Did you know that you can invest in China through the US stock markets? One of the advantages of investing in the US stock markets is that it helps you to geographically diversify your portfolio. Geographic diversification means that all your investments are not concentrated in a single geography. This helps you to move away from a single country or currency risk. Interestingly, you can also indirectly invest in China through the US stock markets. This lets you add another aspect of geographic diversification to your portfolio.
Why invest in China?
Let’s take a look at why one may consider investing in China, the second-largest economy in the world.
China’s economy may be slowing down a little after years of rapid growth, but it is still one of the fastest-growing economies in the world. In 2021, the Chinese economy grew by 8.1%, reaching a size of $17.7 trillion. With this, the Chinese economy surpassed the entire GDP of the 27-country European Union at $15.73 trillion.
According to projections by the British Consultancy Centre for Economics and Business Research, the Chinese economy is expected to grow at 5.7% a year till 2025 and then at 4.7% a year till 2030, when it would overtake the US to become the world’s largest economy. Although the growth rates are slower than in the past, they have a larger base compared to earlier. A population of 1.4 billion, a relatively lower GDP per capita, urbanization, and a growing middle class with increasing income growth, mean that domestic consumption in China has high growth potential.
With a vast labor pool and excellent infrastructure, the environment in China is conducive to manufacturing. According to statista.com, China accounted for 27.8% of the global manufacturing output with manufacturing constituting almost 30% of the country’s total economic output.
China is scoring big on innovation and growth of emerging industries. In areas such as e-commerce, fintech, and artificial intelligence, it is competing with or even leading compared to the United States. China is also a leader when it comes to renewable energy. It is the world’s largest producer of wind and solar energy.
How to invest in China through the US stock market?
There are 3 ways in which you can invest in China through the US markets.
Through ETFs listed on the US stock markets: There are plenty of ETFs that allow investors to get exposure to Chinese equities. This would perhaps be the most convenient way for a beginner investor to start investing in China.
One example is the Morgan Stanley China A Share Fund (CAF) which seeks capital growth by investing at least 80% of its assets in A shares of Chinese companies listed on the Shanghai and Shenzhen stock exchanges. Another example would be the Invesco China Technology ETF (CQQQ) which is based on the FTSE China Inc A 25% Technology Capped Index. The fund invests at least 70% of its total assets in securities that comprise the index. The index includes constituents of the FTSE China Index and the FTSE China A Stock Connect Index that are classified as information technology securities.
Through US companies doing business in China: You may also invest in China through companies listed in the US that are growing their business in China. In a way, this could be a win-win situation for investors as they can invest in US-regulated public companies and participate in the growth potential of Chinese markets.
Apple (AAPL) is now the dominant smartphone company in China, capturing 23% of the Chinese smartphone market in Q4 2021, up from 16% a year ago. Starbucks (SBUX) is banking on China to fuel its growth. It had 5,360 stores in China at the end of Q4 2021. China is Starbucks’ second-largest market after the US, even though it recently missed sales estimates in China due to COVID-19 curbs. YUM China, the parent company of Pizza Hut, KFC and Taco Bell, generated approximately $9.85 billion revenue in China in 2021.
Through Chinese companies listed in the US: It is also possible to invest in blue-chip Chinese companies that are listed on the US markets. Though these companies were a favorite of investors, in recent years, many of these companies have come under intense scrutiny due to inappropriate financial statements, leading in a fall in share price or even delisting from the US markets for companies such as Chinese ride-hailing firm Didi. Recently, the SEC added over 80 Chinese firms to the list of companies that may be delisted from the US stock exchange. With the SEC having the power to ban foreign companies which do not provide required financial information, one may expect increased transparency when it comes to foreign entities listed in the US. This provides investors a chance to find some attractive opportunities, but this option is not meant for all investors.
Even as the potential in China is huge, there are concerns about China’s mounting debt, government policies, sustainability of growth and the ongoing trade war between US and China. These risks may make many investors wary of investing in China. It is important to invest according to your risk appetite and do proper research before making any investment decision.