Market alert: Investing in China

In this article:

• New regulations hit Chinese stocks
• CHNComp in bear market despite euphoria on Wall Street
• How to gain exposure to China

“Be greedy when others are fearful” – this statement from Warren Buffett has been covered in dust as major global equity markets seem to be in unending rally. However, there’s one place where there’s a lot of investors concerns at present – China. Over the weekend Beijing issues new regulations effectively shutting down online education sector. While the sector itself is not a huge part of the stock market, these regulations follow many actions taken against tech companies and investors worry that more might come soon. This has caused a significant repricing of equities and Hang Seng China Enterprises Index (CHNComp) is just some 10% above 2020 pandemic lows!

Then again, China has quickly recovered from the pandemic and it’s gaining share in the global economy. One may argue that while the government wants to maintain some degree of control over the tech sector, these companies remain crucial for economic dominance and thus Beijing will be wary of going too far. Looking at the record valuations on Wall Street, some may see the sell off as an opportunity.

How to invest to gain exposure on China?

That depends on the priorities – investors seeking to benefit from a potential rebound in stock on the near term could consider CHNComp which is a CFD on Hang Seng China Enterprises Index futures while long term investments can be done through ETFs – let’s take a closer look.

CHNComp was above 12200 points as recently as February but plunged below 9000 on Tuesday. Investors hoping for a quick recovery can consider this CFD due to 1:10 leverage but they need to remember that leverage works both ways – multiplying possible gains but also losses.

Among ETFs on China one can consider:

Lyxor China Enterprise HSCEI – this has exactly the same exposure as CHNComp – these are the largest Chinese stocks traded in Hong Kong, the ETF has a relatively high TER of 0.65% (total expense ratio)

iShares MSCI China A UCITS ETF – intriguing due to the fact that it represents stocks traded on mainland exchanges that until recently were unavailable (or hard to invest in) by foreign investors. However, these stocks are generally still relatively close to their recent highs (TER 0.4%)

iShares MSCI China UCITS ETF – yes, it only misses this “A” letter but it makes a huge difference as the A shares are under-represented in the index (only 20% of their market cap is represented) and thus the top stocks are similar to those that are seen in HSCEI. However, this one is well  diversified with as many as 736 constituents (TER 0.4%)

Xtrackers FTSE China 50 ETF – this one is more concentrated (as the name suggests) and there are no A-shares included while it’s also more expansive (TER 0.6%)  

You can find out more in the ETF scanner in the Market Analysis section of the platform.