused on keeping the growth story going and also seems very aware of the debt situation. Overseas investors seem to happy to buy Chinese debt.
And don’t forget China now has a growing middle class which should support consumption and growth. What’s more, MSCI is also set to include some mainland China shares in its emerging markets and global indices. This should lead to share purchases by passive investors and may provide a price floor for some of the largest mainland shares.
Perhaps the answer is to have a modest investment in China but not too much.
How to do it
Anyway, if you decide you do want some stock market exposure to China, there are several ways to go about it.
You could invest directly in Chinese companies. The easiest way to do that is to invest in Chinese shares that are listed in New York – Alibaba, Baidu, China Life Insurance, PetroChina are four examples. You could also invest directly in Chinese firms listed in Hong Kong, but that may be too exotic for some.
Some commentators argue that an active investment approach is your best bet for relatively immature market such as China. The best known actively-managed fund is probably the Fidelity China Special Situations investment trust. This trust had a poor start but has become a good performer in recent years. However, there are no guarantees that the better performance will contionue and the charges are quite high at 1.22% a year.
So if you want to save money and go for a passive approach, there’s a good range of Chinese ETFs.
Before we look at individual ETFs, we should look at the main Chinese stock market indices.
FTSE China 50
This is a market-cap weighted index that comprises fifty of the largest and most liquid stocks on the Hong Kong stock exchange. These are mainly companies that operate in China even though they are listed in Hong Kong. Many of these shares are known as ‘H’ shares. You also have ‘P chips’ and ‘Red chips.’ (P chips are companies that operate in mainland China but are incorporated elsewhere. At least 30% of its shares must be held by mainland Chinese entities. The only difference between ‘P’ and ‘Red’ chips is that for Red chips, at least 50% of shares are held by mainland Chinese entities.)
The index is dominated by financial companies and top holdings include Tencent Holdings, China Construction Bank and Industrial and Commercial Bank of China. Individual companies are capped at 9% of the index in order to ensure diversification. Companies with a weighting greater than 4.5% cannot in total comprise more than 38% of the index’s value.
FTSE China A50
This index comprises the fifty largest companies listed on the Shanghai and Shenzen stock exchanges. These are known as ‘A’ shares. All ‘A’ shares are quoted in renminbi.
Hang Seng China Enterprises Index or ‘Hang Seng’
This widely followed index comprises the 40 largest ‘H’ shares on the Hong Kong exchange. The index is skewed towards large financial companies and doesn’t currently include any Red chips or P chips. That will begin to change from March 2018 when some P and Red chip shares are added to the index over a one-year period.
The MSCI China index is broad with around 150 constituents and includes ‘H’ shares, P and Red chips and also some Chinese companies listed on overseas indices including New York. Thanks to the New York listings, the index includes stocks like Alibaba and Baidu. It’s market-cap weighted with some reference to liquidity as well.
Here are the five biggest constituents of the index:
|Company||% of index|
Source MSCI, November 30 2017
Unlike the finance-dominated Hang Seng, the MSCI China’s biggest sector is information technology with a 41% share, financials are in second place comprising 22% of the index. Some ‘A’ shares will be added to the index from next year.
MSCI China ‘A’ index
This index comprises close to 900 companies listed on the Shenzen and Shanghai stock exchanges. It’s spread fairly evenly across a range of sectors although financials is the biggest sector, comprising 22% of the index. The index is also market-cap weighted with reference to liquidity.
MSCI China ‘H’ Index
This index tracks the 69 largest and most liquid ‘H’ shares on the Hong Kong exchange.
The CSI 300 comprises 300 of the largest ‘A’ shares listed on the Shanghai and Shenzen stock exchanges.
This ETF tracks the FTSE China 50 index and charges 0.74% a year. It has $643 million under management. It’s neither cheap nor diverse, so it’s not the most attractive China ETF. The db x-trackers MSCI China Index UCITS ETF has a lower charge of 0.65% a year and tracks the broader MSCI China index.
This ETF tracks the CSI 300 index and has a total expense ratio of just 0.4% a year which is very low for a fund investing in China. The fund is tiny with just $7 million under management.
This ETF is worth noting because it tracks the Hang Seng index. It has a Total Expense Ratio of 0.65%.