This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.
Whether you are interested in investing in China or not, I would encourage you to read some of the content written by Vivek Viswanathan (Head of Research at Rayliant Capital).
Since Rayliant is a large fund specialising in China his articles would of course their articles try to highlight the benefits of investing in China. Putting that aside, it will open your eyes to how important it is to understand the different classes of shares in China and why some ETFs probably does not give you the exposure in China that you expect. Below are some cliff notes which I think simplifies his messaging
What instruments do you use to invest in China?
For those who don't know, there are several classes of shares in China, with most local investors choosing A-shares and internationals choosing ADR/H-shares.
American Depositary Receipt (ADR) is a certificate issued by a US bank representing a specified number of shares in foreign stock. The certificates are denominated in US dollars and traded on US exchanges.
A-shares: The largest market. These are publicly listed Chinese companies which trade on either Shenzhen or Shanghai Exchanges in yuan renminbi (CNY).
H-shares: Second largest market. traded on Hong Kong's exchanges, are regulated by Chinese law and are freely tradable by anyone in Hong Kong dollar (HKD).
B-shares: Lease common, are domestically Listed Foreign Investment Shares. They list on the Shenzhen and Shanghai exchanges, and trade in foreign currencies.
Why does that matter?
In short - because they do not perform in the same way despite owning the same underlying company. Below is an index of the relative A to H share value:
The general rule of thumb, the index level means the following
When the index is <100, Chinese A-shares are cheaper, normally due to very negative sentiment among mainland investors.
When the index is well >100, it tends to be a sign of A-shares bubble. This may also correspond with regulatory risk.
As well as sentiment, offshore H-shares did not trade the same way when there is a change in the regulatory environment for offshore companies
ADRs and H-shares, which are strongly held offshore or in companies offshore, have been more heavily impacted by the recent regulatory crackdown in July
What else impacts the relationship between A & H shares
China’s domestic A-share market is heavily influenced by domestic retail investors in part due to the regulatory hurdles for institutions to buy these shares. This means
Anecdotally, A-shares are less efficient than the H-shares due to the lower amount of institutional capital in this market
China's government has ceased trading in A-shares more frequently, which in and of itself is a bit concerning
Most passive indices tell you which type of share they own and the performance will differ. As shown in the excerpt below; an investor in MSCI China H-shares would have underperformed the regular China index
Can I make money trading between the two stocks (H-shares & A-Shares)?
It is difficult for the average punter to trade the difference in the two types of shares because
Neither A shares nor H shares are convertible.
It is difficult to sell short individual stocks in the A-share market.
It’s not easy to freely convert the Chinese yuan to Hong Kong dollar or vice versa
Conclusion
Before you invest in China, either directly or through an ETF, it is at least worth understanding how the different share classes function. Whilst the underlying share may be similar, the price/return may differ based on a number of factors.
As a good rule of thumb; A-shares will probably be better insulated from regulatory risk but are more wildly impacted by retail investor sentiment.
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