Morningstar's Guide to Investing in Chinese Stocks via ETFs

As China's prominence in global stock markets rises, so does the need to understand the intricacies of investing in Chinese stocks

Jackie Choy, CFA 19 August, 2013 | 7:00AM

The Chinese economy and equity market continue to demonstrate their importance and impact on the global economy and markets. Our global exchange-traded fund research team has just published "Morningstar's Guide to Investing in Chinese Equities via ETFs" to help investors better understand the nuances of investing in Chinese stocks. The report also gives a comprehensive overview of the global menu of ETFs offering exposure to Chinese equities and highlights key considerations that investors should take into account before making an investment decision.

"As China continues to open its financial markets to the world, Chinese equities are moving towards an increasingly important position on the global investment stage. We hope this guide will provide a useful road map for investors trying to better understand how they can use ETFs to gain access to the Chinese stock market as well as the associated risks," said Ben Johnson, director of Global Passive Fund Research at Morningstar.

Here is the executive summary from the report:

  • China's representation in major equity indices ranges from 2% in the MSCI ACWI Index to 18% in the MSCI Emerging Markets Index. In June 2013, MSCI announced it had initiated a review of China A-Shares for potential inclusion in the MSCI Emerging Markets Index. If China A-Shares were hypothetically included, China would make up close to 30% of the MSCI Emerging Markets Index. However, in our view, this is unlikely to transpire in the near-term as there are still hurdles to inclusion, namely (according to MSCI): "1) capital mobility, 2) the lack of alignment of the size of individual Qualified Foreign Institutional Investor (QFII) quota and the size and investment process of investors, and 3) the lack of clarity on taxation rules."
  • The further opening up of China's capital market and the internationalization of the RMB are a trend that investors and ETF providers should watch closely. In particular, in July 2013, the China Securities Regulatory Commission (CSRC) announced it would expand the RMB Qualified Foreign Institutional Investor (RQFII) scheme, which allows qualified institutional investors to invest directly in Chinese securities, to London and Singapore. We expect that this will lead to the launch of RQFII ETFs in additional countries outside of Hong Kong.
  • As of today, there are over 50 country, sector and strategy indices tracked by approximately 100 Chinese equity ETFs listed on various exchanges outside China, with a combined $28 billion in assets under management (AUM).
  • Chinese companies listed in different markets are classified under different share types/names. They could be classified as onshore or offshore Chinese equities; and then further subdivided into A-Shares, B-Shares, H-Shares, Red Chips and P Chips, etc. It is important that investors make sense of this veritable alphabet soup to truly understand their economic exposure. 
  • Indices tracking Chinese equities are constructed quite differently from one another and as such have very different historical risk/return profiles. These distinctions are particularly pronounced, between onshore and offshore Chinese equity indices. These differences are especially evident amongst the crop of offshore indices. Hence it is crucial that investors closely scrutinise these indices to ensure that they choose the one that best matches their investment thesis.
  • It is important that investors assess and understand the risks associated with these ETFs at all times. These risks include ETF-specific structural risks, market risks and currency risks as well as A-Share specific considerations regarding taxation and the potential for quota-related premiums and discounts. At the end of the report, we include 10 frequently asked questions that we believe every investor should be able to answer before investing in Chinese equity ETFs.  


The complete guide is available here

Click here to see LSE-listed ETFs that offer exposure to Chinese equities.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jackie Choy, CFA  is an ETF strategist at Morningstar, based in Hong Kong.