There’s something happening in the United States in case you haven’t noticed. It has nothing to do with politics, or all the pearl-clutching over the celebrity scandal du jour. It crosses the boundaries of presidential tenures, and is perhaps most evident to those who live outside the country. America is losing its edge to China.

Maybe it’s China’s dramatic growth of output, maybe it’s their desire to clean up after themselves now, or maybe it’s their population migration into the mega cities. It’s probably a bit of all those things, but one thing for certain that contributes to their success is that Chinese people work their asses off. Their work ethic is second to none, and they aren’t constantly looking over their back fearful that they’ll be subject to trial by social media (your “social burden” as one of our local Chinese friends coined it). Maybe that’s because they’ve banned the world’s biggest distraction platform, Facebook, and all that extra time on their hands is being used to create value:

When it comes to working with the Chinese, they’re not as aggressively competitive as the Indians, or at least they don’t show it on the surface. Their calm collectivism makes things operate smoothly, and their strong work ethic and family values keep them localized and productive. It’s almost like America was in the 50s and 60s, with overheated housing markets and financial bubbles thrown in for good measure. Market timing questions aside, China is a very compelling investment thesis that needs to be on every investors’ radar. So how can your average retail investor who doesn’t live in China make “safe” investments in Chinese stocks? The safest investments of course are ETFs.

How to Invest in China

The Top-3 Chinese Exchange Traded Funds

The cookie cutter answer you’ll get from all financial advisers about “how to invest in China” is to simply buy an Exchange Traded Fund (ETF). Usually when it comes to picking a country ETF, we like to look at something called “assets under management” or AUM. We use AUM as a measure here because it shows where the institutional investors are putting their money. They have more resources than we do to analyze what vehicles offer the best risk-vs-reward, all things considered. Here is a look at the top-3 Chinese ETFs by AUM:

Symbol ETF Name Total Assets (billions) YTD Return Avg Volume Price FXI iShares China Large-Cap ETF 3.6 +33% 11603565 $ 45.85 MCHI iShares MSCI China ETF 2.6 +52% 1553153 $ 66.09 KWEB KraneShares CSI China Internet ETF 1.2 +69% 533297 $ 58.57

If we take a closer look at the first two ETFs, they’re dramatically different. The first ETF focuses on the biggest companies in China with 50 stocks in its portfolio. Here is a look at the top-10 stocks in FXI:

When it comes to weightings, the portfolio caps their index members at 9%, meaning that the returns of tech stocks like Alibaba and Tencent are “trimmed” as the companies grow. If we take a look at the second ETF, MCHI, we can see what it looks like when you don’t cap the weights of high-growth technology stocks:

Incredibly we see more than 30% of the portfolio is concentrated in just 2 Internet stocks; Alibaba and Tencent. While this second ETF focuses on the broader Chinese market with 152 constituents, it’s not giving us the sort of diversity that we would expect to see with an 3X increase in the number of stocks. The conclusion is pretty simple.

If you want an ETF that’s concentrated on financials, buy FXI. If you want an ETF that’s more concentrated in technology, buy MCHI. If you want an ETF that’s solely concentrated on technology, in particular Internet technology, buy KWEB. While buying an ETF is nice and safe, we’re more interested in taking a bit of risk and doing some stock picking. Haven’t you ever wondered what the ten biggest companies in China are?

The 10 Biggest Companies in China

This is where things start getting a bit tricky. We’ll spare you a lesson in financial concepts and make this real simple. Typically, you would just go to either of those ETFs we just talked about and take the top-10 index members. You would assume the list to be the same across both ETFs since they are market cap weighted, however the lists are actually different. Why is this? Because FXI actually caps their index members at 9% and MSCI uses “free-float adjusted market caps“. All we want to look at a simple list that just shows us the biggest companies in the world by market cap without complicating things. As it turns out, some MBAs over at PWC put such a list together of the top-100 companies in the world and it’s pretty interesting. Without further ado, the top-10 Chinese companies by market cap and their associated tickers:

Company Ticker Industry MC (billions) Yield Tencent Holdings (HKG:0700) Technology 488 0.15% Alibaba Group (NYSE:BABA) Consumer Services 474 N/A Industrial & Commercial Bank of China (HKG:1398) Financials 316 4.3% China Construction Bank (HKG:0939) Financials 238 4.6% Petrochina (NYSE:PTR) Oil & Gas 213 2.4% China Mobile (NYSE:CHL) Telecommunications 205 3.6% Ping An Insurance Group (HKG:2318) Financials 194 1.6% Bank of China (HKG:3988) Financials 178 4.4% Agricultural Bank of China (HKG:1288) Financials 175 5.4% China Life Insurance (HKG:2628) Financials 129 1.0% China Petroleum & Chemical (NYSE:SNP) Oil & Gas 104 5.6%

Astute readers will notice that we’ve listed 11 companies here. That’s because China Mobile is actually a Hong Kong company, but also the largest mobile company in the world by subscribers (873 million of them).

The tickers we’ve shown you above in bold are all cases where the Chinese company trades their shares on the U.S. market. Those are easy enough for anyone to trade. But what about the stocks which are not traded in the U.S. and consequently have strange numeric tickers? Those require a quick segue into the world’s safest “country”, Hong Kong.

Hong Kong vs. China

Hong Kong, the home of McDull the pig, milk tea, and Dog TV. Hong Kong people are not like those uncouth “mainlanders”. They’re much more civil than that. While most people probably think Hong Kong is part of China, it’s much more complicated than that, and is often described as “one country, two systems”. In Hong Kong there are no Internet restrictions, taxes are among the lowest in the world, and it is considered to be less corrupt than even the United States. Hong Kong has its own companies that you can invest in, one of those being the Stock Exchange of Hong Kong (SEHK) itself:

Out of the +2,000 stocks that trade on the SEHK, about half are Hong Kong companies and the other half are Chinese companies. Choosing to buy companies on the Hong Kong stock exchange is the best choice for U.S. investors who want to avoid taking on currency risk (the U.S. dollar is pegged to the Hong Kong dollar). With over 800 Chinese companies to choose from, you’ll at least be able to access all the big names we talked about and then some. Here’s how to do it.

How to Buy Stocks in China

There is one platform out there that we use religiously for currency transactions and stock trading. It’s the biggest brokerage firm in the United States, a publicly traded company called Interactive Brokers. We’ve used it to buy everything from weed ETFs to shares in ARCAM on the Swedish stock exchange, an investment that paid off handsomely. Now we can use Interactive Brokers to buy stocks directly on the Hong Kong Stock Exchange. Here are the steps you need to take:

Open an account with Interactive Brokers

Request access to the Hong Kong Stock exchange

Buy Hong Kong dollars (pegged to U.S. dollar so no currency risk)

Lookup stock using local numeric stock ticker

Buy stock (it will automatically use your HKD funds) and pay extra exchange transaction fees (reasonable)

Take your mistress purse shopping

That’s it. Now you just need to figure out which Chinese stocks you would like to buy. Unless you have boots on the ground, you probably shouldn’t try to stock pick because China is a completely different animal, engrish and all. While you’re probably better off just investing in one of the ETFs we mentioned earlier, be aware of the risks if you decide to start stock picking. While they’re working to stamp out corruption, China has a great deal of pitfalls that you may not have encountered before. Proceed with caution, gweilo.

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