Chinese stocks hit record value. How to play it with China ETFs & ADRs

Chinese markets have been on a tear. We discuss what it has to do with Joe Biden and list some examples of China stocks to trade.
 
The Shanghai Composite gained 4.4% over the past 3 days, while the Shenzhen index is up 6.9% over 6 straight days of gains. The gains have taken the market capitalisation of all Chinese stocks to a new all-time high according to Bloomberg data.
 
So is now time to invest in China? And how might one do that?
 
Line chart of Market capitalisation (US$tn) showing China's stock market value climbs past 2015 high
 
 

Definition: China A-shares

China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, the 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. 
 

The story

There had been a big jump in July when investors speculated (but then quickly un-speculated) that authorities in Beijing are trying to orchestrate a major domestic bull run to support the economy.
 
The bullish sentiment caught fire again in China upon the return from the week-long National Day holiday in October. By that time election polls in USA had started shifting decisively in favour of former VP Joe Biden and more importantly away from US President Donald Trump. Biden has openly said he would repeal Trump’s tariffs on Chinese imports- thus rendering the US/China phase one trade deal and subsequent phases obsolete.
 
Research analysts such as those at Goldman Sachs have been bullish since the summer, pointing to a combination of factors including robust economic reopening/recovery, well-contained Covid-19 resurgence risk, supportive macro policy and positive government rhetoric towards the equity market, improving corporate earnings trends, undemanding valuations, and rising retail participation.
 

Chart

As shown below, China A-shares is one of those markets which is either ON or OFF. Government policy stance (towards the market) matters a lot and the current rhetoric is positive while state media have pushed for a “healthy” bull market. 
 
China A-shares
Past performance is not an indicator of future results.
 

Risks?

The number one short term risk is that Donald Trump upsets the apple cart one more time and wins a second term in the White House. The other risk is that China - despite all its huge growth potential with its large population - has still not made the transition from export-led to consumption-based growth. If the global economy falls into a double dip recession due a second wave of the coronavirus, demand for Chinese goods will fall with it.
   

How to play it

These Exchange traded funds track large cap Chinese shares
 
ETF Symbol ETF Name
ASHR LN Xtrackers Harvest CSI 300 UCITS ETF
FXC US iShares China Large Cap UCITS ETF
X225.L Xtrackers FTSE China 50 UCITS ETF 1C
FXI iShares China Large-Cap ETF 

 

For those looking to trade individual Chinese equities, US-listed ADRs are often the most accessible. These are the top 7 China listed ADRs by market capitalisation:
 
Share ticker Company name
BABA Alibaba Group Holding Limited
LFC China life insurance
PTR Petro China
JD JD.com
SNP China Petroleum
BIDU Baidu
SINA SINA Corporation

 

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