China ETFs allow Australian investors to gain exposure to Chinese equities. In 2020, the Chinese equity market and economy outperformed the developed markets due to its successful response to Covid-19. The US unemployment rate has been rising precipitously since the onset of the crisis. Simultaneously, the Chinese economy shows signs of recovery, but the health crisis is mostly over to them.
There are two major markets for Chinese shares. Onshore market refers to the equity markets located in China, for example, companies listed on the Shanghai or Shenzhen stock exchange (CSI 300 index). These are called onshore because it is segregated from the rest of the global financial system.
The offshore market commonly refers to companies listed in Hong Kong, which is made up of either Chinese companies listed there or Hong Kong domiciled companies (Hang Seng Index). While nominally a Chinese territory, the financial system is independent of the onshore market where there is free movement of capital between Hong Kong and the rest of the world.
The strict rules on moving capital onshore and offshore segregate the local equity markets from the rest of the world and have kept China out of the major international equity benchmarks. There has been some movement in the right direction, starting with MSCI adding China to the emerging market index in 2018.
How to invest in the Chinese market?
Investors have several options to gain exposure to Chinese equities.
- China ETF: Index fund which tracks the performance of Chinese equities (either onshore/offshore or passive / actively managed)
- Active Managed Fund: A fund that invests in Chinese equities
Only a single ETF meets the criteria for those who can only invest in shares listed on the ASX with the option of immediate liquidity.
ASX China ETF
iShares China Large-Cap ETF (ASX IZZ) is one of the most liquid exchange-traded fund investors can use to gain exposure to Chinese equities. IZZ tracks the performance of the 50 largest Chinese companies listed in Hong Kong.
On a broader level, iShares Asia 50 ETF (ASX IAA) has a broader investment pool and tracks the top 50 companies listed in China, Hong Kong, Macau, Singapore, South Korea and Taiwan.
IZZ Dividend Yield vs IAA Dividend Yield
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Key features of IZZ
- Benchmark: FTSE China 50 Index with quarterly rebalancing
- All performance is measured in HK Dollar (HKD), which is pegged to the US dollar (USD). Fund performance of Australian investors will be affected by the daily changes in the Australian Dollar (AUD)
- IZZ dividend is paid every six months
- IZZ management fee of 0.74%
Key features of IAA
- Benchmark: S&P Asia 50
- Semi-Annual distribution
- IAA management fee: 0.50%
ASX IZZ vs IAA
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IZZ Top 10 Holding Snapshot
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The snapshot highlights the 10 largest positions of the fund. IZZ has a relatively concentrated exposure, with the top 10 positions comprised of more than 55% of the total value. The remaining 40 companies account for 45% of the fund.
The names in the Top 10 holding covers a range of important sectors of the economy:
- Technology: Tencent is the largest Chinese technology company on par with Alibaba, but it is not included in the index.
- Telecommunication: China Mobile is the largest mobile provider in the world and has the largest market share in China
- Major State Banks: CCB, ICBC and Bank of China
- Insurance: Ping An and China Life
- Petrochemicals: CNOCC
IAA holdings concentration
IAA has broader exposure across China, Korea, Taiwan and Hong Kong, which make up more than 90% of the fund exposure. The investment is mostly concentrated in Technology, Financial and Communication sectors.
iShares China ETF performance
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When you contrast the China index fund’s performance with Australian companies and other global benchmarks (such as S&P 500), the returns are quite different. Besides the fact that sometimes it can be an outperformer, it’s always good to have non-correlated returns in the portfolio.
IAA Dividend History
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IZZ Dividend History
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Alternative China Equities Exposure
Emerging Market ETF
We have written in detail about a diversified China exposure through Emerging Market ETF. Emerging market exchange-traded funds are a sector-based fund that invests across a range of emerging markets. China represents one of the largest country allocations (at more than 20%).
Hang Seng Index
Ideally, we prefer direct exposure via the Hang Seng index. Hang Seng is one of the most well-known equity indexes in the region and the earliest index providing investors exposure to China.
Hang Seng is made up of the 50 largest companies listed in Hong Kong and, unlike IZZ, not just Chinese companies. For example, it includes HSBC, a dual UK / HK domiciled bank. The index is more diversified across a number of sectors with no single exposure larger than 10% of the index.
ASX Companies Exposed to China
We have outlined a list of Australian companies exposed to China and generate a large portion of their revenue from China.