How to Buy Chinese Stocks Now That U.S.-Listed Shares Have Become Risky
Owning U.S.-listed Chinese stocks is increasingly risky, thanks to regulatory uncertainties from both countries. Investors who are wary of such risks, but are still bullish on the Chinese economy and markets, can buy Chinese stocks listed on domestic exchanges instead.
Most Chinese stocks available in the U.S. are traded as American depositary receipts. In most cases, ADRs entitle investors to foreign shares being held on their behalf at a bank. But that is not the case for some Chinese ADRs, which represent only an interest in a shell company—often called a variable interest entity, or VIE—designed to get around China’s ban on foreign ownership in certain industries and assets. That means U.S. investors in these stocks technically have no ownership stake in the underlying company itself.
For years, both Beijing and American investors have benefited from this arrangement and glossed over its inherent risks. Chinese companies can raise capital in the U.S. without giving up operational control; U.S. investors can participate in China’s economic gains without the hassles of buying foreign stocks. Today, there are roughly 250 Chinese companies listed in the U.S., whose shares are worth more than $1.3 trillion after the recent selloff.
But tensions between the two countries have escalated. Beijing has been tightening its regulatory scrutiny of Chinese companies listed overseas, while Washington demands that U.S.-listed Chinese firms adhere to American auditing standards or face potential delisting. China has resisted handing over the financial information of its companies to U.S. regulators for years.
To hedge against these risks, many companies have filed secondary listings in Hong Kong, though not all companies can meet Hong Kong’s stricter listing standards.
Institutional investors have largely shifted their Chinese holdings out of ADRs and into stocks listed in Hong Kong, the so-called H-shares, or those listed in the Shanghai and Shenzhen exchanges, known as the A-shares. This could put further pressure on ADRs.
Retail investors concerned about Chinese ADRs’ regulatory risks should follow suit. A handful of big brokerage firms allow direct access to foreign markets.
To trade stocks listed in Hong Kong, Interactive Brokers Group charges a commission ranging from 0.015% to 0.05% per trade value—the higher the monthly volume, the cheaper the commission rate—plus other fees and clearing costs. There is no minimum investment threshold, but there is a floor charge of four to 12 Hong Kong dollars ($0.51 to $1.54) per order. Fidelity charges a flat fee of HK$250 ($32) for every order regardless of trade size; Vanguard charges a $50 processing fee. To trade online, Charles Schwab users need to open a separate global account, which charges HK$250 ($32) per order. They can also trade by phone for a higher commission. E*Trade and Robinhood users cannot trade on foreign exchanges.
U.S. investors will need Hong Kong dollars to purchase H-shares. They have two options, says Steve Sanders, executive vice president of marketing and product development at Interactive Brokers. Investors can convert the U.S. dollars in their accounts to Hong Kong dollars or buy Hong Kong stocks on margin, borrowing Hong Kong dollars from a brokerage firm with U.S. investments as collateral.
Interactive Brokers users can also invest in China’s A-shares through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, Sanders says. Both are cross-boundary channels that allow investors in each market to trade shares on the other market using local brokers and clearinghouses. Access to the mainland Chinese market is not available at Fidelity, Vanguard, or Schwab.
Investors who don’t want to directly own individual Chinese stocks can also access them through exchange-traded funds that mainly hold China A-shares or H-shares. The $2.1 billion Xtrackers Harvest CSI 300 China A-Shares ETF (ticker: ASHR), the $747 million KraneShares Bosera MSCI China A ETF (KBA), and the $649 million iShares MSCI China A (CNYA) all exclusively invest in stocks listed in Shanghai and Shenzhen. The $4.7 billion iShares China Large-Cap (FXI) holds Hong Kong–traded shares only; the $1.7 billion SPDR S&P China (GXC) offers a mixed bag of Chinese stocks, but with a heavy focus on H-shares.