How To Invest in Chinese Stocks From UK: Is It Worth It?

China is home to the second-largest economy on the planet and predictions suggest that it may become the largest in the coming decade. So, it’s no surprise that people want to invest in China’s stock market.

My guide will tell you how to invest in Chinese stocks from UK, including some of the companies you may want to keep an eye on, and some of the intricacies involved with being a foreign investor.

Also consider: Which Shares to Buy in 2024

The different types of Chinese share classes

Before you start thinking about investing in Chinese companies, it’s important to note that the Chinese government has placed strict regulatory rules around foreign investment in its companies.

There are different classes of shares in China which determine where they are traded and to who they are available.

A-shares

A-shares are domestic stocks that are traded on the Shanghai or Shenzhen Stock Exchanges.

Unfortunately, A-shares are typically only available to citizens of mainland China, with the exception of Qualified Foreign Institutional Investors.

The Qualified Foreign Institutional Investor (QIFI) program was introduced by the Chinese government in 2002, giving certain international investors a licence to invest directly in A-shares.

While a QIFI can typically invest in A-shares, this is for institutional investors only. As a result, it’s unlikely you’ll be able to invest directly in these shares on the country’s major stock exchanges.

B-shares

B-shares are also Chinese companies listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, though, unlike A-shares, they are typically listed in foreign currencies.

This makes them more available to foreign investors, though Chinese citizens may have difficulty purchasing B-shares due to currency issues.

Since access to the B-share market is more limited to Chinese citizens, shares for the same company may trade at a higher value compared to their A-share counterparts.

American Depository Receipts

American Depository Receipts (ADRs) are a certificate of purchase from a US bank that represents a specific number of shares.

Instead of purchasing Chinese shares directly from the market, you can instead purchase one of these ADRs. Since they represent a share that has been purchased on the Chinese markets, by purchasing one you are technically purchasing the shares they represent – in this case, for Chinese companies.

ADRs can be purchased on the Nasdaq or New York Stock Exchange (NYSE) much like normal shares. Better yet, they are purchased and pay out dividends in US dollars, meaning there may be less currency risk if you’re purchasing them from the UK.

However, you should keep in mind that you may still incur currency conversion fees from pounds to US dollars when you trade ADRs.

Also consider: The Best AIM Shares to Buy Now in 2022

H-shares

H-shares are mainland companies incorporated in China but listed on the Hong Kong Stock Exchange, or another foreign market.

While H-shares are still regulated by Chinese law, they are usually listed in Hong Kong dollars (HKD).

There are no restrictions on who can trade H-shares.

N-shares

N-shares are Chinese companies that are listed on either the NYSE, Nasdaq, or NYSE American.

Despite being incorporated outside of the mainland and traded in the US, a majority of a company’s revenues or assets must still be derived from mainland China to be classed as an N-share.

To make things even more complicated, an ADR of an H-share or red chip (see below) may be referred to as an N-share. Confused yet?

Red chips

This is where things start to differ slightly. A red chip stock is a company that is incorporated outside of mainland China but trades on the Hong Kong Stock Exchange.

Though they are traded on an external market, red chip companies are typically owned and controlled by the mainland Chinese state.

In fact, Investopedia states that to be classed as a red chip company, it must derive at least 55% of its revenue or assets from the Chinese government.

P chips

P chip shares, meanwhile, are companies that are incorporated outside China and are traded on the Hong Kong Stock Exchange. Unlike red chips, P chips are privately owned and separate from the Chinese government.

There are no restrictions on P chip companies for foreign investors, though the company has to be controlled and established by individuals in China.

How to invest in Chinese stocks from the UK

Open a trading account

Now that you know the different kinds of shares you can access, you need to decide on which provider you will open your trading account with.

Since purchasing Chinese shares is your goal, you should ensure that your desired provider offers access to the Chinese assets you’re able to buy.

Trading fees also play a part in which provider you decide to use. For example, some platforms may only require a flat fee, which could be ideal if you want to trade large amounts of shares.

Of course, some trading platforms may charge you a set percentage for every trade. With an account like this, you may want to avoid trading large volumes of shares, since you will be charged for every trade.

Make a deposit to your chosen account

Once you’ve opened an account, the next step is depositing money to into it.

This can usually be done by bank transfer, with your debit or credit card, and some platforms will allow you to do using Apple Pay or Google Pay, too.

Of course, you could deposit as much money as possible into your trading account, but you may want to consider only depositing the amount you need to make an investment.

This is because you are unlikely to earn interest from uninvested money in your trading account. With inflation rates so high currently, if you have money sitting in an account without it accruing any interest, it will likely lose some of its purchasing power in real terms.

Remember: never contribute money to your account that you need to live your lifestyle.

Decide how you want to invest

Now that you have money in your account, the next step is figuring out how you want to invest.

There are several ways to do so though, but which method will suit you best? Continue reading to find out everything you need to know before deciding how you want to invest.

Individual shares

As you may have guessed, one of the most common ways to purchase shares for a company is to do so directly.

You should take into consideration the above share classes when it comes to Chinese companies. Typically, you may be unable to purchase A-shares since they are usually withheld from foreign investors.

You can, however, still invest in A-shares through ADRs or funds. In fact, you may find it easier to invest in Chinese shares in general with a fund or ADRs since investing in the Chinese stock market can quickly become complicated.

It may also be worth looking into dual-listed shares, though you may be asking yourself: what exactly are dual-listed shares? Well, continue reading to find out what you need to know.

Find Chinese shares that are dual-listed on other markets

Dual-listing, simply put, is when a company is listed on two or more stock markets. For example, a share might be listed on both the Shanghai Stock Exchange in China and the Nasdaq in the US.

This means you can invest in a Chinese company listed in the US rather than China, ensuring you won’t be affected by the A-share classification that may exclude you from certain investments.

Another advantage of investing in dual-listed companies is that exchange rates between currencies are taken into account, meaning the prices on both markets should be the same.

This may reduce currency risk as you won’t have to convert your money into Chinese Yuan.

Some examples of dual-listed Chinese companies include:

• Alibaba Group
• JD.com
• NetEase
• Baidu

Through a fund

Instead of investing in a company directly, you can instead get exposure to Chinese companies through a fund.

A fund is a type of pooled investment that invests in a range of different companies.

When you invest in a fund, a fund manager will typically use your money, alongside other investors’ cash, to make investments on your behalf.

When the performance of a fund’s constituent companies is doing well, the value of the fund increases. This means you can speculate with funds by selling your shares when they are worth more than what you paid for them.

Or, if you would rather earn a regular income from your investments, you can sometimes rely on dividend payments from the fund.

You may find it far easier to invest in Chinese companies through a fund rather than purchasing the shares directly. This is because, while some funds will invest in Chinese companies, the funds themselves are usually listed on UK or US stock markets.

This means the fund acts much like a middleman, reducing some of the risk and complications involved with investing directly in Chinese companies. For example, you are far less likely to face currency risk when you invest in a fund that is listed on domestic markets.

It’s worth keeping in mind that you may face higher costs and charges when you invest in a fund. This is because, since funds are typically overseen by managers, increased fees are there to compensate them.

Derivative trading

One alternative to buying stocks directly is derivative trading.

Simply put, derivative trading is when you “bet” on how a company will perform. Typically, there are two main ways of trading derivatives: spread bets and “contracts for difference” (CFDs).

Spread betting involves staking money on future movements of shares. For example, if you were to stake £100 for every upward point of movement for the Chinese company Alibaba, and it did indeed increase by two points, then you would have made £200.

Of course, this also works conversely – if Alibaba were to drop in value by two points, you would lose £200.

With CFDs, you instead receive the difference in price from when you opened the position.

To give an example, if you predicted Alibaba would rise in value, you could purchase 20 CFDs. If the share price then increased by 20p, you would earn £400. Of course, if the value fell by 20p, you would lose £400.

If you want to try your hand at trading derivatives, you should keep in mind that more than half of retail investor accounts lose money when trading derivatives, so you should do adequate research before investing this way.

If you would like to read more about trading derivatives before you try it, then please read my guide on spread betting, or my article on CFDs to find out everything you need to know.

Decide which company to invest in

When you’ve found a provider that suits you and have opened your trading account, the next step is to decide which Chinese company you want to invest in.

Depending on your investment strategy, there are many different companies for you to choose from.

Keep reading to find out more about some of the biggest Chinese companies later on in my guide.

Purchase the shares

Now, you’re finally ready to make the purchase. All you need to do is search for the share, fund, or ADR you want to purchase on your chosen trading platform, and make the order.

What are some of the largest companies in the Chinese markets?

Despite being thought of as an emerging market, China has the world’s second-largest economy. In fact, according to data provider CEIC, Chinese stock markets had a total market capitalisation of nearly $12 billion in May 2022.

So, when it comes to choosing a company to invest in, you have lots to choose from.

Of course, you don’t have to invest in individual companies – you could, for example, invest in an index that tracks some of the largest companies on the Chinese market, such as the MSCI China Index or the MSCI Emerging Markets Index.

If you would rather invest in individual companies though, you may be asking yourself: what are some of the most popular Chinese companies to invest in? Well, continue reading my guide to discover some Chinese shares you may want to consider purchasing.

Tencent

Tencent is a Chinese technology company which is listed on the Hong Kong Stock Exchange, and is best known for managing WeChat and QQ, two of the largest messaging services in China.

Besides messaging services, Tencent also owns subsidiaries linked to the huge video games Clash of Clans and League of Legends.

JD.com

JD.com is a huge e-commerce company based in China that stores and distributes products internally.

The company, which is dual-listed on the Nasdaq, has over 800 warehouses across China and serves more than 30 major cities.

Bank of China

The Bank of China is one of the largest financial institutions, not just in China, but in the world.

It is the second-largest company in terms of market capitalisation available in Chinese markets, and although it is primarily listed on the Shanghai Stock Exchange, it is also dual-listed on the Hong Kong Stock Exchange.

Alibaba

There is a chance you’ve heard of Alibaba before. Almost a Chinese equivalent of Amazon, Alibaba is an e-commerce distribution website that acts as a middleman in the sale of goods.

The company is dual-listed on both the NYSE and the Hong Kong Stock Exchange, so you can choose to invest in Alibaba in either USD or HKD.

Additional risks involved with Chinese investments

Of course, before investing in emerging markets in general from the UK, you should be aware of some additional risks involved with Chinese investments.

Regulatory rules differ from the UK

To begin with, China is still a communist country on paper. Even though the Chinese government has adopted free-market principles, the rules surrounding publicly-owned companies differ from those in the UK.

According to Investopedia, insider trading also poses a risk when you invest in Chinese markets. Since accounting standards and financial regulations differ from those present in the UK and US, insider trading may be more common in Chinese markets and could hamper the value of your investment.

Currency risk

You should also consider currency risk when you invest in China stocks. Simply put, this is when you potentially lose money when there is a stark difference in price between two currencies.

This is another benefit of investing in Chinese companies through funds – they are typically listed on UK or US markets or use forex futures to hedge this risk.

How To Invest in Chinese Stocks From UK FAQs

Please note

CFDs are complex financial instruments and more than half of retail investors lose money when trading CFDs. Please make sure that you know these risks before you start trading and that you’re aware there’s a high chance of losing money rapidly on your investment.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.