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But the Chinese authorities have taken steps to make it easier for investors elsewhere to buy shares. Late last year, the Shanghai-Hong Kong Stock Connect opened, giving Hong Kong investors direct access to companies listed in Shanghai – and mainland China investors access to Hong Kong stocks.
Enhanced access to Chinese stocks has paved the way for new investment products. This includes China-focused Exchange Traded Funds (ETFs). ETFs are shares that give exposure to a basket of securities, which match a stock market index.
Several China ETFs were listed last year on the London Stock Exchange. With fund fact sheets showing juicy returns from Chinese indices, including performance of more than 50% over one year, it is hardly surprising that investor interest in China ETFs is high.
Deutsche Asset & Wealth Management is among the product providers to offer a China ETF listed in London. It says the European ETF market – established more than a decade ago – is regarded as a successful market, with more than double assets under management compared to the Asia-Pacific ETF market.
“Yet exposure to China held within the European ETF market remains minimal,” it says. Out of more than 1 300 Exchange Traded Products in Europe, currently only about one dozen are focused on China – and of these, most offer exposure to Hong Kong shares (H shares), not China mainland shares (A shares), notes Deutsche Bank.
“There is a huge potential for the A-Shares product to fill previously unmet gaps in investor demand,” it says.
The London-listed db X-trackers Harvest CSI300 Index UCITS ETF (ASHR) tracks China’s 300 largest listed companies in terms of market capitalisation and liquidity. Roughly one-third of CSI300 companies are in the financial services sector.
Risks, says Deutsche Bank, include that the China A-shares market is still restricted. “There is no assurance that additional quota can be obtained to satisfy subscription requests when the quota is reached,” it says, adding that it may suspend shares if it is unable to obtain sufficient quota.
There are also the usual risks associated with investing in foreign jurisdictions. “It should be noted that investments in emerging markets such as China have often been subject to strong fluctuations and therefore require financial expertise in the underlying market and a thorough assessment of the product’s risks,” says Deutsche Bank.
Another London-listed China ETF that is attracting attention is the CSOP Source FTSE China A50 UCITS ETF (CHNP). It also has high exposure to Chinese financial services companies, with more than 40% of the index allocated to banks.
The CSOP Source FTSE China A50 UCITS ETF has been highlighted as being among the priciest passive investments in Europe. It has a total expense ratio of more than 1%, though investors may not be particularly fussed about this because it has delivered double-digit returns.
Issuer Source CSOP Markets plc says the fund “achieves its performance by investing in the constituents of the Index”. “The Investment Manager purchases A shares on behalf of the Fund, using its Renminbi Qualified Foreign Institutional Investor (RQFII) quota. The shares are held in China by the Custodian, via its Hong Kong-based RQFII Custodian and China- based Sub-Custodian.”
Also worth considering for your portfolio if you are planning to access Chinese stocks through London are ETFS-E Fund MSCI China A GO UCITS and Lyxor MSCI China A UCITS, which are also heavily exposed to financial services companies.
Case for investing in China
There is much concern about China’s slowing economic growth. However, as the respected weekly magazine The Economist points out: this is off a big base.
“The International Monetary Fund has cut its forecast for China’s 2015 growth to 6.8%. That would be its weakest performance in 25 years. But when headlines appear about the 25-year low, as they inevitably will, it is worth remembering that the Chinese economy is more than 25-times bigger than it was in 1990,” it noted earlier this week.
There are risks associated with this slow-down. Said The New York Times: “The danger of growing too slowly, given the high levels of credit in some pockets of China’s economy, is that companies or even local-level governments could have trouble paying their debts and be pushed into default.”
Meanwhile, the Chinese government expects the country to avoid a hard landing. The Guardian reported comments by Prime Minister Li Keqiang to delegates at the World Economic Forum in Davos this month that China will ensure a prolonged period of sustainable future medium-to-fast growth.
London-listed China ETFs: performance snapshots
Performance snapshot – fund fact sheet: db X-trackers Harvest CSI300 Index UCITS
Performance snapshot – fund fact sheet: CSOP FTSE China A50 UCITS
Performance snapshot – fund fact sheet: ETFS-E Fund MSCI China A GO UCITS ETF
Performance snapshot – fund fact sheet: Lyxor MSCI China A UCITS ETF (CANAL)
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