With the exponential growth of the Chinese economy it is tempting to invest where much of the world’s growth has been occuring . Fortunately, it is becoming increasingly easy to invest in quality Chinese companies and assets without dealing with international stock brokers and exchanges. Each of these asset classes are easily purchased in the US denominated in US dollars.
ETF Stock Funds
There are ETF’s for every type of market you could want to invest in within China, but some of the easiest are Chinese Index funds. These types of funds attempt to match an underlying index such as the Shanghai composite index, or to match the performance of the broader Chinese market. Here is a list of some Chinese index funds:
FXI: iShares FTSE 25 Index Fund (ticker:FXI) is a fund that consists of 25 large, liquid Chinese companies. It attempts to match the performance of the FTSE China 25 Index. It is also one of the first Chinese index funds, is well known, and very liquid trading millions of shares per day.
HAO: Guggenheim China Small Cap Index (ticker: HAO) is a fund that tracks the underlying performance of Chinese small cap companies. The fund has historically paid out a dividend in December of each year that fluctuates based on the yield of the underlying stocks.
PGJ: Golden Dragon Halter USX China Fund (ticker:PGJ) is a fund that tracks the Halter USX China index. The ETF pays dividends usually in June, September, and December. The Halter USX China index consists of Chinese companies with market capitalizations that exceed $40 million dollars, and the companies must trade on the Nasdaq or NYSE.
ADR’s American Depository Receipts
Many Chinese companies are listed on the American exchanges through American Depository receipts or ADR’s. They trade just like any other stock on the US exchanges. The ADR’s represent ownership in a foreign company, just like a share of stock would represent a partial ownership stake in an underlying US business. Here are some examples of large Chinese companies traded on US exchanges:
Baidu, Inc: Baidu Inc. (ticker:BIDU) is a large Internet company located in Beijing, China. Baidu operates an online collaborative Chinese language encyclopedia, and a Web search engine. Baidu is listed on the Nasdaq 100 stock index.
Sinopec: Sinopec Shanghai Petrochemical Co. (ticker:SHI) is a manufacturer of plastics and resins, along with a refiner of petroleum, and an oil and gas explorer. It is one of the largest corporations in the world and is listed in the top 10 on Fortune’s Global 500 companies.
There are so many Chinese ADR’s that I will write a future article on some more large Chinese companies that trade on US exchanges.
Currency Funds are another great way to invest in the Chinese economy. China has been slowly allowing the Renminbi also known as the Yuan its currency to appreciate against the US dollar. One way to capitalize on currency fluctuations with strictly limited risk is by purchasing shares in a Chinese Currency Fund ETF/ETN. Investing in Forex is extremely risky and can lead to heavy losses that exceed your principal. By investing in a currency fund, you are limiting the risk to the money invested in the shares. With these funds you will also gain if there is currency appreciation, and occasionally through dividends that are interest earnings from the underlying currency. They are also a potential hedge against a falling dollar.
CYB: WisdomTree Dreyfus Chinese Yuan ETF (ticker:CYB) is the larger of the two Renminbi (Yuan) currency funds. It has heavy trading volume and has the potential to pay dividends. It last paid a dividend in December of 2008.
CNY: Market Vectors Chinese Renminbi (ticker:CNY) is another option to diversify into the Chinese Renminbi using convenient NYSE traded ETN shares. The average volume is significantly less the CYB fund.
Another way to invest directly in the Chinese Renminbi is through a deposit account. This operates like a money market account with currency exchangeable from US dollars to Renminbi. The deposit account has the potential to earn interest depending on market conditions. You will also experience appreciation if the Yuan appreciates against the dollar. Of course, this also works in reverse as well. A deposit account is strictly limited risk though. You cannot lose more than your investment amount. This is a great way to keep your account invested in a foreign currency like the Yuan and still be liquid into US dollars when needed. The only company I know of that offers this type of account is Everbank although there might be others.
None of these examples was intended as specific investment advice. They are simply examples of methods to invest in Chinese assets. All investments should be carefully considered using available documents on the SEC website, and by reading the company provided prospectuses. Consult your financial adviser if you have any additional questions about these types of investment products to see if they are right for your situation.