Chinese stocks have been very volatile in 2021. Companies from the world’s most populous country have been impacted by geopolitical tensions between the U.S. and China. How can you buy Chinese stocks in the U.S. and is it a good time to buy the stocks?
China has cracked down on its tech companies. It has especially gone after food delivery companies, EdTech companies, ride-hailing companies, and fintech companies. There has been a sharp sell-off in Chinese names and they have lost billions of dollars of market cap over the last month.
How to buy Chinese stocks
If you are based in the U.S. and want to buy Chinese stocks, you can do so through the following means.
- Buy ADRs of Chinese companies
- Invest in GDRs of Chinese companies
- Buy stocks of Chinese companies listed on the Hong Kong exchange
- Buy OTC traded Chinese stocks
- Invest in China-traded stocks
You can always look at ETFs and mutual funds that invest in Chinese stocks. This would give you diversified exposure and would be less time-consuming. If you are looking to buy specific stocks, then you can do so through any of the above-listed means.
Buying ADR could be the best way to invest in Chinese stocks. A lot of well-known Chinese stocks like Alibaba, JD.com, and Baidu trade on U.S. exchanges. While there have been scandals like Luckin Coffee and debacles like DiDi, investing in Chinese ADRs would still be the safest bet for U.S. investors. ADRs trade like stocks and all brokers will let you buy them.
How to invest in OTC and foreign-traded Chinese stocks
You can also opt for OTC-traded Chinese stocks like Tencent and BYD. Even Berkshire Hathaway is an investor in BYD. The regulatory scrutiny is lower for OTC-traded securities and the volumes can be lower at times. Most U.S. brokers will let you trade in OTC stocks.
A lot of Chinese companies are opting for a Hong Kong listing amid the U.S.-China standoff. You can also buy Chinese stocks listed on Chinese and other global markets. Some of the brokers let you trade in these. However, only sophisticated investors should opt for these stocks since the risk and complicities are higher.
Should you buy Chinese stocks now
Now, let's come to the second part of our question and analyze whether you should buy Chinese stocks. Over the last decade, Chinese stocks have underperformed U.S. stocks consistently. Also, with the secular rise in U.S.-China tensions and uncertainty about China’s regulatory policies, the risk profile of investing in Chinese stocks has increased.
From a tactical asset allocation perspective, it would make sense to buy Chinese stocks now. First, the worst seems to be over and China has indicated that it would take into account the impact on markets while making regulatory changes.
Second, from a valuation perspective, Chinese stocks have started to look very attractive. While they were trading at a discount even before the crackdown, they trade at an even wider discount to their U.S. peers now.
Finally, the risk-reward looks tilted favorably for Chinese stocks. While there's a risk of another crackdown, some of the stocks look attractive. For example, Chinese EV stocks sold off amid the crackdown.
Given the strategic nature of the EV industry, it looks highly unlikely that China will target EVs. Chinese EV stocks have bounced back sharply from the lows, like Alibaba. There could be more upside in the near term for these names as the market sentiments improve.