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How to invest in Chinese ETFs

China is the second-biggest economy in the world and has been delivering high-digit growth in the last decades. Meanwhile, Chinese equities are widely under-represented in global indices and investment portfolios. Find out how to increase your exposure to China by investing in Chinese ETFs.

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Why should you invest in China?

China has been on investors’ horizon since the turn of the millennium. The country’s economy has enjoyed exponential growth over the past two decades before the pandemic, outpacing any other emerging market. With GDP of $14.4 trillion in 2019, China is the second-largest economy in the world.

Figure 1: China’s GDP has enjoyed exponential growth since 1990s

Source: TradingEconomics

With strong economic growth comes high returns. Over the past five years, MSC China All Shares has delivered the average annual return of 10.34%. According to JPMorgan projections, China’s equities will continue to deliver close to double-digit annual returns over the next 10-15 years as its economy could surpass the US in the next two decades. Meanwhile, Chinese stocks are cheaper than the US equities based on price to earnings ratio, and offer a great way to diversify your portfolio and protect from a global sell-off (as Chinese market is the least correlated to US stocks).

Influential investors such as Ray Dalio, the founder of Bridgewater Associates, believe that Chinese stocks will outperform the US and other developed markets over the following years, and therefore warrant a larger exposure in an investors’ portfolio. Dalio says that fundamentals favour China but many investors remain underweight. Given its strong economic growth outlook and rising global influence, China is a market that investors can’t afford to ignore.

Read: how to invest in China

Chinese economy after Covid-19

Being the first hit by the coronavirus pandemic, China’s economy has also been the first to rebound. ‘In the short run, China is first in and first out with this terrible pandemic and is experiencing a V-shaped recovery,’ says Brendan Ahern, chief investing officer at KraneShares. ‘They had a very strong quarantine, and all signs are pointing [that] China is back to work, the economy is rebounding strongly, and that’s providing strong performance for Chinese equities.’

Economists believe China may be the only major economy to grow this year and is on track to expand by an estimated 2% in 2020. Its economic recovery has been speedy compared to the rest of the world, with many countries struggling with the second wave of the virus.

One of the major misconceptions about the Chinese economy, according to Ahern, is the assumption that it is export-driven and manufacturing-oriented. ‘That’s not the case,’ he says. ‘Over 50% of China’s GDP today comes from the service sector. It’s becoming more of a consumption-driven economy, as you’ve had urbanization and a growing middle class that is using mobile technology to purchase.’

Chinese stocks are underrepresented in global indices

Despite its size and economic importance, China’s share of global equity indices is surprisingly low. China only makes up 52% of MSCI’s All Country Equity index known as MSCI ACWI, while the US takes 58.21% (as of September 2020). Considering its equity market has recently passed $10 trillion and is the second largest in the world with Chinese companies taking up most of the Fortune 500 list, there is a clear imbalance.

Read: Chinese shares: should you increase the amount in your portfolio?

How to invest in Chinese ETFs

Using exchange-traded funds (ETFs) is a convenient way to get exposure to Chinese markets as they allow one to invest in baskets of Chinese companies without having to buy stocks directly. ‘There is a multitude of Chinese companies listed on Shanghai, Shenzhen, Hong Kong, London and the US stock markets. Navigating opportunities can be difficult,’ says Brendan Ahern, chief investing strategist at KraneShares. Plus, Ahern points out, that there is a big language barrier that makes it even harder for investors to research Chinese companies.

Investing in a China ETF gives you instant exposure to hundreds of Chinese companies. You can invest in Chinese ETFs using IG’s share dealing platform. In the ETF section of the platform you are able to choose China as the 'Country of Focus' and filter for ETFs listed on the London Stock Exchange (LSE).

Best Chinese ETFs (table)

This list only represents best ETFs traded in GBP and USD to avoid currency risks.

Code Name Fund currency Assets Holdings Annual fee (%) Average bid-ask spread (%) Return - YTD Return 12m
CNYA LN Equity iShares MSCI China A UCITS ETF USD 1466 475 0.4 0.22 29.9 33.3
HMCH LN Equity HSBC MSCI China UCITS ETF GBP 642 714 0.6 0.27 26.8 35.4
FXC LN Equity iShares China Large Cap UCITS ETF GBP 542 50 0.74 0.20 6.6 10.8
LCCN LN Equity Lyxor MSCI China UCITS ETF USD 69 712 0.29 0.18 27.3 35.8
CHIN LN Equity ICBCCS WisdomTree S&P China 500 ETF USD 41 538 0.55 0.82 25.4 31.0
CASH LN Equity L&G E Fund MSCI China A UCITS ETF USD 29 576 0.88 0.68 26.3 29.5
HMCA LN Equity HSBC MSCI China A Inclusion UCITS ETF GBP 26 475 0.3 0.57 30.2 33.5
KBA LN Equity KraneShares MSCI China A Share UCITS ETF USD 13 475 0.4 0.66 26.2 29.7
KESG LN Equity KraneShares MSCI China ESG Leaders UCITS ETF USD 4 149 0.4 0.73 28.4 Launched 3 Feb 2020
KWBP KraneShares CSI China Internet UCITS ETF GBP 197 31 0.75 0.82 4.2* Launched 1 Oct 2020

Source: Bloomberg
*Since launch

How to invest in Chinese ETFs with IG

  • Create your live account with IG in minutes, choosing a share-dealing account type
  • Fund your account
  • Choose the Chinese ETFs from the table above
  • Buy the ETF on IG’s share dealing platform, to get instant exposure to Chinese markets

Read: how to buy Chinese shares in the UK

Risks around investing in China

With every investment you make, there is a risk that its value may fall. Although the growth available in China is appealing, investors should be aware of the risks and uncertainty surrounding China, including US-China tensions and environmental, social and governance (ESG) concerns.

US-China tensions

The trade war between the two largest economies has made many headlines since 2018, with Trump’s presidency taking a strong stance against China. Unhappy with the US trade deficit to China, Trump has accused the opponent of unfair trading practises and intellectual property theft and has followed up by imposing double-digit tariffs on thousands of Chinese products. The trade war has seen supply chains disrupted with significant fallout for the companies involved. And even after the deal was reached in January, tariffs – in some cases at lower rates – have remained in place.

The tensions have accelerated with the focus shifting away from the trade and towards the technology sector. Throughout the trade war, the Chinese companies came under fire from the Trump administration over security and data concerns. Arguably, the most affected is telecoms giant Huawei, which is now banned from doing business with any organisation that operates in the US, such as Google, which has consequently forced the company to abandon the US smartphone market. Most recently, Trump has attempted to ban Tencent’s messaging app WeChat and Bytedance’s video-sharing platform TikTok from operating in the US. The latter clash has been resolved in the ‘TikTok Global’ – a joint venture involving US retailer Walmart, and tech company Oracle. A US-based IPO of TikTok Global could be on the cards, and IG is currently offering to trade its grade market.

Read: TikTok Global IPO: what you need to know

The tech-divorce is already happening and gives China more incentive to become self-reliant in strategic industries. The country is planning to remove all foreign technology out of state offices by 2023. For investors, this may mean more uncertainty, as the combative relationship creates an even larger split between the US and China. Long term this may result in the emergence of two rival spheres of influences, especially in the technology arena.

Read: what is the WTO and its role in the US-China trade war

ESG concerns

ESG investing is an umbrella term that has become popular in the last decade. It is used as a metric to evaluate a company in its long-term impact on society, environment and performance of the business. The new investing trend is exploding, with flows into ESG equity funds hitting record levels in July, according to Calastone’s Fund Flow Index.

It’s fair to say that China is lagging behind on the ESG standards, and may possibly deter investors from buying into Chinese equities. Without an efficient ESG reporting framework, Chinese companies are off the pace compared to their Western counterparts. According to the data from 2019, Only 4% of the MSCI China Index companies had ESG rating of A, 1% were rated as AA and none had the AAA (the highest) rating. Yet there were 36% with B, and 20% with CCC (the lowest) ratings. In comparison, the MSCI All Country World Index that tracks global equity-market performance has 6% of AAA ratings, and 5% of CCC.

Research from SynTao Green Finance on China’s A-Share ESG ratings between 2018 and 2020 showed that nearly 62% of the CSI 800 companies had ‘ESG controversies during the past year’. The most frequent issues include environmental pollution, product quality and business ethics.

Figure 2: MSCI China ESG ratings compared to MSCI EM and MSCI ACWI

Source: MSCI ESG Research as of 1 August 2019

Yet, there is hope that Chinese companies will increase their efforts to become more sustainable. Since 2014, China has been gradually opening up its equity markets to foreign investors by introducing the Shanghai-Hong Kong Connect, and lifting investment quotas. With the foreign ownership rising, Chinese companies face greater scrutiny from the shareholders who expect higher ESG standards. But while the number of companies disclosing their ESG information has been steadily increasing over the past years, there is still a lot of room for improvement.

Investing in China: the bottom line

Given China’s economic might and global influence, there is no doubt that investors should pay attention to the opportunities the country has to offer. Its economy has proven to be resilient during the global pandemic and is expected to surpass the US in the coming decades. ETFs may the most convenient way for investors to get exposure to China. Meanwhile, investors should stay informed about the risks that go with investing in China, such as tensions between China and the US, as well as the ESG concerns.

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Publication date : 2020-11-06T09:41:36+0000

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