Before investing in the Chinese market, investors should consider the pitfalls, understand the risks and rewards, focus on shareholder-friendly companies, and stick to investments they understand.
China is one of the fastest-growing emerging markets in the world. After posting high single-digit growth over the past two decades, the country is expected to surpass the United States and become the world's largest economy over the next few years. And with its enormous population, China's economic growth isn't expected to slow down anytime soon.
But China's stock markets have been a different story. Investor sentiment (at the market level) is the most dominant factor in explaining why China's domestic market is underperforming. So, should you follow Warren Buffett's advice and invest in Chinese stocks?
There is quite a bit you should know before you dive in. If you want to invest in the Chinese market right away, here is a quick guide that can help:
- Choose how to invest in the Chinese market – From individual stocks that are domiciled in China and ETFs that track Chinese stocks’ performance, to U.S. and E.U. companies growing business in China, there are many ways to get exposure to the Chinese market.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the shares of stocks and funds.
- Take your position – create an account with CAPEX.com to start investing in the Chinese market.
Is the Chinese Market a Good Place to Invest?
That depends on what type of investor you are. There's no doubt that the potential is huge. Perhaps no investment opportunity has captured the minds of investors in recent years more than China has. According to the World Bank, China's gross domestic product (GDP) growth has averaged almost 10% per year since 1978. The country is also home to almost 20% of the world's population as of 2022.
A low correlation with other major world markets also makes it a great diversifier. However, there are concerns about China's mounting debt, the overall sustainability of its economic growth, policies, and the country's political policies. These types of risks will prove off-putting to many.
China is still a communist country. So, despite the free-market principles it has adopted, the rules that govern a public company in China are different than those in the US, UK, or EU.
Chinese stocks trade on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Both exchanges have similar listing requirements to those of major global exchanges. Companies have to report financial statements regularly, have audits performed, and meet other requirements of size and capitalization. Beyond that, however, rules and norms differ, which is where things get murky.
Not only do Chinese accounting standards differ from the US, UK, or EU, but regulatory differences abound. One common difference is the trading of company stock by insiders.
Can Foreigners Invest in China?
Retail investors that do not live in China can buy common shares of Chinese companies directly by registering with a Chinese authorized broker if they live in a country considered a partner of the China Securities Regulatory Commission (CSRC). Some of these countries include the US, UK, Brazil, Australia, Singapore, and Russia.
Many well-established brokerage firms have operations in China and can facilitate the process of opening an investment account to trade Chinese securities. Opening a bank account in China is not required. However, investors should be aware that funding a Chinese brokerage account with money that comes from overseas can be costly.
In recent years, the government has sought to make it easier for foreign investors to invest in Chinese stocks. It's still a tricky process, though, and there are options to avoid exposure to China’s regulations, restrictions and risks. As expected, some options are much better than others, and some options should be avoided altogether or left to the most sophisticated investors.
How to Invest in the Chinese stock market
There are at least four ways a foreigner can get exposure on the Chinese markets:
- Indexes of local stock markets. The most widely quoted indexes in the international financial media are probably the Hang Seng Index (HSI), which tracks the Hong Kong Stock Market, and the CSI 300 Index (CSI300), which tracks 300 blue-chip stocks based in mainland China.
- Chinese stocks listed on US Stock Exchange via ADRs. An American Depository Receipt (ADR) is a negotiable certificate that represents a share or a number of shares in a foreign company. The Chinese retail giant Alibaba (BABA) trades in the U.S. as an ADR, sponsored by Citibank.
- Exchange-traded funds (ETFs) that focus on Chinese stocks. There are many to choose from, from the largest providers like iShares, Vanguard, and State Street SPDR.
- Companies with growing businesses in China. An example is Yum! Brands, Inc. (YUM), owner of Pizza Hut, KFC, and Taco Bell. These chains have seen a surge of growth in China, and the Chinese market has increasingly been a source of profit for the company.
Anyone looking to invest directly in companies should consider focusing on blue-chip companies in China. These companies are readily established, and they have deep financial operations and a bigger shareholder base, thus offering investors greater safety in a region still characterized by uncertainty.
Many of them are listed directly on U.S. based stock-exchanges via American Depositary Shares (ADS), making it more accessible for retail investors to get exposure to Chinese stock markets.
Many years ago, these companies were market darlings. In recent years, however, virtually all of them have come under intense scrutiny due to the inability of investors to trust their financial statements. Unable to regain investor confidence, many U.S.-listed Chinese companies' share prices decreased significantly.
Those interested in short to medium-term speculation on Chinese markets via day trading or swing trading should look to Indexes of stock markets based in Hong Kong, Shanghai, Shenzhen, and Taiwan. They can only be traded through CFDs.
Investors interested in owning Chinese stocks should look to index funds tracking local stock markets or professionally managed funds that focus on China. Many asset managers that offer China-focused funds have analysts in China who visit and vet companies before investing in them. Many of these funds also hedge their yuan (or renminbi) exposure back to the U.S. dollar, reducing another source of risk.
Many investors may be interested in sticking with what they know—U.S. and E.U. companies growing business in China. They can offer the best of both worlds: the advantage of strong regulations with the profit growth potential coming from China.
Stock market indexes
Investors who want to follow the Chinese markets and economy can track the indexes of stock markets based in Hong Kong, Shanghai, Shenzhen, and Taiwan.
Hang Seng Index (HSI)
The Hang Seng Index (HSI) is the benchmark stock market index for the Hong Kong financial world and is widely followed as a proxy for the Asian markets in general.
It is a weighted index of the largest companies that trade on the Hong Kong Exchange, covering approximately 65% of its total market capitalization.
This index is thus a benchmark for blue-chip stocks and reflects the performance of the leaders of the Hong Kong exchange. It has four sub-sector indexes: HSI Finance, HSI Commerce & Industry, HSI Utilities, and HSI Properties.
The Hang Seng Index was created in 1969. It is published by a wholly-owned subsidiary of Hang Seng Bank.
China A50 Index
This FTSE index gives foreign investors the chance to access the Chinese domestic market. It’s quoted in real-time and is made up of the 50 largest and most actively traded companies listed on the Shanghai and Shenzhen stock exchanges.
The China50 index is part of a group of indices specially created to enable you to invest in China's mainland stock markets. The ‘A’ means it only takes into consideration A-type shares from the 50 largest Chinese companies. The A-shares were previously only available to domestic Chinese and institutional investors.
The index is reviewed each quarter in March, June, September, and December to make sure it remains representative of the underlying Chinese market.
Taiwan Capitalization Weighted Stock Index
The Taiwan Capitalization Weighted Stock Index is an indicator comprised of stocks traded on the Taiwan Stock Exchange (TWSE), weighted for market capitalization.
The index covers all the listed stocks excluding preferred stocks, full-delivery stocks, and newly listed stocks. The highest-weighted stocks naturally have the most significant effect on the reading of the entire index.
This index was first published in 1967.
Shanghai Shenzhen CSI 300 Index (CSI300)
The Shanghai Shenzhen CSI 300 Index is designed to replicate the performance of the top 300 stocks traded in the Shanghai and Shenzhen stock exchanges and is weighted for market capitalization. As such, it is seen as a blue-chip index for mainland Chinese stocks.
The CSI 300 is considered the blue-chip index for mainland China stock exchanges, as it tracks both the Shanghai and the Shenzhen markets.
Introduced in 2005, the index is managed by China Securities Index Co., Ltd., which maintains 5,000 indexes in 16 nations.
In November 2022, Citigroup became increasingly bullish on Chinese equities, upgrading Hong Kong to Overweight in Asia, noting that Beijing’s changes in Covid Zero policies should boost earnings. Similarly, the government's support to elevate the property sector will support Chinese stocks as well. President Xi Jinping’s rigid policies have shifted, which has turned the market in New York and London bullish on Asia.
Similarly, Morgan Stanley, which has been cautious about the Asian region for most of 2022, raised its estimates for China’s stocks recently, forecasting the MSCI China Index to rally 14% by the conclusion of 2023. Bank of America has also become optimistic about China stock market, where some primary equity gauges lost more than a third of their value in 2022, making them the world’s biggest losers.
JPMorgan Chase moved even quicker than the other Wall Street experts, naming the Chinese market downturn a buying opportunity in late October 2022. This is a massive shift from JPMorgan’s “uninvestable” tag for Chinese internet firms at the beginning of 2022.
Some of the best Chinese stocks to buy for 2023 include Alibaba, Baidu, JD.com, and a few more.
We selected the following Chinese stocks based on positive analyst coverage, strong business fundamentals, and future growth prospects.
Alibaba Group Holding Limited (NASDAQ: BABA), the Chinese e-commerce and technology conglomerate, is considered by analysts one of the best Chinese stocks to buy in 2023.
The company has been heavily impacted by the continued covid-19 lockdowns throughout China and the aggressive rate increases and a deteriorating outlook for China’s economy have weighed heavily on the stock. The share price has also been under pressure due to the U.S. Securities and Exchange Commission’s plans to delist Chinese tech stocks in 2024 if they do not provide access to audit files.
However, Alibaba is considered one of the most undervalued Chinese stocks. The 45 analysts offering 12-month price forecasts for Alibaba Group Holding Ltd have a median target of 136.17, with a high estimate of 223.19 and a low estimate of 72.39. The median estimate represents a +80.00% increase from the end of 2022 prices. (Source: TipRanks)
Baidu, Inc. (NASDAQ: BIDU) was incorporated in 2000 and is headquartered in Beijing, China. The company offers internet search services in China, operating through Baidu Core and iQIYI segments. Baidu is considered by experts one of the premier Chinese stocks to invest in.
Baidu’s mobile ecosystem, which includes China’s dominant search engine, has over 620 million monthly active users. In our view, this ecosystem will benefit from the secular growth of China’s digital advertising industry, as well as the expansion of searchable content from established social media and e-commerce platforms resulting from recent regulatory reforms regarding data interoperability.
Beyond its core search business, Baidu has invested heavily in cutting-edge technologies including cloud, autonomous driving, smart devices, and AI semiconductor chips. The company’s cloud business is one of the largest and fastest growing in China and is differentiated by its AI solutions and higher-value PaaS/SaaS offerings. Baidu has also developed leading autonomous driving technologies that it is commercializing through partnerships with top-tier Chinese auto manufacturers.
The 42 analysts offering 12-month price forecasts for Baidu Inc have a median target of 173.68, with a high estimate of 244.07 and a low estimate of 93.72. The median estimate represents around +90.00% increase from the end of 2022 prices. (Source: TipRanks)
JD.com, Inc. (NASDAQ: JD) is a Beijing-based company that provides supply chain-based technologies and services in the People’s Republic of China. The company offers computers, communication, consumer electronics products, home appliances, general merchandise products, and healthcare products on its platform. JD.com’s annual active customer accounts increased by 6.5% to 588.3 million in the twelve months that ended September 30, 2022.
The 40 analysts offering 12-month price forecasts for JD.Com Inc have a median target of 77.37, with a high estimate of 104.95 and a low estimate of 51.55. The median estimate represents a +28% increase from the end of 2022 prices. (Source: TipRanks)
Pinduoduo Inc. (PDD)
Pinduoduo Inc. (PDD) is one of the top Chinese stocks to monitor. The company operates an e-commerce platform in the People’s Republic of China.
After realizing the first growth curve, Pinduoduo now shifted its focus & investment to agriculture. It is still very early, but the reduced size due to the price drop warrants a position to watch and continue to grow with such a team with a strong culture.
The 40 analysts offering 12-month price forecasts for Pinduoduo Inc have a median target of 101.27, with a high estimate of 139.62 and a low estimate of 62.48. The median estimate represents around a +50.00% increase from the end of 2022 prices. (Source: TipRanks)
ZTO Express (Cayman) Inc. (ZTO)
ZTO Express (Cayman) Inc. (NYSE: ZTO) is a Shanghai-based provider of express delivery and other value-added logistics services for Chinese markets, serving e-commerce and traditional merchants.
The 21 analysts offering 12-month price forecasts for ZTO Express (Cayman) Inc have a median target of 33.61, with a high estimate of 43.36 and a low estimate of 24.60. The median estimate represents around a +35% increase from the end of 2022 prices. (Source: TipRanks)
NetEase, Inc. (NTES)
NetEase, Inc. (NASDAQ: NTES) is headquartered in Hangzhou, China, and the company provides online services consisting of diverse content, community, communication, and commerce in the People's Republic of China and internationally. The company operates through Online Game Services, Youdao, Cloud Music, Innovative Businesses, and other segments. NetEase is one of the best Chinese stocks to consider.
The 35 analysts offering 12-month price forecasts for NetEase Inc have a median target of 102.60, with a high estimate of 140.60 and a low estimate of 59.06. The median estimate is in line with the price at the end of 2022. (Source: TipRanks)
Li Auto Inc. (LI)
Li Auto Inc. (NASDAQ: LI) was founded in 2015 and is headquartered in Beijing, China. The company designs develop, manufactures, and commercializes new energy vehicles for China markets and not only.
The 24 analysts offering 12-month price forecasts for Li Auto Inc have a median target of 28.03, with a high estimate of 60.99 and a low estimate of 5.33. The median estimate represents a +21.35% increase from the last price of 23.10. (Source: TipRanks).
Nio Inc (NIO)
NIO Inc is mainly engaged in the design, development, manufacture, and sales of high-end smart electric vehicles. The Company develops battery-swapping technologies and autonomous driving technologies. Its electric vehicles apply NAD (NIO Autonomous Driving) technology, including the supercomputing platform NIO Adam and super sensing system NIO Aquila. The Company is also engaged in the provision of charging piles, vehicle internet connection services, and extended lifetime warranties. The Company mainly conducts its business in the domestic market.
NIO is one of the most promising EV stocks for 2023 and one of the most traded Chinese stocks. The 34 analysts offering 12-month price forecasts for NIO Inc have a median target of 16.96, with a high estimate of 34.37 and a low estimate of 7.96. The median estimate represents around a 70% increase from the last prices of 2022. (Source: TipRanks).
XPeng is a leading Chinese Smart EV company that designs, develops, manufactures, and markets Smart EVs that appeal to the large and growing base of technology-savvy middle-class consumers in China. Its mission is to drive Smart EV transformation with technology and data, shaping the mobility experience of the future.
The 32 analysts offering 12-month price forecasts for Xpeng Inc have a median target of 11.85, with a high estimate of 33.69 and a low estimate of 4.32. The median estimate represents around 50% increase from the last prices of 2022. (Source: TipRanks).
Tencent Music Entertainment Group (TME)
Tencent Music Entertainment Group (NYSE: TME) is headquartered in Shenzhen, China, and it operates online music entertainment platforms to provide music streaming, online karaoke, and live streaming services for the Chinese market.
The 22 analysts offering 12-month price forecasts for Tencent Music Entertainment Group have a median target of 6.67, with a high estimate of 9.79 and a low estimate of 2.66. The median estimate represents around a 20% increase from the end of 2022 prices. (Source: TipRanks).
ETFs holding Chinese stocks
Another consideration is an exchange-traded fund (ETF). ETFs are investment vehicles that can provide exposure to a certain region, investment strategy, theme, or asset class as they contain an ample basket of instruments that fit the fund’s scope and reach.
ETFs trade as regular stocks. Investors in them are entitled to receive dividends and capital gains corresponding to the number of shares of the fund that they own.
There are plenty of options available that focus on Chinese equities, making it relatively easy to invest passively in a broad array of China-based corporations.
They will typically aim to mimic the performance of a broad-market benchmark such as the above-mentioned.
iShares FTSE China 25 ETF
The iShares FTSE China 25 ETF seeks daily investment results, before fees and expenses, that correspond to two times (2x) the return of the FTSE China 50 Index (the Index) for a single day, not for any other period. The Index consists of 50 of the largest and most liquid Chinese stocks listed and traded on the Stock Exchange of Hong Kong.
KraneShares CICC China Leaders 100 Index ETF
KFYP tracks the CSI CICC Select 100 Index, which takes a smart-beta approach to systematically invest in companies listed in Mainland China. The strategy is based on China International Capital Corporation (CICC)’s latest research on China’s capital markets. This quantitative approach reflects CICC’s top-down and bottom-up research process, seeking to deliver the 100 leading companies in Mainland China.
International Stocks with exposure to the Chinese market
Contrary to popular perception, Apple (AAPL) generates only about 17% of its revenue from the Chinese market. Boeing (BA), Caterpillar (CAT), General Motors (GM), Starbucks (SBUX), Nike (NKE), and Ford (F) are some other US companies with a strong presence in the country. But none of them get more than 25% of their revenue from China.
Morgan Stanley and Thomson Reuters just published their Global Exposure Guide, which tracks revenue and cost exposure by region. Here are some of the most popular American and European stocks with high exposure to the Chinese market, available on CAPEX WebTrader platform:
- Microvast Holdings (MVST), revenue exposure 80%
- Wynn Resorts (WYNN), 76%
- Las Vegas Sands (LVS), 62%
- Nvidia (NVDA), 45%
- Marvell Technology (MRVL), 42%
- AMD (AMD), 39%
- Tesla (TSLA), 25%
- Rio Tinto Ltd (RIO), a revenue exposure of 62%
- HSBC Holdings PLC (HSBC), 53%
- ArcelorMittal (MT), 51%
- Salzgitter AG, 49%
- Anglo American PLC (AAL) 45%
- Glencore PLC, 40%
- Salvatore Ferragamo SpA, 35%
- LVMH Moet Hennessy Louis Vuitton SA, 30%
The stocks and ETFs highlighted on this list are sourced from industry analysts, but they may not be a perfect fit for your portfolio. Before you decide to purchase any of these stocks, do plenty of research to ensure they are aligned with your financial goals and risk tolerance.
The Benefits and Risks of Investing in China
China's economy may have a solid track record of success, but its stock market has been a different story. The government's efforts to contain growth led the Shanghai Composite to fall 25% in 2015, making it one of the worst performers in the world. As a result, international investors should be aware of the benefits and risks before investing in China stock market.
The benefits of investing in Chinese markets include:
- Strong Economic Growth: China has reported high single-digit economic growth over the past two decades, making it the fastest-growing major economy in the world.
- Rising Global Status: China holds a significant amount of U.S. debt and is poised to become the largest economy in the world, giving it growing sway in global politics.
- The risks of investing in Chinese markets include:
- Less Predictability: China has a government that has proven less predictable than democratic governments like the U.S. or E.U. members.
- Social Instability: China's richest 1 percent owned more than one-third of the total national household wealth, while the poorest 25 percent owned less than 2 percent. This wealth disparity could potentially lead to social instability or rapid capital outflows.
- Changing Demographics: China's economic success has been due to a cheap and young workforce, but those demographics could be changing with its aging population.
Trade and invest in Chinese markets with CAPEX.com
Investing and trading are both ways to get exposure to the Chinese stock markets. Even though both offer the potential to profit from the financial markets, they differ fundamentally.
Investing means that you will own the physical shares of stocks and funds until you decide to sell them. When investing, you need to commit to the full value of the investment upfront. If your shares are worth more when you sell them than when you bought them, you’ll make a profit. But, if the price has declined, you’ll incur a loss. While the potential for profit is technically unlimited, your losses are capped at your full initial outlay.
You might want to invest in Chinese stocks if:
- You’re interested in buying and selling assets (stocks and ETFs)
- You’re focused on longer-term growth
- You want to build a diversified portfolio
- You want to take ownership of the underlying asset
- You want to gain voting rights and dividends (if paid)
CAPEX.com offers +5.000 stocks and ETFs with ownership.
Trading, on the other hand, enables you to predict share price movements without owning the underlying asset – and you can go long or short. This means that you can speculate on rising as well as falling prices. You also don’t need all the capital upfront, as you’ll trade using leverage. All you need to open a position is a small deposit called a margin. Keep in mind that leverage magnifies both potential profits and possible losses. This makes it vital that you manage your risk properly.
Do you want to practice trading? Open a CAPEX.com demo account to trade in a risk-free environment.
You might want to trade the Chinese stock markets if:
- You are interested in speculating on the underlying price of the assets (stocks, indexes, ETFs, commodities, bonds, currencies, cryptocurrencies)
- You want to trade rising and falling markets – going long and short
- You want to leverage your exposure
- You want to take shorter-term positions
- You want to hedge your portfolio
- You want to trade without owning the underlying asset
CAPEX.com offers +2.000 CFDs on stocks, indexes, commodities, ETFs, bonds, forex and cryptocurrencies.
Before you start investing and trading in the Chinese markets, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.