Investing in China offers the opportunity to find highly attractive companies growing in one of the world’s fastest growing economies. While there is the potential to find hidden gems and reap the rewards, investing in China also comes with a number of drawbacks that investors should be aware of.
How to invest in China: A step-by-step guide
Investing in China is in many ways similar to investing in U.S. stocks: You need to find a broker, research potential investments like stocks and exchange-traded funds (ETFs), and raise capital to invest. But China also comes with some unique challenges and caveats.
1. Choose an online broker
Getting started with an online stock broker takes just minutes. Brokers allow you to buy and sell stocks and other investments, and they also hold those investments on your behalf. Brokers collect any dividends or interest paid on your investments. To open an account, you will need to provide basic personal and financial information, connect to a bank account and transfer money.
Most brokers don’t charge commissions for trading stocks or ETFs, and many don’t charge commissions for the thousands of mutual funds out there. Most brokers don’t have minimum account sizes, so you can literally get started with nothing.
When deciding which broker is right for you, consider what features you need. The best brokers for beginners are the best choice if you want to trade Chinese stocks listed on American exchanges. These brokers are also useful if you want to buy exchange-traded funds (ETFs) that hold Chinese stocks.
But if you want to buy Chinese stocks directly on a Chinese exchange, consider using moomoo. This broker allows you to trade Hong Kong stocks and China A-shares, both of which are rare on American exchanges, and of course, American stocks and funds, among many other benefits.
Note: Many Chinese stocks listed on American exchanges are usually in a legal form called American Depositary Receipts (ADRs) or American Depositary Shares (ADSs). ADRs represent foreign shares held by US institutions, which issue ADRs to simplify the process of owning and trading shares for US investors. ADSs are the actual shares of a foreign company held by a depository institution, which can be packaged into ADRs. Holders of ADRs typically have the ability to vote in corporate elections and receive dividends.
2. Stock and fund research and analysis
If you plan to buy individual stocks, you will need to research them to determine which ones are good investments. This process can require a lot of work if you want to make a profit.
You need to research the company, its products, its competitive position, the industry, and the company’s financials — that means reading the Securities and Exchange Commission (SEC) filings — and you can also use the best strategies from the experts, including doing your own research, like going to local stores to find out how the company’s products are rated.
Chinese stocks listed on major U.S. exchanges are also required to file quarterly and annual reports with the SEC, and those filings are done in English — though you may not have that luxury if you trade your shares directly on a Chinese exchange.
Chinese stocks have some unusual risks that are important to understand. For example, many Chinese companies traded on U.S. exchanges have complex ownership structures using so-called variable interest entities (VIEs). This structure poses significant risks for investors (more on this below). As of January 2024, there were 166 Chinese companies using this structure on major U.S. exchanges, accounting for 91% of the market capitalization of Chinese companies on major exchanges, according to the U.S.-China Economic and Security Review Commission.
If you’re looking to trade funds, you can screen for high-performing ETFs using your broker’s site or various online screeners. You should look for solid performance over time and low expense ratios so you don’t pay hefty annual fees to the fund company.
After researching the stock, you can decide whether it’s an attractive investment. Once you find a stock or fund that meets your buying criteria, note down its ticker symbol (usually a three or four letter code).
3. Calculate your investment
It’s time to decide how much you want to invest. If you’re just starting out trading, it’s important to know that you don’t need a lot of capital. Many brokers allow you to buy fractional shares, and you can often buy for as little as $5 per share, regardless of the price. The best brokers for fractional shares will let you buy thousands of stocks or funds with pennies.
But regardless of how much you buy now, by continuing to invest regularly, you can grow your wealth over time. So calculate how much you can invest now and how much you can invest in the long term. By investing more over a longer period, you can take advantage of the power of dollar-cost averaging to spread your purchases over time and reduce risk.
If you have more than a few thousand dollars to invest, consider investing in multiple stocks. Doing so can help diversify your investment and reduce risk. However, funds typically hold dozens of investments, which provides some natural diversification and means that if you’re happy with one fund, you may not need to buy additional funds.
4. Make a deal
Once you’ve chosen your stock or fund and have funds in your brokerage account, it’s time to start trading. Enter your order with your broker using a ticker symbol. You can specify what type of order you want to place: a market order or a limit order.
- Market Order: This order allows you to trade shares at the best price available at the time you submit your order, so you do not have complete control over the buy or sell price.
- Limit Order: This order allows you to specify a price and the trade can only occur at or below that price. If the specified price is not available, the trade will not be executed.
If you’re trading just a few shares of a stock, or for larger stocks that trade millions of shares a day, a market order may be sufficient. Limit orders are a better choice for smaller stocks, or if you’re placing orders for more than a few hundred shares. In other words, if you think your purchase or sale of a stock will cause a large change in the stock price, use a limit order.
Once your purchase order is executed and settled, the shares become your property.
5. Track your inventory
Once you have purchased the stock, your journey has only just begun. You should continue to follow the company, looking at its quarterly and annual earnings while also tracking industry trends. As the company’s performance improves, you can increase your holdings. Then, as your expertise improves, you can add more stocks and funds to your portfolio.
Stock prices may fall for a variety of reasons, but that’s just part of investing. It may or may not be a good time to buy more shares in that company. If you’ve been tracking the company’s performance, that knowledge can help you decide whether it’s time to buy more or sell.
If you don’t want to go through the hassle required to invest in individual stocks, consider buying a fund that invests in Chinese stocks (more on that below). Index funds may hold dozens of stocks, and returns are determined by the weighted average performance of the entire portfolio. You get the benefits of diversification and don’t have to do all the research required for individual stocks.
Here are some of the best index funds in America.
Top Chinese stocks traded on major US stock exchanges
Below is a list of Chinese companies (in order of market capitalization) traded on major US exchanges, excluding companies traded on the Pink Sheets.
| Company Name (Ticker) | Market capitalization |
|---|---|
| PDD Holdings (PDD) | $199.6 billion |
| Alibaba Group (BABA) | $189.9 billion |
| NetEase (NTES) | $60.7 billion |
| JD.com (JD) | $45.3 billion |
| Baidu (BIDU) | $33.6 billion |
| Trip.com Group (TCOM) | $33.6 billion |
| Tencent Music Entertainment (TME) | $24.5 billion |
| Lee Auto (LI) | $21.8 billion |
| KE Holdings (BEKE) | $19.3 billion |
| ZTO Express (ZTO) | $19 billion |
Source: Yahoo Finance, as of June 7, 2024
The list does not include large Chinese companies that are not traded on a major exchange, such as Tencent Holdings (TCEHY), which has a market capitalization of $444 billion.It also does not include YUM China (YUMC), which was spun off from YUM Brands in 2016. Although the company has a China focus, it is essentially a U.S. company operating in China.
If you don’t want to invest in individual stocks, you could also consider buying ETFs, which offer diversified exposure to China and lower overall risk compared to single stocks.
The largest China-focused ETF
The list below includes the top five China-focused ETFs (by assets under management) traded in the U.S., excluding leveraged funds.
| Fund (Ticker) | Assets under management | Expense ratio |
|---|---|---|
| CraneShares CSI China Internet ETF (KWEB) | $5.9 billion | 0.69% |
| iShares MSCI China ETF (MCHI) | $5.7 billion | 0.59% |
| iShares China Large Cap ETF (FXI) | $4.8 billion | 0.74% |
| Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) | $2 billion | 0.65% |
| Invesco China Technology ETF (CQQQ) | $667 million | 0.65% |
Source: ETFDB.com, as of June 7, 2024
These funds offer a thematically diverse range of Chinese stocks: For example, the KraneShares CSI China Internet ETF focuses on web-related companies, while the iShares China Large-Cap ETF holds some of China’s largest companies.
These funds aren’t particularly large, and their expense ratios are a bit higher than your average index fund, but still within reason.
The risks of investing in China
Investing in Chinese stocks involves significant risks, so investors should be aware of the following:
- Government Intervention: The threat of government intervention in business is real, and governments and regulators may tell successful companies that they need to change the way they do business or face significant fines — they may even force companies to pay special lump-sum taxes or other penalties.
- Unclear ownership structure: Investors in Chinese companies should pay attention to the ownership structure of the companies, especially what are called variable interest entities. Because Chinese regulations may prohibit direct ownership of various companies, VIEs allow a company to receive economic benefits from a Chinese company without actually owning any shares in that company. VIEs are typically registered overseas, often in the Cayman Islands, and the entity trading in the U.S. has no direct interest in the Chinese company and only owns the overseas entity. Investors should be careful to understand exactly what they own, because what they own may not be as solid as they think it is.
- Geopolitical: Geopolitical concerns, such as the possibility of China taking control of Taiwan and the global reaction to that event, could be significant.
- Accounting Transparency: Accounting regulations may not be as transparent as U.S. investors are accustomed to. For example, the Chinese government has banned its auditors from complying with U.S. regulations on audit inspections for nearly a decade until 2022, according to the U.S.-China Economic and Security Review Commission.
- Currency Risk: Investing in a company that earns its profits primarily in another currency exposes investors to currency risk: an unfavorable currency movement could significantly reduce the company’s profitability in dollar terms and potentially its share price.
Of course, these are just some of the risks specific to China, and like any other investment, investors need to consider a range of other risks, including a company’s competitiveness, financial strength, and management.
Conclusion
China offers the potential to be an attractive investment destination, but U.S. investors should be cautious about the risks associated with investing in Chinese stocks. These risks are significant and could affect even investments with fundamentally strong businesses, solid growth and solid financials.
Editorial Disclaimer: All investors are advised to conduct their own independent research into any investment strategy before making any investment decision, and please note that past performance of any investment product is no guarantee of future price appreciation.
