Since the June highs, China’s markets and country-specific exchange traded funds have plunged about 40%. While investors may be perturbed by the short-term volatility, Chinese equities may offer a long-term investment opportunity.
ETF investors who are interested in the Chinese market have a number of options to choose from. For instance, the iShares China Large-Cap ETF (NYSEArca: FXI) is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange. Similarly, other China H-shares ETFs options include the SPDR S&P China ETF (NYSEArca: GXC) and the iShares MSCI China ETF (NYSEArca: MCHI).
Additionally, investors can take a look at China A-shares ETFs that track mainland Chinese stocks traded in Shanghai and Shenzhen, including the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) and Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK).
Paul Rogers, director and portfolio manager with Lazard Asset Management, pointed out that while the markets may experience some volatility and be pressured by concerns over slower growth, the Chinese economy is making a gradual shift from an export-led country to a more domestically focused market, which is not a smooth transition, reports Bryan Borzykowski for CNBC. [China’s Economy Is Undergoing a Huge Transformation That No One’s Talking About]
Moreover, given the sheer size of the economy – China is the second largest in the world, exponential growth will be harder to maintain, so investors should expect slower and mores stable growth in the years ahead.
Looking over the long-term, investors will be able to capitalize on the country’s growing middle class. Rogers pointed out that the rising income levels would help bolster domestic consumption and fuel economic growth.
In previous weeks, though, local Chinese investors, who are notoriously short-term focused, added the recent volatility, piling into stocks on hopes that the sudden influx of foreign investors would fuel market gains. These types of market speculations are short lived.
Nevertheless, the recent fears and market plunge have made Chinese stocks cheaper, according to Rogers. For instance, the Hong Kong Stock Exchange, where many Chinese company stocks are listed, is trading around 10 times earnings, or near all-time lows.
The H-shares ETFs, or funds that track Chinese companies on the Hong Kong Stock Exchange, also show similar valuations. FXI has a 10.0 price-to-earnings ratio, GXC has a 9.4 P/E and MCHI has a 10.7 P/E, according to Morningstar.
However, the Chinese mainland A-shares market show slightly higher valuations. For instance, ASHR has a 14.2 P/E, KBA has a 16.1 P/E and PEK has a 13.9 P/E.
Jan Dehn, head of research for Ashmore, believes Chinese banks will likely benefit the most as they become some of the largest asset managers in the world. Both H-Shares and A-Shares ETFs are heavy on the financial sector, which makes up 49.0% of FXI and 38.5% of ASHR.
For more information on the Chinese market, visit our China category.
Max Chen contributed to this article.