If there’s one thing that stock market investors hate it’s “uncertainty”. Yet that’s precisely the environment the Chinese government has created for investors by cracking down on its tech giants.
While the implications for the corporate environment in China, and competition more broadly, could be positive – as my colleague Say Boon pointed out in his column here – it has also led to massive declines in share prices.
Primarily, these declines have hit the popular Chinese technology stocks that we’re all familiar with; Tencent Holdings Ltd (SEHK: 700), Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), Meituan Dianping (SEHK: 3690) and JD.com Inc (NASDAQ: JD) (SEHK: 9618).
Of course, there are many more stocks, such as those in online education, that have nearly been wiped out.
However, does that make China “uninvestable”? I certainly don’t think so but it’s clear that the winners and losers will be increasingly defined over the coming years by government policy.
In that respect, here’s one low-cost China ETF that investors can buy if they don’t want exposure to China’s tech giants.
Buying into China’s onshore stock markets
While the regulatory action taken against the US listing of Chinese ride-sharing firm Didi Global Inc (NYSE: DIDI) spooked investors, it hasn’t really stopped foreign investors form putting money into China’s own stock markets – as I’ve previously highlighted here.
One of the best ways to gain access to China’s so called “A-shares” market is to buy the iShares MSCI China A ETF (NYSE: CNYA).
As the general trend is for investor money to migrate away from US-listed Chinese companies, the Shanghai and Shenzhen stock markets are set to benefit.
Beyond that, though, many of the most innovative companies in China are now listing their shares on the local stock markets in order to please regulators but also so that China’s own citizens can purchase shares.
With regards to the iShares China A ETF, it has a bevy of large-cap companies from various industries in its top 10 holdings (see below).
iShares MSCI China A ETF’s Top 10 holdings as of 27 September 2021
For example, the top holding is Kweichow Moutai Co Ltd (SHA: 600519) – the world’s largest liquor maker, by market cap.
There’s also one of the world’s largest battery producers for electric vehicles (EVs) in Contemporary Amperex Technology Co Ltd (SHE: 300750) and the world’s largest producer of advanced solar panels in LONGi Green Energy Technology Ltd (SHA: 601012) among the ETF’s top holdings.
Given many of these companies operate in sectors that are generally favoured by the government (such as clean energy and medical equipment producers), you can avoid the pitfalls of investing directly into China ETFs that tend to have huge exposure to the tech giants.
Lower cost and onside
What’s more, for cost-conscious investors, the expense ratio is favourable when compared to other China-focused ETFs.
The iShares China A ETF has an expense ratio of 0.6% versus, for example, an expense ratio of 0.7% for the Kraneshares CSI China Internet ETF (NYSE: KWEB).
While the iShares China A ETF was down only 1.32% so far in 2021 (up until 31 August), the Kraneshares China Internet ETF was down 33.6%.
Look outside tech
For investors who have a long-term horizon and are still bullish on China’s growth, the A-shares market has very many exciting companies.
However, due to the general difficulty of accessing the market directly, it tends to be better to either buy and ETF or fund to gain exposure.
With the iShares MSCI China A ETF, investors can get exposure to the longer-term tailwinds of clean energy and electrification in China without having to deal with the regulatory minefield that exists in the country’s tech ecosystem.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of LONGi Green Energy Technology Ltd.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.