ETF analysis: how passive investors can buy China

As China grows, navigating its equity markets is an essential skill.

Despite some recent signs of slowing down amid the ongoing trade war with the US, China remains among the fastest-growing emerging markets. The economy has been posting high single-digit GDP growth over the past two decades thanks to rising domestic consumption and infrastructure investment.

China has become a mainstream investment in many portfolios, and this is only likely to increase in coming years. Exchange traded funds (ETFs) offer investors easy access to the Chinese growth story, but navigating the country’s equity market is not straightforward.

How ethical ETFs offers investors shelter from volatility
ETF ideas to profit from fast-growing economies

Too big to ignore

Generally, publicly traded companies in China fall into three share categories: A-shares, B-shares and/or H-shares.

A-shares are securities of publicly listed local companies that trade on stock exchanges such as Shenzhen and Shanghai. These stocks trade in Chinese yuan or renminbi, and until recently they were out of bounds for foreign investors.

B-shares have a face value in renminbi but are listed in foreign currencies to accommodate international investors: US dollars in the Shanghai exchange and Hong Kong dollars in the Shenzhen exchange.

Finally, H-shares trade on the Hong Kong exchange and other foreign exchanges. Despite being regulated by Chinese law, they have been freely tradeable by anyone and are denominated in Hong Kong dollars.

In the past, the A-share market was a closed domestic market, so indices for China equities only included H-shares and B-shares. But the China A-share market is now opening up. This is a very important development, given that the A-shares market is the second largest equity market after the US.

Foreign investors now have an opportunity to gain broader and more balanced access to China. Increasing participation of foreign capital also bodes well for a more robust market structure in China, as foreign investors are likely to push for a sound regulatory framework to give them confidence.

The inclusion of China A-shares in equity indices is being done in stages. In May 2018, MSCI began adding A-shares to its flagship MSCI Emerging Markets index to cover up to 5% of the A-share market. This year, MSCI has accelerated the process, with a view to cover up to 20%. Once full inclusion of A-shares is achieved, China will comprise over 40% of the index. Other index providers are following suit. For example, last June FTSE kicked off the process of gradual inclusion of A-shares in the FTSE Global Equity Index Series.

ETFs for China equities

There is also now a growing range of ETFs offering sole exposure to China. These products typically track the MSCI or FTSE indices. The table shows some examples with relatively low charges.

Given the different categories of China stocks, investors need to make sure the index matches their investment objectives. Some ETFs track China indices focused on one specific share group, such as A-shares or H-shares. Others track those that provide exposure to multiple share categories.

Different indices come with different risks. For example, by focusing on A-shares alone you may benefit from a small-cap premium, as the average market cap of A-share indices is less than half that of H-shares and around 70% of the MSCI China index. However, it would involve a higher risk than broader Chinese market exposure.

China ETFs listed on the London Stock Exchange

Name Ticker Ongoing charge (%) Benchmark Share categories
A-Shares Only        
HSBC MSCI China A Inclusion ETF HMCT 0.30 MSCI CHINA A Inclusion NR A
Lyxor Hwabao WP MSCI China A DR ETF Acc CNAA 0.35 MSCI China A NR A
iShares MSCI China A ETF USD Acc CNYA 0.40 MSCI China A Int'l NR A
H-Shares Only        
Amundi IS MSCI China ETF-C EUR CC1 0.55 MSCI China H NR H
X FTSE China 50 ETF 1C XXXI 0.60 FTSE China 50 NR H
Lyxor China Enterprise HSCEI ETF Acc EUR ASI 0.65 Hang Seng China Enterprises NR H
Multiple Shares        
Franklin FTSE China UCITS ETF FLXC 0.19 FTSE China 30/18 Capped NR A, B, H, N
Lyxor MSCI China ETF Acc LCCN 0.30 MSCI China NR H, B, Red, P, ADRs
HSBC MSCI China ETF HMCD 0.60 MSCI China NR H, B, Red, P, ADRs
X MSCI China ETF 1C LG9 0.65 MSCI China NR H, B, Red, P, ADRs

Note: N-Shares refers to Chinese companies listed on the New York Nasdaq exchange. A = A-shares, B = B-shares, H = H shares, N = N-shares, Red = Red chips, P = P chips, ADRs = American depositary receipts. Red chips and P chips are incorporated outside of China and trade on the Hong Kong exchange. Source: Morningstar Direct

Helaine Kang is an analyst, passive strategies, at Morningstar.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment