The fast growing Chinese economy has been a nice landscape attracting investor’s attention in the past decade and few doubts the growth would end soon. How to capture this golden opportunity and invest in the Chinese financial market? Here we introduce various approaches for both institutional and individual investors.
I) Types of Stocks
Chinese A Shares
Chinese A Shares refer to stocks that are traded on the Shanghai and Shenzhen exchanges. These companies are incorporated in mainland China and their shares are denominated in the local currency, or renminbi. For individual investors, the gyrations of the A share market may be fun to watch, but these stocks are strictly off limits to non-Chinese investors. For professional investors, however, there are a few ways around this restriction.
Chinese B Shares
Some Chinese companies are listed in Shanghai and Shenzhen, dominated in renminbi but traded in U.S. dollars in Shanghai and traded in Hong Kong dollars in Shenzhen. These stocks, known as "B shares", were historically designed to give Chinese companies a way to raise capital from overseas. B shares also allowed foreign (non-Chinese) investors to invest in the market without the restrictions associated with A shares. Over time, however, the B share market has become quite illiquid.
Hong Kong H Shares/Red Chips
Both are Chinese companies. The difference is that H-shares have Chinese incorporation represent state-owned enterprises and "Red Chips" have Hong Kong incorporation and substantial state ownership. These securities are traded on the Hong Kong Stock Exchange and are priced in Hong Kong dollars.
Chinese Stocks in the US (ADRs)
As investor interest in China has grown in recent years, a new crop of Chinese stocks has emerged. These are companies that are headquartered in mainland China, but have chosen to list their shares on the New York Stock Exchange or Nasdaq. There are currently nearly 70 such Chinese companies listed in the U.S., and the list continues to grow. For individual investors, shares of New York-listed companies are by far the easiest way to get started investing in Chinese stocks. Same Chinese companies occasionally list stock on all three markets, Shanghai, Hong Kong, and New York and the three stocks often trade at different prices.
II) Qualified Foreign Institutional Investor (QFII) program
It is a Chinese program that was launched in 2002 to allow licensed foreign investors to buy and sell yuan-denominated "A" shares in China's mainland stock exchanges (in Shanghai and Shenzhen). A qualified QFII must have minimum $10 billion in assets, a multiyear track record, and the willingness to commit at least $50 million. As of February 2009, a total of 79 foreign institutional investors have been approved under the QFII program. Foreign access to China's yuan-denominated "A" stocks are still limited, with quotas placed under the QFII program amounting to US$30 billion. QFII is allowed to buy up to 10 percent of the outstanding stock in any listed company (provided the total shares of one company owned by QFII is less than 20 percent).
ETFs
An exchange-traded fund or ETF is an investment vehicle that is traded on the stock exchange. Good example: iShares FTSE/Xinhua China 25 Index (FXI) which tracks a FTSE/Xinhua index mainly comprising state-owned enterprises (SOEs). Other EFT examples are:
- Claymore/AlphaShares China Real Estate ETF (TAO)
- Claymore/AlphaShares China Small Cap Index ETF (HAO)
- iShares FTSE Hong Kong Listed China Index Fund (FCHI)
- iShares FTSE/Xinhua China 25 Index Fund (FXI)
- iShares MSCI Hong Kong Index Fund (EWH)
- NETS Hang Seng China Enterprises Index Fund (SNO)
- Powershares Golden Dragon Halter USX China Portfolio ETF (PGJ)
- ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP)
- SPDR S&P China ETF (GXC)
- WisdomTree Dreyfus Chinese Yuan Fund (CYB)
- iShares FTSE/Xinhua China 25 ETF (FXC-LSE)
US Mutual Funds Specialized in China. For example:
- AllianceBernstein Great China '97 A (GCHAX)
- Columbia Newport Greater China A (NGCAX)
- Dreyfus Premier Greater China A (DPCAX)
- Eaton Vance Greater China Growth A (EVCGX)
- Fidelity China Region (FHKCX)
- Gartmore China Opportunities A (GOPAX)
- Guinness Atkinson China & Hong Kong (ICHKX)
- Matthews China (MCHFX)
- Templeton China World A (TCWAX)
- iShares MSCI-Hong Kong Index (EWH)
- China Fund (CHN)
III) Investment alternatives for individual investors
Alternative means in investing in China
- Directly invest in QFII
Individual investor may be able to strike a deal with an established QFII like UBS, in which the QFII buys the stocks the individual investor want, and then sells the individual investor a "swap" that passes some of the profits and losses through to you. Normally, QFII requires the individual investor to commit a few million.
- Invest in B-share
With an account at a global brokerage firm like Merrill Lynch, you might be able to buy some B-shares.
- Invest in H-share in Hong Kong
Investor need to invest through Hong Kong Stock Exchange.
- Invest in ETF
- Invest in mutual funds
- Invest in New York Stock Exchange or Nasdaq listed Chinese stock
The above three kind of investment can be done directly in USA.
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