How to Invest in China
China is the second-largest economy in the world and has attracted the attention of many investors around the world. Constantly changing government policies, geopolitical tensions, an ongoing trade war with the US and restrictions on foreign investment have made investing in China more challenging.
However, for those interested in diversifying their portfolios to try and receive the performance of China's economy, there are a few methods open to investors who want to invest in China. Learn more in this How to Invest in China article.
Table of Contents
How to Invest in China
There are a variety of options for investing in China. A few of them include:
- Chinese stock market indices
- China ETFs
- Chinese stocks
- Chinese Yuan
1. Chinese Stock Market Indices
One of the most common methods to receive the performance of a country's economy is to invest in its stock market. In mainland China, there are two stock exchanges called the Shanghai Stock Exchange and the Shenzhen Stock Exchange. A stock exchange is a place where people such as traders, investors, stockbrokers and others can trade in shares of publicly listed companies. The market capitalization of all the stocks listed on China’s stock exchanges has surged in recent years and now both sit in the world’s top eight, as shown below:
The New York Stock Exchange is the world’s largest stock exchange operator with a stock market capitalisation of more than $25 trillion. The Shanghai Stock Exchange is the fourth largest in the world with the Shenzhen Stock Exchange the seventh largest in the world. It is worth noting that many Chinese stocks, especially Chinese tech stocks, are also listed on other global exchanges.
A stock market index tracks the underlying performance of a basket of stocks that represent an economy. For example, the FTSE China A50 Index is a stock market index that tracks the performance of the largest 50 A Share companies listed on the Shanghai and Shenzhen Stock Exchanges. It is free-floating and the constituents are reviewed quarterly.
Currently, the top 5 constituents in the index include Kweichow Moutai (15.65%), Contemporary Amperex Technology (7.01%), China Merchants Bank (4.39%), Wuliangye Yibin ((4.08%) and Ping An Insurance (3.56%). Of the 50 constituents in the China A50 Index, 12 are from the banking sector, 9 from the food beverage and tobacco sectors and 6 from the energy sector with the rest split into other stock sectors.
As foreign investors cannot invest directly in Chinese stocks (unless they are listed on a Western exchange), investing in a Chinese stock market index is a way to receive the performance of the publicly listed companies operating in the Chinese economy. With Admirals you can trade the China A50 Index Futures CFD commission-free. CFDs, contracts for difference, allow you to trade long and short the instrument.
2. Invest in China ETFs
An ETF is an investment fund that tracks the performance of a specific market such as an index, commodity or stock sector. They allow investors to access sectors of the stock or regions that they would otherwise not be able to access. For example, a well-known China ETF is the SPDR S&P China ETF. This ETF tracks the performance of the S&P China Index and holds 945 Chinese stocks in the fund.
The top 5 stocks in the SPDR S&P China ETF include Tencent Holdings (10.57%), Alibaba Group (7.61%), Meituan Class B (3.22%), China Construction Bank (2.30%) and PDD Holdings (2.26%). By investing in this ETF investors can gain broad exposure to the performance of China's economy.
3. Invest in Chinese Stocks via ADRs
American Depositary Receipts (ADRs) are a popular way for investors to trade shares of foreign companies. As many investors outside of China would find it difficult to invest directly with the Shanghai Stock Exchange or Shenzhen Stock Exchange, ADRs have grown in popularity.
In the United States, an ADR is issued by a US financial institution and then traded on a US stock exchange, like the New York Stock Exchange. Essentially, the ADR is a certificate that represents a certain number of shares in a company. Typically, the financial institution would buy a large number of shares in a foreign company and then reissue them on the stock exchange.
With Admirals you can invest in more than 100 Chinese ADRs, some of which include Alibaba, NIO, Baidu and JD.com. For ADRs listed on the New York Stock Exchange, you invest in them with a commission from $0.02 per share and a low minimum transaction fee of $1.
4. Trading the Chinese Yuan
Many forex brokers now provide access to trading China's currency. Tradable 24 hours a day, 5 days a week the forex market has higher liquidity than the stock market. However, the Chinese Yuan is very volatile and is often subject to intervention from the government. With Admirals, you can trade the US Dollar / Offshore Renminbi Yuan (USD/CNH) exchange rate.
Learn more in the How to Trade the Chinese Yuan & Renminbi (USD/CNH, USD/RMB) article.
Pros & Cons of Investing in China
China has the second biggest economy in the world. According to the Centre for Economics and Business Research, China’s economy will surpass the United States by 2028. In the year 2000, China’s share of global gross domestic product (GDP) was just 3.6%. This figure surged to 17.8% in 2019 with many analysts predicting even more growth in the future.
While analysts are forecasting significant growth for the Chinese economy, there are also some drawbacks that need to be taken into consideration. The ongoing US-China trade war took a step further in the middle of 2023 with US President Joe Biden restricting American investment into Chinese technology companies. In retaliation, the Chinese government banned its employees from using Apple iPhones. The regulatory environment in China can change very quickly. This is one reason many companies - such as Apple - are investing in manufacturing plants outside of China such as India. This could affect China's economic growth as much does come from the Western reliance on its manufacturing and production plants.
- Capitalise on the potential growth of China's economy
- Multiple options for investing in China
- Volatile and ever-changing economy
- Ongoing US-China trade war and tensions
- ADR stocks can be delisted in the US
- Specialised knowledge required to trade the Chinese Yuan
As the world's second-largest economy, there is still room for more growth. While there are restrictions to investing in China from outside the region there are a range of options for investors which include trading Chinese stock market indices, investing in Chinese stock ADRs and ETFs or trading the Chinese Yuan currency. Practising your skills and ideas on a demo trading account can be useful in understanding the risks of trading and investing.
- Trading the Chinese Financial Market
- How to Invest in China's Shanghai Index
- How to Trade the Chinese Yuan & Renminbi
- How to Trade Asia Markets
- How to Build an Investing Portfolio
FAQs on Investing in China
How to Invest in China from the UK?
Investors in the UK can invest in China in a variety of ways. This includes trading the Chinese stock market index, and purchasing shares in Chinese companies listed on Western exchanges through ADRs or ETFs that track the Chinese economy.
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.