The Chinese Equity Markets

In Part 1 of Luckbox‘s “Trading China’s Coronavirus” series, a list of stocks that have seen large increases in volume and volatility since the outbreak was highlighted. In Part 2, Luckbox is focusing on how traders can access exposure to Chinese equity markets for either taking or managing risk. 

Active traders love to follow the trade “de jour,” and at this moment it’s all about the coronavirus that has been spreading out of Wuhan, China. 

Coronavirus outbreak key updates:

  • The number of estimated coronavirus infections rises to 2,887, with 81 associated fatalities.
  • The World Health Organization (WTO) hasn’t yet declared the outbreak a global health emergency and is continuously monitoring the situation.
  • It’s now believed the Wuhan coronavirus can be transmitted during the incubation period (i.e. when infected individuals are not exhibiting symptoms).
  • The Chinese government is expediting the construction of two new hospitals in Wuhan, projected to be completed in only two weeks.
  • The Chinese government has officially extended the Lunar New Year holiday to try and help contain the outbreak.
  • As of yet, there have been no fatalities reported outside of China.

Starting off a fresh week of trading, market indexes are sliding, commodities such as crude oil and crop futures are getting hammered, single-stocks exposed to China (and/or the coronavirus) are making jagged moves in both directions, and volatility has expanded across the board.

Phew, quite a Monday!

While the danger to humankind can’t be overlooked, current activity in the financial markets can’t be either—it’s a veritable feeding frenzy for those who love to trade.

And while the coronavirus may have brought added attention to the Chinese financial markets at the present, China is the second-biggest economy on the planet, meaning it’s highly relevant to global investors no matter the current circumstances.

As with any investment or trading decision, market participants should weigh all risks prior to trade deployment, and ensure that potential exposures match their outlook and profile.

Getting down to brass tacks, there are five primary methods by which investors and traders can access equity markets in China:

  • Direct: Trading or investing in a Chinese entity using a broker who has access to mainland Chinese exchanges (Hong Kong, Shanghai, Shenzhen)
  • American Depository Receipt (ADR): Trading or investing in ADRs, which are certificates issued by U.S. banks that represent a specific number of shares in a foreign company (e.g. BABA)
  • Exchange-Traded Products: Trading or investing in China via an exchange-traded fund (ETF), which provides exposure to a basket of China-focused stocks as opposed to a single one (e.g. FXI)
  • Options: investors and traders can also access exposure to Chinese equities through options on all of the above products (except mainland Chinese equities which don’t offer options)

While direct trading of Chinese equities may seem like a great way of accessing direct exposure to the Chinese market, the reality is that this is a more complicated process as compared to trading securities in one’s own country. Likewise, the language barrier, the difficulty in retrieving associated research and information, as well as illiquidity can all represent significant headwinds when pursuing this avenue of investment. 

Alternatively, traders and investors are able to access exposure to foreign markets (like China) using American Depository Receipts (ADRs) and Exchange-Traded Funds (ETFs). These two types of securities are commonly traded by U.S. investors and typically offer associated options.

In terms of ADRs, some of the largest capitalized Chinese ADRs will already be familiar to most U.S.-based investors: BABA, BIDU, JD, etc. 

However, Luckbox has compiled a slightly longer list of some of the highest volume Chinese ADRs trading in the United States, including Nio (NIO), Luckin Coffee (LK), Alibaba (BABA), iQIYI (IQ), (JD), (TRIP), KALI (KALY), Momo (MOMO), Tencent Music (TME), China SXT Pharma (SXTC), Qudian (QD), Pinduoduo (PDD), Baidu (BIDU), Tencent (TCEHY), Bilibili (BILI), and TAL Education (TAL).

For traders looking for securities that are more diversified than the single-stocks listed above, it’s estimated there are roughly 570 ETFs that have at least some degree of exposure to the Chinese market. Given that China’s economy is the second-largest on earth, and comprises roughly 17% of the world population, it’s not surprising that such a high number of exchange-traded products have exposure to that specific country.

Within that group of 570, however, there’s a much smaller list of ETFs that receive an outsized amount of attention in terms of media coverage and trading volumes. Some of the best-known China-focused ETFs include the following:

  • iShares China Large Cap ETF (FXI) — The largest China ETF by almost any measure, focused on the biggest companies in China, with 50 diversified holdings
  • iShares MSCI China ETF (MCHI) — Benchmarked to the MSCI index holding more than 300 Chinese stocks, this ETF holds many of the same stocks as FXI, and then some
  • SPDR S&P China ETF (GXC) — Comprised of nearly 400 different Chinese companies, this ETF is even more diversified than MCHI
  • Xtrackers Harvest CSI 300 China A-Shares Fund (ASHR) — An ETF that focuses on A-shares, which previously were reserved for only mainland Chinese investors, viewed as financial sector heavy
  • Xtrackers Harvest MSCI All China Equity Fund (CN) — A comprehensive ETF covering not only the mainland, but also Hong Kong, holding a diversified portfolio of over 500 stocks
  • KraneShares CSI China Internet ETF (KWEB) — Technology-heavy ETF that includes well-known names such as Alibaba, Tencent, and Bidu
  • Direxion Daily China 3x Bull Shares (YINN) — Reserved for aggressively bullish investors, this fund aims to generate three times the daily returns of an underlying index of 50 top stocks in the region
  • Proshares Ultrashort FTSE China 50 (FXP) — The yang to YINN’s yin, this fund seeks to produce the inverse (-2x) of the daily performance of the FTSE China 50 Index

The next issue of Luckbox magazine is focused on China. Help us with our coverage by lending your thoughts on the China Threat, Trade policy & Trump. Your responses may be published in our next issue. Check out the current Luckbox Reader Survey here.

To read the first part of this series, “Trading China’s Coronavirus,” click here. To learn more about trading emerging markets, including the China-focused FXI, traders may want to review a past installment of Market Measures on the tastytrade financial network.

Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to