Chinese Stocks

Business and Politics

The new economic power China? 1.42 billion people live in China, which is more than the combined population of Europe and the United States. The interesting thing about this is China's recent rise. The Chinese population is becoming wealthier every day, and the standard of living is increasing. This brings attractive future opportunities, as there are many listed companies in China that we can benefit from this development.

From an investor's perspective, it is interesting to note that the Chinese stock market has little correlation with the US stock market. This means that declines in the US market do not necessarily result in losses in China, and vice versa. A well-diversified portfolio can benefit from China as a potential anchor during times of crisis.

The power of the economy, but also its simultaneous dependence on politics, becomes clear in numbers. State-owned companies have a significant economic impact. More than 40% of the gross domestic product and 60% of the workers are accountable to state-owned companies. This is mainly due to influential banks and real estate companies that particularly benefit in rapidly growing emerging countries. But risks like the recent one with Evergrande can also arise.

Politics and the economy are inseparably connected in China. All companies and resources (real estate) are firmly in the hands of the government, either through equity participation or licenses.

With 1.42 billion people and a Gross Domestic Product of 14 trillion USD, China is the second largest economy in the world after America (21 trillion USD). More importantly, China is the fastest growing major economy in the world, with an average growth rate of approximately 9.5% since 1990. At least, if we can trust the Chinese figures.

The ADR model and investing for foreign investors

The Chinese stock market is not open to foreign investors. We can only indirectly invest in Chinese companies.

The Chinese stock market is being used by an increasing number of companies that finance their growth from other investors. About 400 to 500 companies from China, Taiwan, and Hong Kong choose to go public every year.

The Chinese population believes in their companies and therefore invests gladly. However, the success of these companies also proves them right. Companies like Alibaba, Tencent, JD, Meituan Dianping, and Co. are popular investments abroad as well. However, as an investor, one must be cautious!

A common model for this is a secondary listing in Hong Kong or the Cayman Islands. Alternatively, there is also the option to invest in an American Depositary Receipt (ADR). The investor does not hold direct shares in the respective company, as is the case in Germany, but instead a bank holds the shares of the Chinese company and issues certificates that can be traded on the US stock exchange. However, this incurs small fees for investors.

Regulation and the Communist Party in China

China is governed by a single party: the Communist Party. It has an interest in the success of China but also regulates the market to protect the country. In China, most large companies are fully or partially owned by the government. Where they are not involved in equity, the companies must acquire licenses.

Every car manufacturer, for example, requires numerous licenses from the government before it can actually start production of its vehicles. The banking, energy, and natural resources sectors are firmly under state control. And yet, in China, it is a positive sign if the government is involved. It is a sign of the seriousness of a company if it is even endorsed by the state.

However, as an investor, one must always be prepared for the government to assert its interests and regulate companies. This happened in 2021 with some internet giants and the education sector. Therefore, despite the opportunities undoubtedly provided by investing in China, one must not overlook the risks or the dependence of companies on the government.

The largest companies

Tencent and Alibaba. In particular, two companies should be mentioned. Tencent and Alibaba are the absolute giants in China. These two companies form the Chinese nervous system and are the most important companies in the country. Without these two companies, the Chinese economy would be practically paralyzed.

Alibaba is the largest internet retailer in China, a payment service provider (Alipay), and China's most important cloud infrastructure provider. Alibaba benefits primarily from the increasing prosperity of people in China. They use Alipay and make purchases through Alibaba's platforms such as Aliexpress and Alibaba.

Tencent, on the other hand, is more focused on communication. They operate the social media app WeChat, which functions similarly to WhatsApp and Instagram. Here, you can exchange messages with your friends. But WeChat is not a WhatsApp clone. WeChat is actually more like the central hub in every Chinese person's life. In the app, you can manage your money, make digital payments, buy train tickets, and book vacations.

The app is more like a smartphone operating system. Additionally, Tencent is active in gaming. They own several gaming studios and are involved in many gaming companies such as Activision Blizzard, Roblox, Epic Games, Discord, and Ubisoft. Both companies can offer attractive opportunities to benefit from China and its emerging economy.

The largest and most important trading venues

Hong Kong (HKEX), Shanghai (SSE), and Shenzhen (SZSE). In China, there are three independent stock exchanges where Chinese companies are listed: Hong Kong (HKEX), Shanghai (SSE), and Shenzhen (SZSE). The Chinese benchmark index CSI 300 (China Securities Index 300) represents the performance of the 300 largest companies listed on the two largest stock exchanges in mainland China: Shanghai and Shenzhen.

Index performance

The CSI 300 is the most important (index). The CSI 300 has been published by the China Securities Index Company since August 8, 2008, based on a base value of 1,000 index points on December 31, 2004. Currently, the index stands at over 4,600 points.

The index is calculated during the trading hours of the Shanghai and Shenzhen exchanges (Monday to Friday, 9:30 am to 11:30 am, 1:00 pm to 3:00 pm local time).

Trading hours in China

In China, the markets are open from 2:30 am to 8:00 am European time.