Accessing the Middle Kingdom
The Chinese New Year is upon us and we now move into the Year of the Ox. According to Chinese astrology, this will bring prosperity, success in business and career advancement. Although the Ox is serious and not naturally sociable, which could signify success in the COVID environment.
There has been growing interest in investing in China over the past few years and the number of ETFs covering China has also been increasing.
China is currently the second largest economy in the world and, with its current growth trajectory, is on track to be the largest by 20281. However, this is a growing market which many investors have been unable to tap into in the past due to restrictions imposed on foreign investment. But the barriers are slowly being removed.For an institution to trade shares in China there are two main routes:
- Stock Connect: a collaboration between the Hong Kong, Shanghai and Shenzhen Stock exchanges allowing a limited number of shares from mainland China to be traded outside of China.
- RQFII: the Renminbi Qualified Foreign Institutional Investor (RQFII) program is a policy initiative that allows foreign investors who hold the RQFII quota to invest directly in mainland China's Shanghai and Shenzhen exchanges.
There are a select number of Chinese stocks available to buy and sell via Stock Connect. However, holding an RQFII grants access to all Chinese companies trading on the local exchanges, which collectively form the second largest stock market in the world2.
This is an important distinction. Many actively managed funds and ETFs which focus on China and are available to Australian investors are merely accessing the limited companies available on Stock Connect. It therefore pays to assess your investments and fund manager to ensure you are accessing the full investment opportunity on offer in China.
VanEck is one of the few fund managers in Australia that has an RQFII and can trade shares within the local Chinese markets, whilst also having access to Stock Connect.
Trading China ETFs
China has a number of holidays during the year that close the Chinese stock exchanges for a week. The two main holidays are Chinese New Year in February and the National Week holidays in October. Although the market is closed during these times, Chinese ETFs trading on ASX still provide the ability to buy and sell during these periods.
The ETFs are able to continue to operate as the market maker providing quotes on the exchange holds inventory in the ETF which they then use to provide the bid and ask on screen.1. https://www.theguardian.com/world/2020/dec/26/china-to-overtake-us-as-worlds-biggest-economy-by-2028-report-predicts