How to invest in China
China’s size and influence on the world stage means it offers a great opportunity for investors. We discuss China’s changing economy and outline the top Chinese shares and ETFs to consider.
China’s economy: what you need to know
China is the second-largest economy in the world in terms of gross domestic product (GDP) and is expected to overtake the US frontrunner in the not-so-distant future. It is already the biggest when measured by purchasing power parity.
Despite its size and the influence this gives the country on the world stage, China continues to grow at more than twice the average rate of the rest of the world, making it the engine of global growth. So much so that, over the past 30 years, since it began to open up and reform itself in 1978, China’s share of the world economy has ballooned from below 2% to over 16% today.
It is China’s role as the world’s factory, accounting for over one fifth of all manufacturing, that has driven the country’s expansion.
China’s annual growth has averaged over 10% during the last three decades but this has slowed significantly in recent years. The 6.1% growth reported in 2019 was the slowest on record since 1990, and the International Monetary Fund (IMF) forecasts that will slow further over the foreseeable future.
China is transforming its economy...
The expansion of the Chinese economy has to date been driven by cheap labour manufacturing goods that are then exported to the rest of the world. However, this has long been regarded as unsustainable and responsible for creating economic, social and environmental imbalances. For example, the IMF says investment still accounts for 45% of GDP, over double that of the US. GDP per head is still low, at just over $15,000 compared to nearly $50,000 for advanced economies, and the country is by far the world’s largest polluter, emitting more carbon dioxide than the US, India, Russia and Japan – the four next biggest emitters - combined.
But China is trying to follow in the footsteps of advanced countries. It is transforming its economy by moving away from offering cheap labour to produce cheap goods for the rest of the world to one built on more sophisticated and lucrative industries, such as technology and services, and led more by wage growth and the consumption of its burgeoning population of 1.4 billion people. This will leave the cheap manufacturing of goods to other countries that can offer lower labour costs, such as Vietnam.
The country is aiming to do it swiftly too. In 2015, the government released a ten-year plan named ‘Made by China 2025’, which is supposed to reflect a move away from the ‘Made in China’ model that it is currently known for. This detailed plan is about making China a leading force in the next generation of technologies that are often touted to unleash the fourth industrial revolution, such as robotics, artificial intelligence (AI) and 5G telecommunications.
… But this has its consequences
China is only halfway through this decade-long plan, but it is already making an impact by ensuring China is more influential on the world stage. Take Huawei and ZTE, two of the country’s leading telecoms companies, as an example. They are regarded as leaders in 5G technology that is expected to unleash the full potential of other breakthroughs, including everything from autonomous vehicles to AI. It is argued that the US is beginning to lose important ground in the technological race to its biggest partner and rival. That argument has been emboldened after the UK government defied warnings from Washington, which had said Huawei’s involvement in rolling out its 5G network could compromise the UK’s security, by allowing them to play a limited role in its network.
Apart from the threat China poses to the dominance of American tech companies, the US and other western economies are sceptical of China’s plans. The country is helping its businesses rise to the top by using government subsidies and leveraging state-owned enterprises, which the US has claimed is not in line with world trading standards. The US has long complained about China’s use of subsidies to prop up Chinese firms and the fact it discriminates against foreign companies operating in the country. For example, it has long been accused of unfairly poaching technological advancements and intellectual property from foreign firms. Virtually every foreign company that wants to do business in China has to form a joint venture with a Chinese firm and share intellectual property (IP) and technology - and the US claims this has given the country the opportunity to pilfer secrets for its own benefit.
This is the main reason why US President Donald Trump started his prolonged trade war with China. The US is keen to keep a lid on China’s international expansion, such as in 5G, and to address the country’s trading deficit with China.
What are the best ways to invest in China?
There are several ways for investors to gain exposure to China. You are able to choose from a slew of Chinese stocks or, for those wanting broader exposure and following a lower-risk strategy, a number of exchange traded funds (ETFs).
Top Chinese stocks to watch
Below are the five most popular Chinese stocks among IG clients.
China is the world’s largest car market and one company, Geely, has evolved into one of the country’s largest manufacturers in recent years. It sold 1.36 million vehicles in 2019 and although it offers 17 different models it mostly sells sedans and SUVs. It sells virtually all of its cars in China, but exports are booming, mainly to Eastern Europe, the Middle East and Africa. Exports more than doubled last year but that wasn’t enough to offset a 12% fall in China, resulting in an overall fall of 9%. However, it is hoping to raise production in 2020 by around 4% to 1.41 million units.
Geely’s long-term ambition is to be a leader in what it calls ‘new energy and electrified vehicles’, or ‘NEEVs’. Its goal is to generate 90% of sales from NEEVs but it has a long way to go, having sold just 113,000 of them last year, representing just 8% of sales.
Investors can also expect Geely to become more influential outside of China in the coming years. It has bought up foreign brands, including Britain’s Lotus and Sweden’s Volvo, and it more recently bought a 10% stake in German outfit Daimler. Recent reports also suggest Geely is considering ploughing significant sums into troubled British luxury carmaker Aston Martin.
Tencent operates a variety of Internet services in China, including the country’s biggest social media platform, QQ, and messaging services, Weixin and WeChat. Its activities are diverse, spanning videos, music, gaming, literature and live broadcasting, including sports. It is also the country’s second-largest cloud-computing firm behind Alibaba.
Revenue continues to grow strongly, up 21% in its latest quarterly results, and although it is profitable it is still reinvesting huge sums to gain market share and consolidate its position in the market. Over 1 billion people use its messaging services on a monthly basis and over 500 million social media users.
The diversity of the company and its revenue streams makes it a unique proposition for anyone looking to gain exposure to China – and the fact it is in the black and paying dividends is a bonus.
Ping An Insurance
Ping An Insurance is the largest insurer in China but has ambitions to be a bigger player in the fintech space. It has three core areas - insurance, banking and investment - but it has become known for its ability to buy or develop an array of financial technology platforms. This strategy, it says, means it is the only company in China that can offer customers everything they need financially. Over 90% of its operating profits come from individual retail customers using its services and momentum is only building as it expands into new areas and its ability to reach customers and cross-sell them services improves. Over one-third of all its customers use more than one Ping An service.
Ping An, while operationally confined to China, is already the world’s second-largest insurer behind Berkshire Hathaway, based on market cap. It is becoming a key financier of new technology and has interests in everything from aviation to pharmacies, making it a great way to gain broad exposure.
MTR Corp, or the Mass Transit Railway Corporation, is majority-owned by the Chinese government and responsible for managing Hong Kong’s rail network, including major high-speed lines such as the Guangzhou-Shenzhen-Hong Kong High Speed Rail. It also operates several lines in mainland China and it has expanded internationally – it will operate Transport for London’s ‘Elizabeth Line’ when it opens. Other countries it has moved into includes Australia and Sweden.
MTR has a solid track record when it comes to its financial performance. Revenue has more than doubled over the last decade and profit has increased by two thirds. Cashflow has also remained strong enough to underpin the firm’s dividend – which has increased for 13 consecutive years.
Last on the list is BYD, which designs and makes a number of ‘zero-emission energy solutions’. In layman’s terms, this means it makes a range of hybrid and electricity-powered cars, commercial vehicles like buses and lorries, and monorails. It also makes solar panels and energy storage systems, as well as a range of electronics that are used in the likes of mobile phones and automobiles. China is a key market, but it is a global business with manufacturing sites in India and Europe. Over half of its revenue comes from selling cars, with just under 40% coming from making components for phones and other devices.
Best Chinese ETFs to watch
ETFs allow investors to spread the risk by gaining diverse exposure to China as a whole or a specific part of the economy. Investing in an individual stock can be seen as putting all your eggs in one basket, whereas ETFs give you interest in multiple stocks. Below is a list of the four largest Chinese ETFs based on their net assets as of 6 February 2020.
ChinaAMC China 50 ETF
The ChinaAMC China 50 ETF provides exposure to all the constituent stocks of the Shanghai Stock Exchange 50 Index, also known as the SSE 50 Index. This means it has interests in the 50 largest companies listed in Shanghai in terms of market cap.
In terms of sectors, it is overly reliant on financial services which accounts for over 58% of its portfolio weighting. Ping An Insurance is by far the largest investment, representing 17% of its portfolio, followed by Kweichow Moutai (8.7%), China Merchants Bank (6.6%) and Industrial Bank Co (4.7%). This ETF has returned over 16% in the past 12 months.
China Southern CSI 500 Index ETF
The China Southern CSI 500 Index ETF aims to track the performance of the CSI 500 Index. This means it follows 500 medium- and small-cap stocks listed on the Shanghai and Shenzhen stock exchanges. The ETF is more diverse in terms of sectors than the ChinaAMC ETF and its largest holding accounts for just 1.8% of the portfolio, meaning it is also more diverse. Still, 43% of its portfolio is made up of stocks ‘sensitive’ to the economic backdrop while 38% are in cyclical industries. This ETF has returned over 26% in the past 12 months.
Huatai-PineBridge CSI 300 ETF
The Huatei-PineBridge CSI 300 ETF follows the top 300 largest companies listed on the Shanghai and Shenzhen stock exchanges. Financial services is where most of its exposure lies, accounting for one third of the portfolio. Ping An Insurance is the largest holding again, accounting for 7.7%. This ETF has returned 22.8% over the past 12 months.
iShares MSCI China ETF
The iShares MSCI China ETF tracks the performance of the MSCI China Index comprised of large and medium-sized securities listed in Shanghai and Shenzhen. Cyclical consumer companies and communication services is where most exposure lies. Its top holding are in Alibaba (18%) followed by Tencent (13.8%), China Construction Bank (3.6%), Ping An Insurance (3.1%) and China Mobile (2.4%). This ETF has returned 5.1% over the past 12 months.
Find more Chinese ETFs using the IG ETF Screener
There are over 300 different ETFs to consider when you use IG. Not only does this give you multiple ways of gaining broad exposure to the country, but it also allows you to target a specific area of the economy or a specific industry. For example, one like the Invesco China Technology ETF provides exposure to high-end tech companies, while the GF CSI Medical ETF offers a more defensive portfolio made up of healthcare stocks.
You can find the right ETF for you by using IG’s ETF Screener.
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