Since 1979, the Chinese economy (in GDP) has been growing at an astonishing rate of 9.5% per year! That’s an incredible achievement. Because of this enormous growth, China was able to double its GDP every 8 years. However, as you can expect, the Chinese economy cannot grow like this forever. The International Monetary Fund (IMF) expects growth to slow down to about 5.5% per year as of 2024. So, are you too late to invest in China? If not, how can you invest in China yourself? Let’s find out more!
After watching the documentary “American Factory” on Netflix, I was very impressed by the efficiency, ambition and work ethic of the Chinese. In my opinion, the Americans in that factory never stood a chance in terms of these three aspects.
For those of you who haven’t seen the documentary, it gives an (fairly) unbiased view on what happened when a Chinese company took over a closed General Motors factory in Ohio. You can really see that trying to melt two completely different (working) cultures together is very hard.
Actually, it made me worry a little bit about all ours jobs here in Europe and the United States! We need to be really smart if we want to outpace or keep up with the Chinese work ethic. At least, if we still want the option of 9-5 working days.
From what’s portrayed in the documentary, the Chinese work much longer hours then we’re used to and in much worse conditions. I think we’re somewhat spoiled.
We all want a better life for our children
Do I envy the Chinese way of working? Definitely not. But we can definitely learn some things from them. As a 30 something year old, I think that I’m really standing on the shoulders of my parents and grandparents who helped build the incredible country I live in. They fought (WWll) and worked hard for a better life for their kids.
Of course, we all want a better (financial) life for our children. However, I think that the Chinese want it harder! That’s exactly the reason why so many Chinese are willing to work horrendous hours in terrible conditions.
If you can’t beat them, join them!
That’s exactly what I thought after the documentary. It made me broaden my horizon. Also from an investing perspective. I’m definitely biased to mainly look for investment opportunities in the United States or Europe. However, the world is so much bigger.
Even a famous All World index tracker in the FIRE scene, VWRL, is heavily biased towards the United States (55%) and Europe (13%). Of course, there is nothing wrong with this and it seems like a safe bet. Investing in emerging markets are not for the faint of heart. However, does China still deserve an ‘emerging market’ title?
China is the world’s 2nd largest economy in the world. With a population of 1.4 billion (2018) and with a steady GDP growth, it will become the largest economy sooner rather than later. Even though the GDP growth is slowing down, I think there is still a lot of potential. That’s why I decided to increase my investments in China.
What great Chinese companies are there already?
There are so many great Chinese companies have become great global powerhouses. We all know Alibaba, Huawei, Tencent (WeChat, etc.), Baidu, and recently all over the news Bytedance (TikTok). These companies have shown growth that is similar to Google, Facebook, Amazon, etc.
I would be a fool not to add (some) exposure to China in my portfolio!
Don’t forget about the risks of investing in China
There still is a lot of potential to invest in China. Strong economic growth and an increasing global presence. China is not only being able to copy products from the United States of Europe, but is able to manufacture high quality products by themselves.
However, don’t forget about the risks. China is no democracy. The government decides. If the government doesn’t agree with you or your company then you are out of business. There are a lot of political risks with a low level of predictability. Like I said before, investing in China (and emerging markets for that matter) is not for the faint of heart.
How to invest in China? What options are there?
China is still very wary of foreign investors. Even though China is turning more and more capitalistic, we’re not there yet. Investing in China is not as straightforward as investing in any American or European listed company. However, there are several options available to small investors like myself. Investing in China through ETFs is the easiest and in my opinion, best way to go.
But remember, I’m no financial advisor! The following options may not be suited for your personal situation. Always perform your own research!
Now that we have this disclaimer out of the way, let’s dig in ?.
What is the difference between China A and B shares?
There are 2 types of shares that are commonly used if you want to invest in China. A shares and B shares. So what is the difference?
Let’s start with the B shares. B shares are shares that are denominated in foreign currency. Either US dollars (Shanghai Exchange) or Hong Kong dollars (Shenzhen Exhange). These shares were initially aimed at attracting foreign investors. However, since 2001, also local Chinese residents are allowed to invest in them.
A-shares are listed in the local Chinese currency, the renminbi. The difficulty is that foreign investors are not allowed to invest in A-shares directly themselves. But there is an alternative. But only if you are qualified as a “China’s/Renminbi Qualified Foreign Institutional Investor”. That’s exactly why ETFs are a good way of gaining exposure to China because certain companies, such as Vanguard, qualify to invest in A-shares. Even though these ETFs are also funded by retail investors.
What are the best ETFs to invest in China?
I’ll go through several ETFs that you can invest in if you live in the European Union. If you live in the United States, you are lucky, you have a lot more options at much cheaper expense ratios. I will name a few later on.
HSBC MSCI CHINA UCITS ETF (EUR)
This ETF is listed on the German stock exchange (Deutsche Boerse AG). It tracks the MSCI China Index and is market-cap weighted. It invests in large-cap companies in China (primarily B-shares but also A-shares). The expense ratio of 0.60% is fairly high considering the fact that it primarily invests in B-shares that are easier (less expensive) to acquire.
ISHARES MSCI CHINA A UCITS ETF USD (ACC)
This ETF is listed on different exchanges such as the German stock exchange. It tracks the MSCI China A Inclusion Index. It invests primarily in A-shares. The number of physical holdings is 473. The expense ratio is 0.40%. The expense ratio makes sense as the method to purchase A-shares is fairly complicated (via Stock Connect (connection of various stock exchanges in China) or specific qualification). It reinvests dividend automatically.
XTRACKERS HARVEST CSI300 UCITS ETF 1D (EUR) | RQFI
This ETF is listed on different exchanges such as the German stock exchange. It tracks the performance of the CSI300 Index which reflects the performance of 300 (large) companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The ETF has 293 holdings. The expense ratio is 0.65%.
BONUS: SOME ETFS YOU CAN BUY TO INVEST IN CHINA IF YOU LIVE IN THE UNITED STATES
I’ve selected a few ETFs that you can consider if you live in the US:
- iShares China Large-Cap ETF (ticker: FXI)
- iShares MSCI China ETF (MCHI)
- SPDR S&P China ETF (GXC)
- Xtrackers Harvest MSCI All China Equity Fund (CN)
Always check whether these ETFs are a good fit for your personal situation and be aware of expense ratios. Expenses are real costs that can eat away your returns rather quickly over time.
What ETFs do I buy myself to gain exposure to China?
I personally prefer direct exposure to A-shares of China. In my opinion I consider these companies to have better growth potential, albeit with a lot more volatility than for example, B-shares.
That’s why I invest in iShares MSCI China A UCITS ETF USD (Acc). It provides solid diversification at a 0.40% expense ratio. Dividends are automatically reinvested and is therefore more tax efficient (in my case).
However, this ETF, does not invest in Chinese B-shares. As a result, I don’t have exposure to large Chinese companies such as Alibaba and Tencent. Because I want that as well, I also invest in a Vanguard FTSE Emerging Markets ETF.
The Vanguard FTSE Emerging Markets ETF gives me exposure to 7% of Alibaba and 7% of Tencent. In total it gives an exposure of about 45% to China (primarily B-shares and some A-shares). I expect the A-shares to be a lot more volatile than the B-shares. So by also investing in the Vanguard FTSE Emerging Markets ETF I further diversify into China and beyond.
I expect to invest about 15% of my total portfolio (which is 80% in stocks and 20% in real estate) in iShares MSCI China A UCITS ETF USD (Acc) and about 10% of my portfolio in Vanguard FTSE Emerging Markets ETF. I do not advise anyone to copy this strategy as it’s rather risky to invest 25% of your portfolio in emerging markets with a significant overweight in China. However, I’m confident that China will do well long-term and that I can stomach the volatility along the way.
Still not convinced to invest in China?
As I’ve mentioned several times, investing means taking risk. Investing in China (and emerging markets) means taking a lot of risk. However, I really think that any long-term investor (20+ horizon) should have some exposure to China. Even if it’s just a small percentage.
If this blog hasn’t convinced you yet, I highly recommend you watch this documentary from Stansberry Research on YouTube. Please ignore some of the advertisement, but I was positively surprised how far China has come in a very short period!