Investing in Chinese Stocks, whether in their local market or as foreign shares, can be a lucrative business and/or retirement provision.
China aspires to become the world’s largest economy by 2030. Extremely hard-working citizens and a tightly administered country pave the way for innovation and growth. China is already ahead of the West in terms of 5G networks, electric vehicles, online payment, AI, and other IT-driven sectors.
In 2021, China introduced a number of new regulations in the tech sector with the aim to increase public benefit (公益) for everyone and to combat monopolies, keeping the knowledge and influence of Chinese companies in the country. This move drove global investors away and their capital out of the Chinese market.
However, leading banking experts and investors view the most significant legislation as having passed and are now being implemented. Therefore, they predict that investors are preparing to jump into Chinese technology stocks. For example, the CEMAC-GS Leading Index is anticipated to grow by 13-30% in 2022.
Let Tenba Group guide you through the largest Chinese stocks. Read up on the different niches, and how to invest in Chinese stocks from within or outside of Mainland China.
Disclaimer: The information in this article has been researched to the best of our knowledge and provides an overview of the topic of investing in Chinese stocks as of Q1/2022. As government rules may change and investment tactics depend on your very specific personal situation and knowledge, this article shall NOT be viewed as financial or investment advice.
Table of contents
- Introduction to Investing in Chinese Stocks
- Common Investment Terms for Investing in Chinese Stocks
- 5 Key Risks when Investing in Chinese Stocks
- Foreigners Investing in Chinese Stocks
- Opportunities of Investing in Chinese Stocks
- Global Investors Who Are Investing in Chinese Stocks
- Key Differences between Chinese & Western Environments for Investing in Chinese Stocks
- Chinese Share Classes for Investing in Chinese Stocks
- Stock Exchanges in China
- Investing in Chinese Stocks: Beyond Tech Companies
- 1. E Commerce/Technology Industry
- 2. Mobility Industry
- 3. Banking Industry
- 4. Solar Power Industry
- 5. Health Industry
- 6. Insurance Industry
- 7. Luxury/Sports Industry
- 8. Consumer Goods Industry
- How to Get Started with Investing in Chinese Stocks
- Investing in Foreign Companies That Grow Business in China
- What to Consider before Investing in Chinese Stocks – The Takeaway
Introduction to Investing in Chinese Stocks
As you may know, China is the world’s most populous country with the second-largest economy. In fact, China’s GDP has had growth rates of up to 9.5% in the last 10 years.
Despite the Covid-pandemic and consequent global supply chain disruptions, China’s economy continues to grow strongly, although Chinese officials may be hyping the actual economic development, and the GDP growth rate is actually slowing down a little. However, this doesn’t have to be a negative implication for the Chinese stock market.
At the same time, an improving economy instead of a surging economy creates slower, healthier growth, which in turn leads to high common prosperity vs. only a handful of the super-rich. Between 2022 and 2026, the Chinese GDP growth rate is expected to average around 5%, which is still significantly above other major global economies.
China’s success may be explained by the combination of market size, lifting growth opportunities, urbanization, and digitalization. There is an almost endless amount of growth and expansion measures by the Chinese government to promote innovation and technology.
A prominent example to boost China’s economy and ensure steady GDP growth is its Belt and Road Initiative. On the other hand, such investments and economic boosters add to the country’s national debt, which is growing at 9% per year on average and is expected to reach 20 billion USD in 2026.
At the same time, large corporations are incentivized to expand into their surrounding areas. IT and future-driven companies have to pay little or no taxes. In addition, the 2022 Winter Olympics in Beijing are boosting the economy, whereas the Party Congress in Autumn 2022 is a “major event” in Chinese politics and may come with policy and other changes, likely in ease of regulations.
China knows that the race among industrialized nations for power and influence will be determined through innovation and the economy.
As the global Covid-pandemic is fading out, the Chinese stock market is expected to bounce back in 2022, likely led by green energy and big tech.
Common Investment Terms for Investing in Chinese Stocks
CSI 300 Index: The CSI 300 is the leading stock market index in China, depicting the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It has two sub-indexes: CSI 100 and CSI 200.
Hang Seng Index (HSI): The leading stock index in Hong Kong and one of the most important ones in Asia. It is a price index and tracks the share prices of the 50 largest and most traded companies on the Hong Kong Stock Exchange.
ISIN: An International Securities Identification Number (ISIN) uniquely identifies a stock. The ISIN code is a 12-character alphanumeric code. CN stands for China (A Shares, B Shares), KYG stands for Cayman Islands (VIEs), BVI stands for British Virgin Islands (VIEs), and US stands for USA (ADRs).
Listing standards for companies: For example, at the New Beijing Stock Exchange, retail investors must have securities assets of at least 500,000 RMB (~78,000 USD) and have an investment history of more than two years to be listed at the BSE.
Preferred vs. Common Stock: Preferred stocks give NO voting rights to shareholders whereas common stocks do. However, preferred shareholders are paid dividends before common shareholders. For day traders and short-term investors, ADRs may be more suitable compared to common stocks. That’s because ADRs provide higher liquidity and are easier to trade than a foreign stock (in terms of commissions, frictional costs, and spreads).
VIE: Chinese companies that are set up as Variable Interest Entities (VIE) are allowed to list in offshore markets if they register with regulators and meet compliance rules. They are normally registered in tax havens like the Cayman Islands and are essentially holding companies designed to establish profit-sharing mechanisms between foreign investors and Chinese companies.
5 Key Risks when Investing in Chinese Stocks
Generally speaking, investors are well-advised to be cautious when investing in Chinese stocks.
1. Arbitrary Government Regulations
The government may implement short-notice alterations of regulations, restrictions, censorship, fines, or bans. The official reasons are often related to (cyber) security, citizen safety, fair competition, and pro modesty.
For example, in recent years, the Chinese government tightened the regulations for private Chinese companies that wanted to IPO abroad, in particular, the US, but also Hong Kong. A well-known example is driving service provider Didi (the “Uber” of China), which had to do a cybersecurity audit shortly after its IPO in the US, resulting in a ban of its app in China.
Besides, the Chinese government may be “adjusting” reports on market size, growth numbers, and industry development to fit the political narrative, particularly, in the face of major political events like the 2022 Party Congress.
Finally, whereas Chinese companies principally can list on foreign stock exchanges, especially US exchanges, foreign companies are banned from listing on Chinese stock exchanges.
2. Insider Trading for Investing in Chinese Stocks
The reality, however, may be more related to expropriation and nationalization. However, industry experts believe that the peak of regulation tightening has been reached. Insiders may take advantage of their knowledge and access to information.
3. VIEs as Auxiliary Construct for Foreign Investors
VIEs work differently than regular stocks. When investors buy VIE, they don’t technically own the shares themselves, but parts of an offshore shell company that has a claim to the profits of the respective stock.
Therefore, VIEs are an auxiliary construct for foreigners to invest in Chinese stocks that are actually banned for foreigners, like the tech industry.
Whereas by law it is illegal for foreigners to invest in specific niches like Chinese tech companies, in practice it is tolerated via the VIE construct. However, this is subject to the discretion of the Chinese government.
4. Limitations of Investments by Foreigners
In general, the Chinese government strongly regulates the performance of the economy including investments and stocks.
This includes the limitation of foreign investors to invest in Chinese companies, especially the booming tech sector.
5. Political-Motivated Delisting
As a political measure in the ongoing China-US trade war, the US may delist ADRs from the US market, in which case the company could buy back the shares, the investor could transfer the shares, or the shares may end up in limbo. Such a delisting happened in 2021 when China Mobile was forced to delist from the NYSE.
Other risks are more general, including less stringent disclosure requirements, looser accounting standards, and regulatory differences.
Foreigners Investing in Chinese Stocks
It is challenging for foreign investors to invest directly in Chinese companies. And there is also a “political risk” as by law foreigners are prohibited from directly investing in China.
Professional foreign investors however can invest in Chinese companies through ADRs, ETFs, mutual funds, A Shares (through the QFII program), B Shares, H Shares (Hong Kong-listed Chinese stocks), VIEs, and by collaborating with Chinese businesses in mainland China. Except for B Shares, private foreign investors cannot trade at Chinese stock exchanges.
Opportunities of Investing in Chinese Stocks
However, the Chinese stock market also comes with unique opportunities. As the correlation with other major global markets is low, Chinese stocks provide a great diversification opportunity.
Besides, China’s increasing openness to foreign direct investment (FDI) – in 2020 China was the world’s second-largest FDI recipient after the US – is an important contributor to the country’s economic growth.
Finally, the price/earnings ratio is at a very low level, which is not commonly found any more in the Western investment landscape.
Global Investors Who Are Investing in Chinese Stocks
The major Western accounting firms Ernst & Young, PWC, KPMG, and Deloitte recognize China as a huge investment opportunity.
Widely regarded as the most successful investor worldwide, Warren Buffet started investing in Chinese stocks in 2005, and now holds shares of BYD (manufacturer, including electric vehicles) and CATL (electric vehicle battery manufacturer) among others.
Other renowned investors like Bridgewater’s Ray Dalio value the benefits of investing in China in terms of the aforementioned portfolio diversification and growth opportunities. Likewise, Charlie Munger has recently doubled his company’s investment in the Alibaba Group.
Key Differences between Chinese & Western Environments for Investing in Chinese Stocks
China can afford to exclude Google, Facebook, and Amazon from their markets and still have the upper hand with globally used WeChat, Alibaba, and an enormous digital ecosystem. Why is that so, you may ask? Well, China’s more than 1.4 billion population equals a quarter (!) of the global population and therefore has huge market leverage.
Besides, most large companies are fully or partly government-owned (through equity or licenses). For example, every car manufacturer needs numerous licenses from the government before they can start production.
Especially the banking, energy, and raw materials sectors are firmly owned by the Chinese state. Therefore, state-owned companies have a significant economic influence, contributing to more than 40% of the GDP and 60% of the country’s jobs. And economic powerhouses Alibaba and Tencent also wouldn’t be where they are now without the government support.
In fact, in theory, the Chinese government owns everything: companies, real estate, capital, and workforce. Although this has loosened more and more over the last decades, the Chinese state does have the power to “expropriate”, albeit at a fair market price.
Consequently, the government allocates where the capital goes. It can be viewed as a mix between planned economy and a market economy. Since the planned economy under Mao Zedong has left China stagnant, most are satisfied with today’s market economy in China.
In China, unlike Western countries, nobody seems to have a problem with surveillance, cameras, routine ID checks at hotels or public transportation, and so on – given that it increases public safety and security. Even the latest “social score” doesn’t rouse Chinese citizens.
At the same time, we would also like to point out the main similarity between China and Western countries, which is the high consumer focus.
Chinese Share Classes for Investing in Chinese Stocks
Chinese companies may list their stocks on multiple exchanges – domestic and foreign. If you are planning on investing in Chinese stocks, you should know the following share classes.
Generally speaking, it’s easier for larger companies to be listed outside of China (offshore) whereas smaller companies often may not have the resources or expertise to do so and may only list within China (onshore).
An American Depositary Receipt is a certificate issued by a US bank representing a specified number of shares in foreign stock. ADRs in more than 350 Chinese companies are listed.
The certificates are traded on the NYSE and NASDAQ. Some companies such as Pinduoduo are only listed in the US and therefore have an ADR status. However, ADRs are at risk of forced delisting by the US government as a political measure.
Equities of companies incorporated and listed in mainland China (onshore) with the currency RMB. Since 2003, A Shares have been accessible to international investors through the Qualified Foreign Institutional Investor (QFII) system. The QFII program allows specified licensed international investors to buy and sell on mainland China’s stock exchanges.
However, this only applies to selected industries. Trending sectors like the tech industry are exempt from professional foreign investors, which is where the VIE setup comes into play.
Equities of companies incorporated and listed in mainland China (onshore) with the currencies USD and HKD. B Shares are traded in USD on the Shanghai Stock Exchange and in HKD on the Shenzhen Stock Exchange.
Whereas B Shares are accessible to foreign investors, there are only a few investable stocks left on this market, which is why in practice, most investors neglect B Shares.
Equities of companies incorporated in China, but listed in Hong Kong and denominated in HKD (offshore). H Shares are accessible to foreign investors directly.
Shares of Chinese companies incorporated outside of mainland China and listed on the New York Stock Exchange, the NASDAQ Exchange, or the NYSE American. A majority of the revenue or assets must be derived from mainland China. Sometimes, ADRs of H Shares and Red Chips are also referred to as N Shares.
Shares of Chinese companies incorporated outside of mainland China, mostly in Hong Kong. P Chips are traded on the Hong Kong Stock Exchange and are owned by private sectors in China.
Equities of companies, incorporated outside of mainland China (offshore) but owned by China state entities that generate most of their revenue in China.
Red Chips are denominated in HKD, traded in Hong Kong, and accessible to foreign investors directly. This makes it easier for Chinese companies to acquire foreign investments.
Shares of Chinese companies that are listed on the Singapore Exchange. One index that covers the prices of S Chips is the FTSE ST China Index.
Comparison for Investing in Chinese Stocks
Compared to ADR, H Share stocks have lower risks for foreign investors. That’s because ADR on the US market can be delisted by the US government, whereas native H Share listings on the Hong Kong stock exchange have no reason to be delisted by the Chinese government.
Stock Exchanges in China
In mainland China, there are three main stock exchanges: Beijing, Shanghai, and Shenzhen. In the Greater China Area, the Hong Kong and Taiwan stock exchanges are most noteworthy for investing in Chinese stocks.
The SSE and SEHK have similar listing requirements as US stock exchanges, e.g., financial reports, and audits. However, Chinese accounting standards differ from the US GAAP principles and there are regulatory differences. Besides, reports and statistics are often adjusted to fit the political narrative in China.
New Beijing Stock Exchange (BSE) & NEEQ
Established in September 2021 to aid the growth of small and medium enterprises, the New Beijing Stock Exchange (BSE) is based in China’s capital and operates independently. Trading at the New Beijing Stock Exchange started on 15 November 2021, and 81 companies are currently listed there.
The BSE can be considered an upgraded version of the National Equities Exchange And Quotations (NEEQ). The New Beijing Stock Exchange is owned 100% by the NEEQ.
The NEEQ also referred to as the “New Third Board”, was established in 2012 to serve micro-companies, SMEs, and startups, which could not fulfill the listing standards of the stock exchanges in Shanghai and Shenzhen.
Now, the NEEQ is geared more towards high-quality and innovative companies. To date, more than 10,000 companies are listed at the NEEQ.
With the establishment of the SME-specialized BSE, the Chinese government is trying to keep IPOs of Chinese, technology- and future-oriented companies in the country – just like it did with the establishment of the STAR Market in the Shanghai Stock Exchange.
As the Beijing Stock Exchange just opened, the following questions are still to be answered:
- Can foreign-invested enterprises IPO on the BSE?
- Will the BSE draw funds from the Shanghai and Shenzhen stock exchanges?
- General impact of the BSE on the Chinese stock market, the economy, and investors?
Next, let’s take a look at the other two main stock exchanges in mainland China for investing in Chinese stocks.
Shanghai Stock Exchange (SSE) & STAR Market
Did you know that the birthplace of securities trading in China is Shanghai, with roots dating back to the 1860s? The Shanghai Stock Exchange was established in 1990 and is now the largest stock exchange in Mainland China and the fifth-largest stock exchange in the world.
As such, it is an important pillar of the Chinese economy. Unlike the Hong Kong Stock Exchange, the SSE is still not entirely open to foreign investors and often affected by the decisions of the Chinese government.
Besides, there is the Shanghai Stock Exchange “STAR Market” (Science and Technology Innovation Board), a Chinese science and technology-focused equities market that was established in 2019. It mainly lists start-ups as well as high-tech companies and can be regarded as equivalent to the US NASDAQ.
Today, more than 1,500 companies with more than 1,600 stocks are listed on the Shanghai Stock Exchange while more than 370 companies are listed on the STAR Market.
Shenzhen Stock Exchange (SZSE) & ChiNext
The Shenzhen Stock Exchange (SZSE) was founded in 1990 and lists a variety of market indices with different market positioning. The SZSE focuses on Blue Chip stocks (large well-established companies with an excellent reputation) with high market capitalization.
The SZSE also established ChiNext in 2009 as a subsidiary in the style of the NASDAQ. ChiNext aims to attract innovative and fast-growing companies, especially high-tech firms. The ChiNext listing standards are less strict than those of the Shenzhen Stock Exchange.
In 2021, more than 3,000 companies were listed on the SZSE with the majority from the manufacturing sector. Meanwhile, more than 800 companies are listed on the ChiNext exchange.
Whereas the STAR Market focuses more on technology companies, the ChiNext is geared more towards growth-oriented innovative and start-up enterprises.
Stock Exchange of Hong Kong (SEHK, SEHK)
The Stock Exchange of Hong Kong (SEHK) or Hong Kong Stock Exchange (HKSE) is the fourth largest stock exchange worldwide with more than 2,500 listed companies and the largest bourse in terms of market capitalization. The SEHK is reported to be the fastest-growing stock exchange in Asia.
Taiwan Stock Exchange (TWSE)
The TWSE was established back in 1961 in Taipei and began operating as a stock exchange in 1962. Today, more than 800 companies are listed on the Taiwan Stock Exchange.
Investing in Chinese Stocks: Beyond Tech Companies
The Chinese investment landscape is largely technology and communication-driven. We will take a look at a selection of the most significant industries and companies as well as emerging sectors and enterprises. Keep in mind the restrictions – and solutions/workarounds – for investing in Chinese stocks by foreigners.
- E Commerce/Technology
- Solar Power
- Consumer Goods
Due to the bursting of the real estate bubble in China, we will take a look at this sector and further industries at a later point.
1. E Commerce/Technology Industry
With the Chinese retail market observing a 10% annual growth prediction until 2025, stocks in this sector are generally expected to have good investment potential.
The tech industry still observes a heightened regulatory risk by Chinese and overseas governments, and foreigners are not legally allowed to invest in Chinese tech stocks – although it is possible in practice, and tolerated. On the other hand, despite the Covid-induced semiconductor chip shortage, demand remains strong.
This global e commerce giant is one of the largest online retailers worldwide. As of 2020, the Alibaba Group has the sixth-highest global brand valuation. With more and more services around Cloud and payment solutions (AliCloud, AliPay), Alibaba can also be considered a Chinese tech giant, equivalent to Amazon, eBay, and PayPal.
Founded in 1999, Alibaba was originally China’s answer to Amazon. Following its ADR IPO on the New York Stock Exchange in 2014, the Alibaba Group has since become the largest B2B online marketplace.
- NYSE Ticker (USA): BABA
- H Shares Ticker (Hong Hong): 9988
- ISIN: US01609W1027 (ADR), KYG017191142 (VIE)
- Risks: Chinese government tax hikes, fines, and antitrust regulations
- Opportunities: leading analysts generally see BABA as a “strong buy”, also as ADR
China’s second-largest online retailer, JD, is backed by Tencent. The company first went public in 2014 at the NASDAQ as the biggest listing of a Chinese company in the US.
- NASDAQ Ticker (USA): JD
- H Shares (Hong Hong) Ticker: 9618
- ISIN: US47215P1066 (ADR), KYG8208B1014 (VIE)
- Risks: JD is considered less risky than Alibaba as JD faces fewer fines and restrictions
- Opportunities: leading analysts generally see JD as a “strong buy”
This e commerce platform is renowned for its group-buying services. In 2018, just 3 years after its establishment, Pinduoduo went public on the NASDAQ.
- NASDAQ Ticker (USA): PDD
- ISIN: US7223041028 (ADR)
- Risks: the company is not yet profitable and finds itself in a highly competitive market with Alibaba, JD.com, and JD.hk
- Opportunities: long-term opportunities as the second-largest e commerce company in China with 683 million active buyers
The most popular search engine in China with more than 80% market share, leader in AI and innovative fields. In 2007, Baidu became the first Chinese company in the NASDAQ-100 index. The Western equivalent is clearly Google.
- NASDAQ Ticker: BIDU
- H Shares (Hong Hong) Ticker: 9888
- ISIN: US0567521085 (ADR), KYG070341048 (VIE)
- Risks: increasingly popular and highly-functioning in-app search functions on ubiquitous social media WeChat (Tencent), TikTok (ByteDance), and Toutiao (ByteDance), as well as the Alibaba ecosystem with one-stop-fulfillment functionalities, may make a pure search engine less relevant. The Chinese government also has an eye on Baidu’s market power.
- Opportunities: solid business concept, leadership in AI, large ecosystem with close to 50 digital services/products, including electric vehicles
The e commerce giant behind WeChat and messenger QQ was first listed on the Hong Kong Stock Exchange in 2004. The company’s super-app WeChat can be compared to Facebook including WhatsApp and Instagram.
- H Shares (Hong Hong) Ticker: 700
- ISIN: KYG875721634 (VIE)
- Risks: Short-term headwinds and delisting risk as well as other new government regulations like the 2021 anti-monopoly crackdown against Tencent, Alibaba, JD.com and the likes that included financial penalties. However, compared to its competitors, Tencent didn’t take that much of a nosedive after the crackdown.
- Opportunities: With its superstar WeChat and other significant investments, Tencent has a solid industry standing and growth outlook. Some industry experts even say that the stock is undervalued right now. Tencent’s diversified portfolio and particular strength in the gaming sector contribute to the upward trend prognosis.
Founded in 2010, Xiaomi is a leading manufacturer of consumer electronics (software, home, and household appliances). It is the second-largest manufacturer of smartphones after Samsung.
Xiaomi is a prominent example of delisting when the US government temporarily banned this tech stock in 2021.
- H Shares (Hong Hong) Ticker: 1810
- ISIN: KYG9830T1067 (VIE)
- Risks: US-tensions; privacy concerns around data collection; alleged imitation of Apple; several controversies and lawsuits around invalid patents/patent infringement
- Opportunities: market penetration; innovation capacity; above-industry ROCE
Formerly known as Meituan-Dianping, this popular Chinese local shopping app was founded in 2010, allowing Chinese consumers to purchase entertainment (e.g. tickets), dining, delivery, travel, and other services at the tip of their fingers.
The app basically unites Western equivalents like Google My Business, Delivery Hero, Eventim, and UBER Eats.
- H Shares (Hong Hong) Ticker: 3690
- ISIN: KYG596691041 (VIE)
- Risks: high penalty in 2021 for violating anti-monopoly regulations; welfare of the company’s delivery personnel; as part of the tech sector, Meituan is affected by new policies and regulations in this sector
- Opportunities: expansion into the booming group buying market, large cash on hand level (similar to JD and Pinduoduo), recovery of the tourism and even sector post-Covid will likely boost ticket, travel, and service purchases
2. Mobility Industry
China is widely regarded as an industry leader in many sectors, including electric mobility. No other country produces and uses more electric vehicles. The streets are full of electric scooters and electric cars. In southern China, almost all taxis and buses are electric, with many produced by BYD.
In fact, BYD and NIO are the most well-known companies in this sector. In 2021, BYD sold more than 600,000 vehicles while NIO sold almost 100,000 vehicles.
Founded in 2014, NIO is a multinational automobile manufacturer of electric vehicles, specializing in sports cars in the premium segment. Its investors include Tencent (WeChat) and Lenovo. The NYSE IPO was in 2018.
- NYSE Ticker (USA): NIO
- ISIN: US62914V1061 (ADR)
- Risks: relatively new brand; slower growth rate than electric vehicle competitors; company bail-out out by the Chinese government in 2020; acquisition of sufficient investment capital
- Opportunities: innovative and trending renewable energy sector; autonomous vehicle testing program; industry experts rate NIO undervalued
Founded in 1995, BYD Co. Ltd. (Build Your Dreams) is a Chinese manufacturing company, specializing in automobiles (electric, hybrid), solar panels, and rechargeable batteries. In 2008, Warren Buffett’s Berkshire Hathaway Inc. acquired about 10% in stocks of the BYD company.
- H Shares (Hong Hong) Ticker: 1211
- ISIN: US05606L1008 (ADR), CNE100000296
- Risks: legal disputes around alleged forced labor and patent litigation; general tech sector risks
- Opportunities: stable growth; established dominant electric vehicles player in China in a trending segment – pushed by the Chinese government (green growth)
Also known as Li Xiang (the name of the founder), this Chinese electric vehicle manufacturer was founded in 2015. In 2021, Li Auto sold more than 90,000 vehicles. The NASDAQ IPO was in 2020.
With a lower price-to-sales ratio compared to BYD and Nio, Li Auto is able to grow its sales at a higher rate compared to its competitors.
- NASDAQ Ticker (USA): LI
- H Shares (Hong Hong) Ticker: 2015
- ISIN: US50202M1027 (ADR), KYG5479M1050 (VIE)
- Risks: relatively new brand; comparatively expensive sales prices; highly competitive environment
- Opportunities: growth in the domestic market anticipated; production being scaled up; increase of income and cash on hand
Founded in 2014, XPeng Motors is a Chinese electric vehicle manufacturer. In 2021, XPeng sold around 100,000 vehicles. Among others, XPeng is backed by the Alibaba Group and Xiaomi as strategic investors.
- NYSE Ticker (USA): XPEV
- H Shares (Hong Hong) Ticker: 9868
- ISIN: US98422D1054 (ADR), KYG982AW1003 (VIE)
- Risks: relatively new brand; very high growth rates of up to 500%; XPeng stock is overvalued according to industry insiders
- Opportunities: exciting products range; autonomous vehicles testing permit in the US; XPeng’s stock is trading at a better price-to-forward-sales ratio compared to international competitors
3. Banking Industry
Other strong industries in the Chinese market are banks and real estate companies, which both are based on the real estate boom in China of the last 30 years. Unsurprisingly, the banking sector in China is now the largest in the world, managing the largest amounts of assets worldwide.
Although this sector is very large, it is rather risk-prone, especially with its linkage to property prices, property debt, and exports (China-US trade war).
Generally, the banking sector is a solid choice for value investors, who seek stocks that trade for less than their intrinsic value. Besides, the banking sector pays dividends, which provides investors with a share in profits.
On the other hand, investors may want to consider the overall recent weak performance of the Chinese real estate sector which is tied directly to the banking sector.
Industrial and Commercial Bank of China
Founded as a limited company in 1984, the Industrial and Commercial Bank of China (ICBC) is a state-owned commercial bank with capital provided by the Ministry of Finance of China. In terms of total assets, ICBC is the largest bank in the world (more than 5.1 trillion USD in 2020).
ICBC is ranked first on the Forbes Global 2000 list of the world’s biggest public companies since 2016 and is considered a systematically important bank worldwide.
- H Shares (Hong Hong) Ticker: 1398
- ISIN: CNE1000003G1
- Risks: below average growth rate; isolated controversies around money laundering, bribery, and lack of due diligence (2005-2021)
- Opportunities: ICBC shares are less expensive compared to similar stocks; safely financed (Government-backed)
Bank of China
Founded in 1912, the Bank of China (BOC) is the fourth largest bank in the world by total assets (after ICBC, China Construction Bank, and the Agricultural Bank of China). BOC is a separate legal entity from its subsidiary, the Bank of China (Hong Kong).
As of 2019, it was the second-largest lender in China and it is also considered a systemically important bank by the international Financial Stability Board.
- H Shares (Hong Hong) Ticker: 3988
- ISIN: CNE1000001Z5
- Risks: isolated international controversies around lack of due diligence and money laundering (2008-2014)
- Opportunities: attractive dividend yield and a payment history; “buy” rating by international industry experts
4. Solar Power Industry
The value of the global renewable energy sector is anticipated to reach close to 2 trillion USD by 2030.
With a global community seeking to make the world’s energy supply sustainable, renewable energy systems are THE trending industry together with tech/AI, e commerce, and green mobility.
On the other hand, green energy is a highly competitive field. Plus, with market saturation, solar system module prices will start to decline.
Founded in 2006, JinkoSolar Holding Co., Ltd. is the world’s largest solar panel manufacturer, selling its products internationally. JinkoSolar has more than 13,500 employees worldwide and 15 overseas subsidiaries. The company went public on the NYSE in 2010.
In 2021, the US started banning the import of JinkoSolar products due to concerns of forced Uyghur labor.
- NYSE Ticker (USA): JKS
- ISIN: US47759T1007 (ADR)
- Risks: comparatively low margins on sales
- Opportunities: ongoing expansion; above-industry growth rates (production, revenue); undervalued according to industry experts; good pick for value investors
Founded in 2008, Xinyi Solar Holdings (XYS) is the world’s largest solar glass manufacturer, focusing on the Chinese local market. Xinyi Solar is the third-largest private solar farm developer and operator in China.
Xinyi Solar is an investment holding company, deriving revenue from two core business segments, the manufacturing and sale of solar glass as well as solar farm businesses.
- H Shares (Hong Hong) Ticker: 968
- ISIN: KYG9829N1025 (VIE)
- Risks: below industry growth-rates; comparatively high share prices; certain degree of volatility
- Opportunities: short-term buy signals from industry experts; undervalued according to industry experts; stable share prices compared to peers; earnings are expected to increase by more than 80% over the next years
5. Health Industry
In our fast-paced global society, and especially in the face of the worldwide Covid-pandemic, the pharmaceutical and BioTech industries are booming. By adopting trends like AI to revolutionize data analytics, and automation to optimize production, they are ensuring to further stay ahead of the game.
This is also particularly relevant in regards to the overall improved health and well aging population, making the pharma industry and its products increasingly important. The research and further development of mRNA technology for Covid-vaccines have also given a push to this technique, also providing more data for cancer research.
So, whatever the market situation is, the pharmaceutical industry is an “evergreen” sector. Globally, it is a 50 billion USD industry with 7%-8% growth rates per year. In particular, the global biotechnology market size is expected to continue its strong upward trend with annual growth rates of 15% and more between 2021 and 2028.
Besides, out of the 33 WHO-approved Covid-vaccines, China is the leading supplier worldwide. Sinovac Biotech leads the global Covid-vaccine production, but other Chinese companies like Sinopharm, CanSino Biologics, and Anhui Zhifei Longcom Biopharmaceutical also produce vaccinations against the Coronavirus.
Even though China’s general policy tightening also doesn’t stop at the Chinese pharmaceutical industry, in the mid and long run this isn’t likely to damage national big pharma companies.
Founded in 1998 by the government-owned China National Pharmaceutical Group (CNPG), the Sinopharm Group is a Chinese pharmaceutical company. Today, the CNPG is a majority shareholder of Sinopharm.
In fact, the Sinopharm Group is the third-largest pharmaceutical company in the world after Johnson & Johnson and Pfizer, and is part of the 2021 Global Fortune 2000 list, as well as the ETF “MSCI China Health Care ETF“. Sinopharm debuted its H Shares on the SEHK in 2009.
- H Shares (Hong Hong) Ticker: 1099
- ISIN: CNE100000FN7
- Risks: controversy around ineffective DPT vaccines (2017); plateau in global Covid-vaccines; Chinese policy headwinds; “hold” indication by industry experts
- Opportunities: established company; government-backed
Founded in 2010, WuXi Biologics provides laboratory and manufacturing services for pharmaceutical and biotech companies. WuXi Biologics has state-of-the-art research and manufacturing facilities around the world as well as partnerships with international big players in the industry.
In 2020, WuXi Biologics was selected to be a part of the Hang Seng Index in Hong Kong. Interestingly, Sinopharm is not part of the HSI. WuXi Biologics is part of the “MSCI China Health Care ETF“.
Wuxi Biologics produces ingredients for vaccines including AstraZeneca’s Covid-19 vaccine.
- H Shares (Hong Hong) Ticker: 2269
- ISIN: KYG970081173 (VIE)
- Risks: highly competitive market that requires special knowledge, skills, and access (e.g. patents); historic volatility; US-trade halted in early 2022; policy headwinds by the Chinese government; “hold” recommendation by industry experts
- Opportunities: growth opportunities in a booming sector once trade issues are sorted; 100%-200% growth in revenue and profit in 2021
6. Insurance Industry
Over the past decade, the Chinese insurance industry has experienced rapid expansion. Steadily increasing demand is fueled by (a) a growing, aging, and wealthier population, (b) a strong economy, (c) consumer awareness, and (d) government investments including lower entry barriers by the Chinese government for foreign insurers that are now allowed to establish joint-venture insurance firms in China.
Overall, there are more than 230 insurance companies registered in China, with a little over half domestic firms, and the rest foreign-funded. By 2029, the Chinese insurance market is predicted to surpass the US insurance market.
The largest Chinese insurance companies are China Life Insurance (approx. 50% market share), Ping An (approx. 16% market share), China Pacific Insurance, the People’s Insurance of China, and New China Life Insurance.
Ping An Insurance
Also known as Ping An of China, Ping An Insurance is a Chinese holding conglomerate. Although Ping An started as a property and casualty insurance company, it has now expanded into life insurance, banking, online financial services, wealth management businesses, healthcare, auto services, and smart city. Its strategic goal is to become a comprehensive financial services provider.
Founded in 1988, Ping An literally means “safe and well”. The company is China’s second-largest insurer and was the largest insurer in the Asia-Pacific region until 2021 when AIA took that place. Besides, Ping An is the second-largest insurance company in the world in terms of net premiums written after UnitedHealth Group Incorporated (USA).
Ping An’s IPO was in 2004. Today, the company is in the top 50 of the SSE and the SEHK. It is also included in the CSI 300 Index and the Hang Seng China 50 Index. Besides, Ping An ranks in the top 10 of the Forbes Global 2000 list.
- H Shares (Hong Hong) Ticker: 2318
- ISIN: CNE000001R84
- Risks: competitive industry; tied to the economic development (in particular auto and real estate purchases)
- Opportunities: established and leading company in China; reputable; above-average growth rates in the insurance industry (tech-powered); ecosystem of services offered; fair profitability; considered moderately undervalued; excellent risk-to-reward-ratio
7. Luxury/Sports Industry
The size of the global sportswear is currently at over 350 billion USD and is expected to exceed 420 billion USD by 2026. Of course, you are familiar with the big global players in the industry – Nike, Adidas, Puma, Under Armour, New Balance, and the likes. In China, Anta Sports (15%) and Li-Ning (7%), dominate the sportswear sector.
Sportswear and athleisure wear are gaining popularity and have arrived in all social classes. Fueled by innovation and technological development, comfortable and sporty clothes perfectly fit and complement today’s busy lifestyle.
Founded in 1994, Anta Sports is a Chinese sportswear and accessories multinational company with more than 25 brands. It is China’s largest sports brand, the world’s largest pure sports equipment company by revenue, and the third-largest manufacturer of sporting goods overall after Nike and Adidas.
Through the 2008 Beijing Olympics, Anta Sports expanded its footwear, and in 2022, Anta Sports became the official sportswear partner of the Winter Olympic Games in Beijing.
Anta Sports’ IPO on the SEHK was in 2007. In 2009, the company acquired the Fila trademark in mainland China, Hong Kong, and Macao. Anta Sports is also the official supplier and sponsor of various international sports teams, players, and associations.
- H Shares (Hong Hong) Ticker: 2020
- ISIN: KYG040111059 (VIE)
- Risks: alleged accounting and governance issues (2019), dispute with international unit (2021)
- Opportunities: established company; highly undervalued say industry experts; steadily increasing its brand value to surpass Adidas according to experts; stable and profitable company with low volatility and low risks
Founded in 1989 by Li Ning, a former Chinese Olympic gymnast, Li-Ning is a Chinese sportswear and sports equipment company, endorsing a number of athletes and teams worldwide. The brand has international strategic partnerships, including with AIGLE and the Acquity Group to expand into the US market. Li-Ning’s IPO on the SEHK was in 2004.
Li-Ning is China’s second-largest sports brand, utilizing sponsorship deals with athletes and sports teams in China and abroad to boost its profile. Some of the company’s high-profile collaborations include Jackie Chan and Dwyane Wade. In 2020, as part of Li-Ning’s 30th anniversary, the brand held a fashion show during the Paris menswear fashion week.
Even though Li-Ning was not an official sponsor of the 2008 Beijing Olympics, the company expanded its reach and position as sports and business icons by providing outfits for TV presenters.
- H Shares (Hong Hong) Ticker: 2331
- ISIN: KYG5496K1242 (VIE)
- Risks: controversy around environmental pollution in the production process (2011)
- Opportunities: established company with the founder on the Board of Directors; industry experts expect a long-term increase of the stock; good return rate; stable growth rate; undervalued according to industry experts; stable and profitable company with low volatility and low risks
8. Consumer Goods Industry
Consumer staples generally refer to essential products used by consumers, including foods and beverages, household goods, hygiene products as well as alcohol and tobacco. As such, consumer goods are less affected by economic cycles, meaning they remain stable even in times of economic crisis.
With China being estimated to be the largest consumer economy globally in terms of purchase power parity (PPP), stocks in this sector are worth taking a closer look at. In China, urbanization, increasing disposable household income, as well as government support for basic goods for lower-income earners and union members, contribute to the growth of the consumer goods sector.
Despite the destabilizing impact of the global Covid-pandemic, companies in the consumer staples sector remain well-positioned as consumers prioritize buying basic goods. As the transmission of the virus decelerates, the sector is expected to return to its longer-term growth trend.
Headwinds include the ongoing international trade dispute with the US, which potentially slows or halts exports of certain product ranges, an aging population, increased international competition, as well as private labeling which fuels competition.
Kweichow Moutai Company
Founded in 1999, Moutai is also known as Maotai (Pinyin). It is a type of Baijiu, a distilled Chinese spirit (liquor), made in Moutai Town in Guizhou province. Just like champagne, only the Baijiu that is produced in Moutai Town is allowed to be called Moutai, and specifically, only the Baijiu that is produced by the Kweichow Moutai Company, which is partially owned by the Chinese state.
Kweichow Moutai is the most famous Chinese liquor brand. What makes this luxury spirit an elite alcohol brand, and so popular is that it is favored by Chinese politicians and businesspeople who want to impress their partners during important business meetings and events. Its limited supply makes the brand even more sought-after. Baijiu is usually not consumed at home or alone, but during business lunches or other corporate events.
Building a good relationship (Guanxi) is above everything else when doing business in China. Toasting with a glass of Baijiu is said to bring luck. There is even a saying “As long as there is a business in China, there will be Moutai”. In other words, this special liquor helps to do business in China smoothly and to get the deal sealed.
Besides, Moutai, as the national drink of China, became the beverage of choice for greeting foreigners on official state or business visits. It is also used as a bribe for high-ranking officials. Today, Moutai sells more than 200 tons in more than 100 countries around the world.
Kweichow Moutai Company’s IPO on the SSE was in 2001. Today, Kweichow Moutai is among the most valuable public companies in China, with the current top five being Tencent, Kweichow Moutai, Alibaba, ICBC Bank, and China Merchants Bank. Finally, Kweichow Moutai is the largest net asset holding of the MSCI China Consumer Staples ETF and the MSCI China A Index.
- SHA Ticker (China): 600519
- ISIN: CNE0000018R8
- Risks: internal organizational structure and leadership changes; government and political interventions (e.g. pricing); counterfeit products (with limited comparability to the original so far)
- Opportunities: established company; state-backed private company; crisis-resistant niche; decent growth; positive cash flow; zero debt; truly unique brand positioning; strong brand loyalty; limited competition
Founded in 1985, Hengan International is the largest producer of sanitary napkins and baby diapers in China. They export their products into more than 60 countries around the world.
Hengan’s IPO on the SEHK was in 1998. Hengan is currently ranked 11 in terms of net assets of the MSCI China Consumer Staples ETF.
This evergreen industry supplies China’s populations with sanitary napkins, baby and adult diapers, and other personal hygiene products. By integrating technology and e commerce platforms, Hengan is finding new ways to unlock growth potential.
- H Shares (Hong Hong) Ticker: 1044
- ISIN: KYG4402L1510 (VIE)
- Risks: stock decline since 2015, possibly due to sell-off by banks that held the shares as collaterals to the company’s loans
- Opportunities: established company; safely financed; undervalued according to industry experts; evergreen sector that will likely recover after the plunge; industry-average dividend payout ratio
This brings us to the end of the overview of the largest industries and companies in China.
How to Get Started with Investing in Chinese Stocks
Perhaps the easiest way to get started with investing in Chinese stocks is through Chinese ETFs which are available easily and quickly around the world.
An exchange-traded fund is a basket of securities that trade on an exchange just like a stock. As an ETF basket consists of several securities, their prices are generally less volatile and therefore less risky.
Besides, ETFs typically have steady long-term growth, although the potential gains are typically much lower than certain stocks that have the potential to “explode”. MSCI (Morgan Stanley Capital International) ETFs are among the most known.
ETFs generally provide investors with exposure to A Shares, which private foreign investors cannot buy as individual stocks. Besides, ETFs minimize individual China stock risks and are easier available as more and more Chinese companies are listing in Hong Kong or Shanghai, instead of or beside the US, where delisting is a threat.
Finally, investing in ETFs is generally easier as investors don’t have to research and follow individual stocks.
- CSI 300: It tracks 300 stocks with the largest market capitalization and liquidity among A Share companies in China.
- Dow Jones China Offshore 50: This index tracks the largest companies that primarily operate in mainland China but are traded on exchanges in Hong Kong or the US.
- FTSE China 30/18 Capped: It tracks Chinese companies with large and medium market capitalization that are listed on stock exchanges in China (A Shares) or outside of China (B Shares, H Shares, P Chips, Red Chips, S Chips, N Shares).
- FTSE China 50: This index tracks the 50 largest and most liquid Chinese companies listed on the Hong Kong Stock Exchange (H Shares, Red Chips and P Chips).
- FTSE China A-H 50: This index tracks the 50 largest Chinese A Shares listed on the Shanghai or Shenzhen stock exchanges.
- FTSE China A50: This index tracks the 50 largest Chinese A Shares listed on the Shanghai or Shenzhen stock exchanges in local currency.
- MSCI China: This index tracks the largest and most liquid Chinese stocks, listed on the Hong Kong stock exchange (H Shares, B Shares, Red Chips, P Chips).
- MSCI China A: This index tracks the largest and most liquid Chinese A Shares in local currency and is listed on the Shenzhen and/or Shanghai stock exchanges.
- MSCI China A Inclusion: This index tracks China A Shares and is also included in the MSCI Emerging Markets.
- MSCI China All Shares Stock Connect Select: This index tracks large and medium Chinese securities, including shares listed in Shanghai or Shenzhen (A Shares, B Shares), Hong Kong (H Shares, Red Chips, P Chips) as well as foreign listings.
- MSCI China H: This index tracks the largest and most liquid Chinese H Shares that are listed on the Hong Kong stock exchange.
- S&P China 500: This index tracks the 500 largest and most liquid Chinese companies (all share classes including A Shares and offshore listings).
In terms of individual stocks, foreign investors can invest in China through
- A Shares (only professional investors through the QFII program), B Shares, H Shares (Hong Kong listed Chinese companies)
- ADRs at US stock exchanges
- Unlisted Chinese mutual funds
collaborating with a broker who offers access to stock listed in Mainland China, Hong Kong, or other Chinese exchanges of interest. An example of a broker with good coverage and offers is Interactive Brokers.
Alternatively, foreign investors can take advantage of China’s potential by investing in foreign businesses that are expanding in the Middle Kingdom.
Investing in Foreign Companies That Grow Business in China
Some investors may prefer to stick with what they know while lifting the potential of the exciting Chinese growth market. In this scenario, foreign companies that massively expand in the Middle Kingdom may be an option.
Investors may be interested in the likes of Apple, Nike, Starbucks, Unilever, Apple, and Yum! Brands (Pizza Hut, KFC, Taco Bell) – all of which have seen a significant growth surge in China.
What to Consider before Investing in Chinese Stocks – The Takeaway
2022 is the year of the Tiger. The time to invest in Chinese stocks is now! With the New Silk Road, the largest infrastructure project of new history, China aims to become the most influential economy by 2050. The project also aids China’s global geopolitical power and influence.
As such, Chinese companies across a variety of sectors are expected to continue to grow and expand – an ideal investment opportunity. China’s large market size and 1.4 billion population present an opportunity in itself. Besides, the Middle Kingdom’s capacity to innovate and lead the global technology and digital sectors, make stocks of Chinese companies worthwhile to consider for investment. Finally, foreigners can diversify their investment portfolio with Chinese stocks.
At the same time, investors need to keep in mind the risks of investing in Chinese stocks, which are mainly arbitrary regulations by the Chinese government, insider trading, VIEs as an auxiliary construct for foreign investors, and politically-motivated US-delistings.
Foreigners who are interested in investing in Chinese stocks can do so, some of which may not be 100% in line with the Chinese law, but are tolerated. Overseas investors can invest in Chinese companies through ADRs, ETFs, mutual funds, A Shares (only professional investors through the QFII program), B Shares (also for private investors), H Shares (Hong Kong-listed Chinese companies), VIEs, by collaborating with Chinese businesses in mainland China, or by investing in overseas companies that expand in the Chinese market, e.g. Nike or Yum! Brands.
Do you want to find out more about the Chinese investment landscape, trending companies, and how to invest in Chinese stocks? Book your investment consultation today!
Disclaimer: The information in this article on investing in Chinese stocks has been researched to the best of our knowledge and is dated Q1/2022. Government regulations may change and investment tactics depend on your very specific personal situation and knowledge. Therefore, this article may NOT be construed as financial or investment advice.