Invest In China: A Guide For Indian Investors

Investing in China from India is a complex process. The Chinese market is notoriously difficult to access for foreign investors due to strict regulations and government interference. However, there are a few ways that Indian investors can gain exposure to the Chinese market. One way is through exchange-traded funds (ETFs) that focus on China or include Chinese stocks. These ETFs can be purchased on domestic Indian markets or through foreign brokers. Another option is to invest in mutual funds that invest in Chinese companies, although these funds have often been closed to new investments. Additionally, Indian investors can consider investing in indices on emerging markets or Asia, which include a large portion of Chinese stocks.

How to Invest in China from India

Investing in China-focused exchange-traded funds (ETFs)

China-focused exchange-traded funds (ETFs) are a great way for Indian investors to gain exposure to Chinese markets and geographically diversify their portfolios. ETFs are a low-cost way to invest in a broad market index, and China ETFs specifically track publicly listed Chinese companies. This means that investors can benefit from the growth of the world's second-largest economy without having to directly purchase stocks.

There are a variety of China-focused ETFs available, and they can be categorised by the types of Chinese stocks they track: A-stocks, B-stocks, and H-stocks. A-stocks are stocks of Chinese companies listed on the Shanghai or Shenzhen stock exchange and traded in local currency. B-stocks are similar but are traded in foreign currency, and H-stocks are stocks of Chinese companies listed on the Hong Kong stock exchange and traded in Hong Kong Dollars.

When choosing a China-focused ETF, it is important to consider the type of China ETF, the expense ratio, and the underlying assets. The expense ratio is an annual fee paid out of your investments in the fund, so a lower ratio is preferable. It is also important to remember that investing in China ETFs carries risks, such as trade tensions and other geopolitical factors.

• Matthews China Active ETF
• IShares China Large-Cap ETF
• KraneShares CSI China Internet ETF
• Franklin FTSE China ETF
• IShares MSCI China ETF
• Global X MSCI China Consumer Discretionary ETF
• Invesco China Technology ETF

Additionally, there are two China-focused ETFs available on the domestic market in India:

• Mirae Asset Hang Seng Tech ETF
• Nippon India ETF Hang Seng BeES

Investing in Chinese stocks through foreign brokers

American Depository Receipts (ADRs)

ADRs are certificates issued by US banks that represent shares in a foreign company. They are traded on American exchanges in US dollars, making them a convenient way to access Chinese markets without the complexities of foreign trading. However, it is important to be cautious due to market volatility and the risk of ADRs being delisted.

Brokerage Accounts with Foreign Firms

Another option is to open a brokerage account with firms that offer access to Hong Kong or mainland Chinese exchanges. This allows for a wider range of Chinese stocks but requires a deeper understanding of local regulations. Larger brokers will generally provide ways to buy Chinese shares through their foreign entities.

Exchange-Traded Funds (ETFs)

ETFs are a convenient way to invest in a diversified pool of Chinese stocks without having to pick individual companies. There are several ETFs that track the performance of Chinese stocks, such as the iShares MSCI China ETF and the Xtrackers CSI 300 Swap UCITS ETF 1C. ETFs can be purchased through any discount or full-service broker.

Mutual Funds

Mutual funds are another option for gaining exposure to the Chinese market. These funds are actively managed or tied to an exchange and offer exposure to a specific country, diversification, and management expertise.

Direct Stock Purchase

It is also possible to purchase shares of Chinese companies directly through a broker that operates on Chinese exchanges. This approach requires analyzing individual companies and understanding the risks associated with foreign investment, such as a lack of timely and accurate information and regulations that can impact your investments.

Understanding the different categories of Chinese stocks (A-stocks, B-stocks, H-stocks)

China has experienced significant economic growth over the years, making its stock market an attractive prospect for investors. However, buying shares of public Chinese companies is not as simple as buying shares in the United States. The Chinese stock market has strict restrictions on who can buy and what is available to them for purchase.

There are three categories of Chinese stocks: A-stocks, B-stocks, and H-stocks. Each category has different characteristics and requirements for investors.

A-Stocks (A-Shares)

A-stocks are the stock shares of companies incorporated and listed in mainland China and traded on the Shanghai or Shenzhen stock exchanges. They are quoted and traded in the local currency, Chinese yuan or renminbi (RMB). Historically, A-shares were only available for purchase by mainland citizens due to China's restrictions on foreign investment. However, since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor (QFII) system. A-shares are also known as domestic shares.

B-Stocks (B-Shares)

B-stocks are the stock shares of companies incorporated and listed in China, but they are quoted in foreign currencies such as the US dollar (traded on the Shanghai exchange) or Hong Kong dollar (traded in Shenzhen). B-stocks are more widely available to foreign investors and can be accessed directly by them. However, with the recent relaxation of restrictions on A-shares, B-shares are becoming less attractive and are considered a "dying" market.

H-Stocks (H-Shares)

H-stocks are the stock shares of companies incorporated in mainland China but listed and traded on the Hong Kong Stock Exchange (HKG) in Hong Kong dollars (HKD). H-shares are open for trading to all investors, including foreign investors. The rules for H-shares listed on the HKG require companies to follow Hong Kong or international accounting standards and include specific sections in their articles of incorporation clarifying the nature of domestic and foreign shares and the rights given to each purchaser.

Comparison and Other Considerations

There are usually price discrepancies between a company's A-shares and H-shares, with A-shares generally trading at a premium. Due to the limited access of Chinese investors to B-shares, the same company's stocks often trade at much higher valuations on the A-shares market compared to the B-shares market.

It is important to note that investing in Chinese stocks comes with certain challenges and risks. Foreign investors may face difficulties accessing A-shares due to Chinese government regulations, while Chinese investors may have challenges accessing B-shares, mainly due to currency exchange issues. Additionally, there are strict regulations and limitations on foreign investments in China, which can impact the availability of investment options and the liquidity of certain stocks.

When considering investing in Chinese stocks, it is essential to do thorough research, understand the different categories of stocks, and be aware of the restrictions and risks involved.

Exploring alternative investment opportunities in emerging markets or Asian indices

Investing in China as an Indian investor can be a complex and challenging endeavour due to various factors, including regulatory restrictions and political tensions between the two countries. As such, it may be worthwhile to explore alternative investment opportunities in emerging markets or Asian indices. Here are some options to consider:

Emerging Markets Indices：

One option is to invest in emerging markets indices, which offer exposure to a diverse range of developing economies, including Brazil, India, and China. These indices typically have a significant allocation to Chinese stocks, allowing you to gain indirect access to the Chinese market. Examples of such indices include the FTSE Emerging Index and the MSCI Emerging Markets Index. By investing in these indices through Exchange-Traded Funds (ETFs), you can benefit from the growth potential of multiple emerging markets while reducing the risks associated with investing in a single country.

Asian Indices:

Another alternative is to invest in Asian indices, which provide exposure to the economies of countries in the Asia-Pacific region, including China. These indices typically have a sizable allocation to Chinese stocks, allowing you to gain indirect access to the Chinese market while also diversifying your investment across other Asian countries. Examples of such indices include the MSCI AC Asia Pacific ex-Japan and the MSCI AC Asia ex-Japan. By investing in these indices through ETFs, you can gain exposure to the dynamic and rapidly growing Asian markets.

China-Focused ETFs:

If you are specifically interested in investing in China, there are a limited number of China-focused ETFs available in the Indian market. These ETFs provide direct exposure to Chinese stocks and can be a convenient way to invest in the Chinese market without the complexities of investing directly in Chinese companies. Examples of such ETFs include the Mirae Asset Hang Seng Tech ETF and the Nippon India ETF Hang Seng BeES. However, it is important to note that the availability and liquidity of these ETFs may be limited, and they may trade at higher premiums due to high demand.

Mutual Funds:

Mutual funds that invest in China or other emerging markets can also provide a viable alternative investment opportunity. These funds are managed by professional fund managers who select a diversified portfolio of stocks or other financial instruments. By investing in these mutual funds, you can benefit from their expertise and gain exposure to a carefully curated set of investments. However, it is important to carefully consider the fees and charges associated with mutual funds, as they can impact your overall returns.

Foreign Brokerage Accounts:

If you are willing to explore more complex investment routes, you can consider opening an international brokerage account with a foreign broker that allows you to invest in a wider range of global markets, including China. This option may provide you with more flexibility and investment choices but may also come with additional complexities and regulatory considerations. It is essential to thoroughly research the regulations and restrictions that apply to foreign investments, especially when dealing with countries like China, which may have specific requirements for foreign investors.

Weighing the risks and considerations of investing in the Chinese market

China's economic growth has been impressive, and it has been one of the most attractive investment destinations for investors worldwide. However, investing in China also comes with certain risks and considerations that investors, especially those from India, should be aware of before committing capital. Here are some key factors to consider when weighing the risks and rewards of investing in the Chinese market:

Political and Economic Risks

China's communist political structure and economic reforms bring about certain risks. The country's economy and foreign companies operating within are vulnerable to external shocks such as spikes in global commodity prices, especially energy costs, epidemics, regional political unrest, and protectionist sentiment in the Western world. Domestic political instability, rapid growth, and social issues resulting from economic reforms can also impact investor confidence.

Regulatory Differences and Insider Trading

Regulatory differences between China and other countries, particularly the US, are significant. Chinese accounting standards differ from US Generally Accepted Accounting Principles (GAAP). Insider trading, which is stringently regulated in the US, is also an issue in China. Academic studies and news reports suggest that Chinese executives often make well-timed, lucrative stock transactions before significant share price-moving events, despite laws banning such practices.

Government Restrictions on Foreign Investment

China imposes restrictions on the flow of capital from foreign investors, making direct investments challenging. While the country has made efforts to attract foreign investment, the process remains tricky, and mutual funds or ETFs are often a more viable option for foreign investors.

Geopolitical Risks

Geopolitical tensions between China and other nations, particularly the US, can impact the stability of investments. Trade wars and an increasingly contentious relationship between the two countries have caused uncertainty for investors.

Company-Specific Risks

Chinese companies listed on US stock exchanges have come under scrutiny due to a lack of investor trust in their financial statements, leading to decreased share prices. Transparency is improving, but investors should carefully research and vet these companies before investing.

Currency Risk

Fluctuations in the value of the yuan (or renminbi) against other currencies can impact investment returns, especially when investing through mutual funds or ETFs that hedge their yuan exposure back to the US dollar.

High Demand and Limited Investment Options

Indian investors interested in investing in China should be aware of the high demand and limited options for China-focused exchange-traded funds (ETFs). This has resulted in these ETFs trading at high premiums.

In conclusion, while China offers significant investment potential due to its economic growth and large population, investors should carefully consider the risks and challenges associated with investing in the country. It is crucial to understand the regulatory, political, and economic landscape of China and strive to properly account for these risks in your investment strategy.

Frequently asked questions