The Chinese Stock Market and Investing in China

International investors eager for growth have been looking to China in recent decades. China, the world’s second largest economy, is a key driver of global growth. In the following article we will discuss what it means to invest in China’s Stock Market.

Brief Background

China has experienced tremendous growth in the last forty years, becoming one of the fastest major growing economies in the world. It is the second-largest world economy behind the United States, with a gross domestic product (GDP) of more than $11 trillion in 2016.

The country has a population of nearly 1.4 billion people, making it the most populous in the world and allowing it to have a labor force of more than 807 million people.

China’s Economy

In the 1970s, China implemented reforms that changed its economy from a closed system to a more market-oriented one. Prior to the 1970s, the Chinese Communist Party, under Mao Zedong’s leadership, introduced collectivized agriculture. However, following Mao’s death, China underwent a number of reforms, including the elimination of collectivized agriculture and an embrace of autonomy for state businesses, the development of a stock market and banking system, private sector growth, and increased foreign investment and trade. These changes helped the country grow its GDP tenfold since 1978.

China’s GDP was about $11.4 trillion in 2016. The country is the largest export economy in the world – in 2016, China exported more than $2 trillion and imported around $1.3 trillion. Its per capita GDP is $15,500.

China’s stock market is more than 100 years old and is one of the largest in the world, second only to the New York Stock Exchange

In 2016, U.S. goods and services trade with China totaled more than $640 billion and the country is America’s largest goods trading partner. China’s biggest exports are computers and broadcasting equipment, totaling $251 billion, followed by telephones, integrated circuits, and light fixtures.

Chinese Stock Exchanges

China’s stock market is more than 100 years old and ranks as one of the largest in the world, second only to the New York Stock Exchange (NYSE). China’s mainland exchanges are based in Shanghai and Shenzhen, with a third exchange in Hong Kong.

Shanghai

The Shanghai Stock Exchange is governed by the China Securities Regulatory Commission (CSRC). Nearly 1,400 stocks are listed on the Shanghai Stock Exchange, along with nearly 11,000 securities and more than 1,400 stocks. The index tracks the fourth-biggest stock market worldwide by market value.

Shenzhen

The Shenzhen Stock Exchange was established in 1990 and is also regulated by CSRC. It is one of the world’s busiest exchanges and is heavily tech-focused. Manufacturing companies make up the bulk of Shenzhen’s listings by market cap, but the exchange also offers investors exposure to industries such as technology, pharmaceuticals, and consumer goods and services.

The Shenzhen exchange is located just over the border from Hong Kong, a former British colony. The exchange has become a nexus for tech, healthcare, and consumer companies. The ChiNext market, which has been compared to the U.S.’s Nasdaq, is in Shenzhen.

Hong Kong

The Hong Kong Stock Exchange is the third-largest in Asia by market volume. It was founded in 1986 with the merger of four Asian exchanges. In 2015 and 2016, the exchange was the world’s number one IPO market. More than 2,000 companies are listed on the Hong Kong exchange.

In the past, individual investors have had very limited access to China’s stock market and have had to apply for individual quotas in order to be able to trade.

A cross-boundary link – called Stock Connect – was established in 2014 between the Hong Kong and Shanghai exchanges. It allows international and mainland Chinese investors to trade in each other’s markets. The exchange links allow Chinese investors to trade Hong Kong stocks via the Shanghai and Shenzhen exchanges.

A similar trading link between Shenzhen Stock Exchange and Hong Kong – known as Shenzhen-Hong Kong Stock Connect – debuted in December 2016, allowing foreign investors to trade more than 800 stocks without having to apply for licenses and quotas. The Shenzhen link was an extension of the existing trading link.

Stock Connect serve as a direct way for foreigners to trade mainland stocks and allows Chinese investors to trade Hong Kong-listed stocks.

Ways You Can Invest in China

One of the ways for overseas investors to buy into Chinese companies is to purchase shares that are listed on U.S. exchanges. That includes companies such as Alibaba, one of the world’s largest e-commerce retailers, and Baidu, China’s largest search engine.

Chinese companies can issue different classes of shares depending on which investors are allowed to buy them. The classes are A, B, and H. A-shares trade on either the Shanghai or Shenzhen exchanges and are quoted in Renminbi or Yuan, the chinese currency. B-shares trade on the same exchanges but are quoted in U.S. dollars on the Shanghai exchange and Hong Kong dollars on the Shenzhen exchange. Stocks listed in Hong Kong are known as H-shares and offer international investors exposure to Chinese firms as there are no restrictions on who can trade them.

ETFs

Another way to invest in China’s stock market is by investing in shares of ETFs that track companies within this sector. This investment offers a way for investors to get exposure to companies that trade in some the Chinese stock exchanges without the need to by the particular stocks. Think of an ETF as a basket of stocks.

It’s important to point out that investing in these ETFs can be risky. China’s stock markets are known for experiencing high levels of volatility in the past.