Tap Into China's Core: Two ETFs for Domestic Stock Market Access

Know what you're buying when it comes to China

When it comes to investing in Chinese equities through ETFs, many of the most liquid and prominent ones follow benchmarks like the FTSE China 50 Index, featuring familiar names such as Alibaba, Meituan, Tencent, JD.com, Xiaomi, Ping An, Bank of China, and BYD.

These holdings, however, represent only a portion of the Chinese market accessible to foreign investors. They are known as H-Shares—mainland Chinese companies listed on the Hong Kong Exchange and denominated in Hong Kong dollars (HKD).

These shares are accessible to international investors without restrictions and are tracked by indexes like the FTSE China 50 and the Hang Seng China Enterprises Index (HSCEI).

However, the true breadth of the Chinese stock market is more obscured. Beyond H-Shares, there exist A-Shares, which are traded on the Shenzhen and Shanghai Stock Exchanges, and are priced in Chinese yuan (CNY).

These shares are typically reserved for Chinese citizens, making them challenging for most international investors to access directly. That being said, foreign institutional investors can access them through approved quotas that have expanded over recent years.

Key indexes such as the CSI 300 and the FTSE China A50 track the performance of these A-shares. In Shanghai, there are 1,691 A-listed companies with a total market value of $6.572 trillion, while Shenzhen hosts 2,834 stocks valued at $4.599 trillion.

Out of the 300 companies in the CSI 300 index, 79 are dual-listed in Hong Kong. These dual-listed H-shares account for about 30.7% of the total market cap within the index, offering an essential bridge between the Chinese mainland and Hong Kong stock markets.

The main takeaway? If you're restricted to H-Shares, your exposure to the Chinese market is inherently incomplete.

The CSI 300 index is widely recognized as the primary benchmark for assessing the performance of China's A-share market. It includes the largest and most liquid A-shares, making it a crucial indicator of market dynamics.

Due to strong fiscal and monetary support from the government, domestic listed stocks often receive a positive impact, enhancing investor sentiment and stability in the market. The so-called "national team," or government-led stock purchases, further bolster this effect by providing direct support to the market.

Consequently, the CSI 300 index is ideally positioned to capture the full impact of positive developments within the domestic Chinese market. Its composition of highly liquid stocks means that it stands to benefit significantly from any fiscal stimulus. This advantage makes the CSI 300 a more reliable measure for investors seeking to gauge the trends of the Chinese stock market.

How to gain exposure to A-Shares

Some ETF providers have recognized the limitations of traditional H-Shares-based ETFs and have stepped up to offer more direct access to A-Shares, enabling investors to tap into a broader spectrum of a fast-growing portion of the Chinese stock market.

One notable example is the Xtrackers Harvest CSI 300 China A-Shares ETF

. Launched in 2013, ASHR was the first ETF to track A-Shares. It is very liquid, with the ETF Central screener showing a 30-day average daily volume of 26.6 million shares traded, along with a minimal 0.036% bid-ask spread.

This passively managed ETF is benchmarked to the aforementioned CSI 300 Index, covering the top 300 stocks by market cap listed on the mainland Chinese exchanges. As noted earlier, this is the main onshore equity benchmark to watch.

ASHR - Xtrackers Harvest CSI 300 China A-Shares ETF

With an expense ratio of 0.65%, ASHR includes significant Chinese companies that are absent in H-Shares-focused ETFs, such as Kweichow Moutai, a luxury liquor producer known for its high-quality baijiu, and China Yangtze Power Co., a major player in the electricity and energy sector.

Valuations come into play too, as multiple metrics suggest that the Chinese market, represented by ASHR and the CSI 300 index, trades at a relative bargain compared to US and EAFE markets.

While ASHR offers a market-cap-weighted approach—where larger stocks have greater representation—investors looking for exposure to smaller and potentially faster-growing A-shares might consider the Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF

.

ASHS - Xtrackers Harvest CSI 500 China A-Shares
Small Cap ETF

It carries the same expense ratio of 0.65% but focuses on the 500 largest, most liquid small-cap stocks in the China A-Shares market. The ETF offers a significant tilt towards the technology sector, contrasting ASHR's heavier emphasis on financials.

When it comes to China, index selection matters

When considering investing in ETFs, especially those that provide exposure to foreign markets like China, it's crucial to understand exactly what you're buying.

While ETFs tracking H-Shares are popular due to their liquidity and familiarity with stocks like Alibaba and Tencent, they might not give you the full picture of China's dynamic market.

Examining these ETFs and the indices they track closer reveals that you could be missing out on significant opportunities offered by A-Shares. These shares, only accessible through specific channels like ASHR and ASHS, represent a more comprehensive slice of the Chinese economy.

These ETFs include companies that might not be available through H-Shares, offering greater diversification and a chance to tap into China's domestic growth.

So, when building your investment portfolio, always take a closer look under the hood. Examine the indices that your ETFs track and consider whether they align with your investment goals, especially in complex markets like China.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.