How to invest in the Shanghai Stock Exchange from the US

• Learn about trading Shanghai Stock Exchange shares, ETFs, and index funds.
• Compare Shanghai Stock Exchange online brokers and set up your first order.
• Discover the pros and cons of trading assets on the Shanghai Stock Exchange.

US investors are not limited to investing in companies listed on the New York Stock Exchange (NYSE) and NASDAQ. Many online brokers offer the opportunity to invest in companies listed on other major global exchanges. A possible destination for US overseas investment is China’s Shanghai Stock Exchange (SSE), the leading one of three share markets for China’s expanding economy, tipped eventually to overtake the US and become the world’s largest economy – although growth predictions have recently become more conservative.

The Shanghai Stock Exchange is now the world’s third largest measured by market capitalization, behind the NYSE and NASDAQ, and ahead of the Euronext.

This is your complete guide to investing in the Shanghai Stock Exchange from the US.

You can’t invest directly in the Shanghai Stock Exchange by buying a share of it. Instead, you can invest in index funds that track a market index, or other exchange traded funds (ETFs), or invest in individual Chinese companies.

Index funds

Since access to individual SSE-listed shares can be difficult for individual foreign investors, one of the easiest ways to invest in Chinese companies is to buy units in an index fund. An index fund is a type of Exchange Traded Fund (‘ETF’ – see below) that pools investors' cash to buy stocks in the same proportion as a financial market index. In other words, by investing in an index fund, you have a spread of investments which matches a particular market sector, such as the 50 largest Chinese companies. You can buy and sell units in an index fund the same way as you buy and sell shares.

There are Chinese stock index funds listed in the US, such as:

• iShares MSCI China A ETF (NASDAQ: MCHI). Tracks the MSCI China A Inclusion Index.
• Xtrackers MSCI All China Equity ETF (NYSE: CN). Reflects the performance of the MSCI China All Shares Index.
• Invesco Golden Dragon China ETF (NASDAQ: PGJ). Based on the NASDAQ Golden Dragon China Index, composed of US exchange-listed companies that are headquartered or incorporated in China.

When you invest in an index fund, the value of your investment will rise and fall almost exactly in line with the index it tracks and approximately in line with the broader Chinese market.

Exchange traded funds

While index funds are a type of ETF, there are other China-focused ETFs that offer broad exposure to companies incorporated in China without completely tracking an index.

Exchange traded funds (ETFs) track the performance of a basket of shares selected by a management group to follow a specific market sector or strategy. Since the investment is spread over many companies, ETFs are a more diversified and generally less risky form of investment than individual shares because sudden large price fluctuations are less likely.

Here are some examples:

• Matthews China Active ETF (NYSEARCA: MCH)
• China Innovation ETF (NYSEARCA: KEJI)
• JPM China A Research Enhanced Index Equity (ESG) UCITS ETF (LON: JREC). Trades on the London Stock Exchange in USD.

Individual company shares

As a foreign investor, buying shares in individual Chinese companies is complicated.

Two classes of shares are listed on the SSE – A-shares and B-shares.

• A-shares are traded in renminbi (also known as yuan), the local currency, and are essentially off-limits for individual investors from overseas. Qualified Foreign Institutional Investors (QFII) are the only overseas investors allowed to trade on the SSE.
• B-shares trades are settled in USD and can be purchased by foreign investors. There are B-share companies in the retail, electronics, machinery, real estate, tourism, and food and beverage sectors. However, intra-day trading is not allowed, and there are other restrictions.

If you really want to invest in individual Chinese companies, a much easier method is to buy American Depositary Receipts (ADR), financial instruments listed in USD on both NYSE and NASDAQ, as well as being available on the over the counter (OTC) market. ADRs are issued by US financial institutions and represent an underlying foreign stock which the bank has been able to purchase as a Foreign Institutional Investor. Here’s a small sample of some of the hundreds of China stock ADRs you can trade in:

• Alibaba Group (NYSE: BABA)
• China Southern Airlines (NYSE: ZNH)
• Huazu Group (NASDAQ: HTHT)
• Kingsoft Cloud (NASDAQ: KC)
• Tencent Music (NYSE: TME)

Alternatively, you could buy shares in one or more of the small number of Chinese companies directly listed on a US exchange, such as:

• Sinovac Biotech (NASDAQ: SVA)
• China Yuchai International (NYSE: CYD)
• China Automotive Systems (NYSE: CAAS)

However, investing in a single company, or just a few companies, is much riskier than having a diversified holding in ETFs.

Step 1: Choose a broker

When you buy shares online, you do it through an intermediary called a broker. There are hundreds of online brokers available, offering various options.

Some key features to look for when choosing an online broker:

• Low-cost brokerage (the fee charged for processing orders)
• Easy-to-use trading platform with clear charting
• Research and reporting from market analysts
• Demo account so that you can practice trading first without risking real money

If you would like to invest in Shanghai Stock Exchange B-shares, you also need to make sure that you choose a broker offering access to the Chinese share market.

Step 2: Decide how much you want to trade

You should always have an investment budget based on what you can afford. You can always buy more later if the price drops or when more funds are available. If you can’t withstand losses in the short term, it’s best to wait until you can or plan to invest for the long term only. Losses are always a possibility, and your capital will be at risk.

Step 3: Fund your account

Trading accounts need money added to them to become fully active, but in the early stages it's a good idea to be cautious about how much you add.

It may take a few days for your funds to clear before you can begin trading.

Step 4: Choose between shares, ETFs and index funds (or opt for a combination)

ETFs and index funds are usually diversified across multiple companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

• Short-term investors hoping for rapid capital gains (but also prepared for losses) may prefer to buy shares.
• ETFs can often be traded commission-free.

Step 5: Decide your order type

Orders are your method of telling your online broker what sort of trade to make and how you'd like your money to behave. Depending on the broker you use, you can configure many different kinds of order.

• A market order is the most straightforward, requiring virtually no setup. Once executed, you’ll get shares at the next market price for the share or fund unit.
• If you have a specific strategy, you’ll probably want more options in terms of configuration. Some brokers have highly customizable orders that can be triggered by events, meaning you can buy or sell when your chosen share or fund hits a price target.

Step 6: Place your order

Once you're happy with your strategy and with funds in place, it's time to trade.

Step 7: Monitor your investment

Whether you are trading to gain from short-term speculation on price fluctuations or as a long-term investment, you should keep monitoring the fund’s or company’s performance and its price movements.