China is one of the world's most important emerging markets. With its double-digit growth and booming economy, the country is poised to overtake the United States as the world's largest economy by 2027, according to Jim O'Neill, the Goldman Sachs analyst that coined the acronym BRICs (which stands for emerging markets Brazil, Russia, India and China).
International investors have a number of different ways to gain exposure to the Chinese marketplace, but exchange-traded funds (ETFs) offer one of the easiest methods. Since these funds are traded on U.S. exchanges, Chinese ETFs are considered easier to trade than domestic securities that have a number of restrictions for outsiders.
Top 10 Most Popular Chinese ETFs
There are many different ways that international investors can gain exposure to Chinese stocks via ETFs. While broad market ETFs offer exposure to the entire Chinese economy, investors looking for more targeted exposure can trade both industry-specific and asset class-specific funds offered by a number of different companies.
The three most popular broad market Chinese ETFs are:
- iShares FTSE/Xinhua China 25 Index Fund (NYSE: FXI)
- iShares MSCI Hong Kong Index Fund (NYSE: EWH)
- SPDR S&P China ETF (NYSE: GXC)
Investors looking for targeted exposure by industry may want to consider Global X's line of Chinese ETFs:
- Global X China Consumer ETF (NYSE: CHIQ)
- Global X China Energy ETF (NYSE: CHIE)
- Global X China Financials ETF (NYSE: CHIX)
- Global X China Industrials ETF (NYSE: CHII)
- Global X China Materials ETF (NYSE: CHIM)
- Global X China Technology ETF (NYSE: CHIB)
Investors looking for targeted exposure by asset class may want to consider the following Chinese ETFs:
- MSCI China Small Cap Index Fund (NYSE: ECNS)
- Guggenheim/AlphaShares China Small Cap Index ETF (NYSE: HAO)
The Benefits and Risks of Chinese ETFs
Investing in Chinese ETFs may give international investors exposure to one of the largest economies in the world, but there are many risks involved that make it different from investing in any average U.S. company or ETF. It's important that investors carefully consider these risks in order to avoid misallocating their portfolio or taking undue risk.
The benefits of investing in Chinese ETFs include:
- Early Stages of Economic Development. China is in the early stages of its economic development and could become a solid long-term investment if it can successfully transition from an export-driven economy to a domestic services economy like the United States or Canada.
- Low Debt & Solid Accounting. China has a debt-to-GDP ratio of just 33.8% as of the year 2010 with a nice trade surplus thanks to its export-driven economy. This has helped it avoid some of the debt problems faced by the European Union during the 2010 and 2011 sovereign debt crisis, for example.
- Strong Economic Growth. China has taken a lot of heat for its state-controlled economic policies, but so far, its economy has done remarkably well. In fact, its economy has grown at a rate of more than 10% over the past 30 years.
The risks of investing in Chinese ETFs include:
- Government Intervention. The Chinese government has shutdown or imposed harsh new rules on many companies with very little notice. For instance, the country's mining sector came under pressure in 2010, which forced many smaller mining firms to shutdown or be acquired at very cheap prices.
- Opaque Business Structures. Many Chinese companies have complex business structures that are risky and difficult to understand. For example, companies operating in restricted industries (where foreign investment is carefully watched) have used VIEs (variable interest entities) that have come under close government scrutiny.
- Accounting Fraud. Accounting fraud may happen in the United States and other countries, but it has recently become a major problem for some Chinese companies. For instance, the fall of the high-profile Sino-Forest Corporation due to fraud allegations hurt even experienced investors that had put money into the stock.