The tales are many, the tales about the impressive rise of the Chinese economy and the wondrous, envious growth seen in past years. Many are the foreign firms wanting to have a piece of this growth saga, and many are those traders wanting to gain access to shares of Chinese companies. Is it even possible though, to trade directly into the shares of Chinese companies? What do you need to know prior to investing in China tied assets such as stocks and funds? This article will guide your way into the Chinese Stock Market, giving you valuable tips and pieces of info.
THE CHINESE STOCK MARKET
China is the world’s second-largest economy, and the Chinese Stock Market is by far the largest and most influential market in Asia. A dip in the Chinese market has repercussions in markets globally, as we noticed in the crash of 2015 in China’s stock Market and the effect it had on other countries’ markets. In the aftermath of the Chinese Stock Market meltdown of 2015, it was seriously discussed by financial ministers and central bankers from all corners of the world during an International Monetary Fund (IMF) meeting, if the meltdown would elicit yet another financial crisis.
The Chinese Stock Market is an important driver in the global financial engine, and keeping track of it is important to your trading portfolio even if you do not own any Chinese shares.
Let’s go back a bit in history though. The Chinese Stock Market is a fairly new one, with its roots dating back to the 90s; quite a you market in other words that has done well for itself in an very short period of time.
The main three exchanges in China are the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE) and the Hong Kong Stock Exchange (SEHK). While the Hong Kong Stock Exchange is open to foreign investment, the same can unfortunately not be said about the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The Shanghai and Shenzhen exchanges are laden with tight capital and regulatory controls by the Chinese state, making it difficult to enter this market as a foreign investor, and especially so if you are a foreign based retail investor, an individual trader with limited means.
The Central Government of China are the ones deciding on which companies are to be listed on Chinese Stock Exchanges, when and to what price. As we will discuss in the chapters about trading in China and risks connected to it, numerous and extensive government interference is an issue to keep in mind.
Another issue is related to what type of investors you will find in the Chinese Stock Market; roughly 80% of shares are owned by retail investors, leading to greater extent of short-termism in trading and price changes. This is compared to other markets in the world, where the majority of capital and shares are owned by institutional investors.
Indices are good to keep track of and benchmark against, and the main Chinese based—and China Stock Market connected—ones are the Shanghai Composite Index (SCI) and the Hang Seng Index (HIS).
Research is the mother of success if you want to make it big trading Chinese shares. Examples of news websites to keep track of can be but do not need to end at the following news outlets:
- http://www.scmp.com/ – South China Morning Post has been around for quite a while, proving market information to HK based readers and an international crowd
- http://www.shanghaidaily.com/business/ – online version of the Shanghai Daily, an English daily news paper
HOW DO YOU TRADE CHINESE SHARES?
As we have mentioned earlier, there are many regulatory hindrances that stand in the way of foreign investors wanting to trade the shares of Chinese companies. There are shares, A-shares, that can only be bought by mainland China residents and Qualified Foreign Investors (QFIs) – becoming a QFI is not in the realm of small investors, as the status as a QFI is only granted to really large institutional investors.
There a select few so called B-shares that are open to trading by foreign investors, and these shares can be found on the Shanghai and Shenzhen Stock Exchanges. H-shares, available from a limited set of companies, are also open to foreign investors, and are listed on the Hong Kong Stock Exchange – many companies that offer H-shares also offer A-shares, making it possible to indirectly buying into companies that are not open to you as a retail investor.
There are Chinese firms listed on exchanges in other countries such as the UK and the US, making it easier to buy their stock. As these stocks are listed in the currency of the country they are listed in, it removes the currency risk that would have been connected to stocks whose price is in the Chinese Renminbi. As an example, so called N-shares are available via NYSE and NASDAQ in the US.
Another way of trading Chinese shares is via American Deposit Receipts (ADRs) and Global Deposit Receipts (GDRs). ADRs are stocks trading in the US and represent a set of stocks connected to a foreign company; GDRs work much the same way. For traders in other countries then the US, talk to your broker or local major exchanges on what your country’s equivalent is of ADRs and GDRs.
You can’t discuss trading in major foreign markets without mentioning Exchange Traded Funds (ETFs); ETFs focus on buying shares tied to certain companies, with different industry focus and niches. Depending on your trading needs, it might be enough to buy ETFs instead of buying Chinese shares directly, and possibly easier.
THE NOT SO SMALL RISKS WITH THE CHINESE STOCK MARKET
The regulatory situation in China is the way it is; complex, political, volatile, and not as foreign-investment-friendly as you might wish. The Chinese State has not been shy to intervene in the market, and has a large ownership in important infrastructure and industrial firms listed in China base exchanges. This shouldn’t keep you from trying your wings though; go out there and trade your first Chinese stock!