China’s growth economically has actually slowed from nearly 12% in 2012 to seven percent for the first quarter of 2015, but the Shanghai Stock Exchange Composite Index has gained 100% in one year. China bubble or not, investors should pay close attention.
China Bubble: Shanghai Composite Returning 31% Since 2015’s Start
Shanghai-Hong Kong Stock Connect, announced in April of 2014, is a cross-boundary trading program that opened the door for mutual market access between the Mainland China exchange, the Shanghai Stock Exchange, and the Hong Kong Stock Exchange. (Source: Hong Kong Exchanges and Clearing Limited web site, last accessed April 15, 2015.)
Before the announcement, investing in publicly listed Mainland China stocks was limited to foreigners and until 2005, restrictions were even placed on Chinese investors. This all changed with the Shanghai-Hong Kong Stock Connect. The Shanghai Composite is up from 2,101 in April 2014 to its close at 4,135 on April 15, 2015.
The total market capitalization of the A shares, stocks of Mainland China companies, listed on the Shanghai Stock Exchange totals $5.0 trillion, which is quickly creeping up on the S&P 500, which is worth $7.0 trillion. To say the least, the Chinese market is massive and deserves attention from investors globally. (Source: Hong Kong Exchanges and Clearing Limited web site, last accessed April 15, 2015.)
‘Shanghai Stock Exchange Composite Index vs. S&P 500 Index – May 2013-Present,’
Chart courtesy of StockCharts.com
The price performance of the Shanghai index has truly been remarkable, catching up to the S&P 500 after lagging for years. For example, since the start of 2015, the S&P 500 returned 2.5%; the strongest European index, Germany’s DAX, returned 28%; while its Shanghai counterpart returned 31%, adding to the 66% returned throughout 2014.
China’s Growth: Three Chinese Highflying Stocks
Given these returns, it’s useful to get to know some of the highflyers that make up China’s stock market. These are stocks that may be possible household names a couple of years down the road and that influence the direction of the world’s second-biggest stock market globally, falling second only to the New York Stock Exchange (NYSE). To get a sense of the size of the Chinese titans, keep in mind that Apple Inc. (NASDAQ/APPL) is worth $736 billion and Exxon Mobil (NYSE/XOM) is valued at $363 billion.
China Merchants Bank Co., Ltd. (SHA/600036), with a market cap of $59.0 billion, is the “Wells Fargo of the Far East.” China Merchants provides all standard retail and commercial banking services through more than 1,000 branches in over 100 cities, earning the bank $36.0 billion in sales for 2014. (Source: China Merchants Bank Co., Ltd. web site, last accessed April 15, 2015.)
However, China Merchants is only the ninth-largest stock on the Shanghai Composite. The fifth most influential issue, with a market cap of $128 billion, is China Life Insurance Company Limited (SHA/601628, NYSE/LFC), the country’s largest life insurance company. In fact, throughout most of its history (the company opened in 1949), China Life Insurance has been the only insurer accepted by the Chinese government. On December 17, 2003, it listed on the NYSE, weighing in as the largest initial public offering (IPO) of that year. (Source: China Life Insurance Company Limited web site, last accessed April 15, 2015.)
By far the biggest name on the Shanghai Composite is PetroChina Company Limited (SHA/601857, NYSE/PTR), with a market cap of $323 billion and total revenues to match, hitting $372 billion over the last 12 months. The behemoth is involved in everything oil and gas related, including exploration and production activities, and refining and distribution.
China’s Economy: Three ETFs to Watch to Profit from Sky-High Growth
The connection of the Shanghai and Hong Kong stock markets, along with continued government reforms aimed at financial liberalization and simplifying bureaucratic processes, has likely fueled the unprecedented rise in the Chinese stock market. How long this market rally will last and whether China will be able to overcome its closely linked property market and staggering debt level issues is anyone’s guess. “China bubble burst 2015” may be a valid headline.
Investors looking to ride the rally higher for the time being and add some international flare to their portfolios should consider a few exchange-traded fund (ETF) options for safety.
With a long name, but with the most assets under management in this space, Deutsche X-trackers Harvest CSI300 China A (NYSEArca/ASHR) is a viable option investors may want to consider looking further into. It was the first ETF of its kind to be listed in the U.S., and it invests all of its funds into the 300 largest and most liquid stocks on China’s A-share market. Other notable mentions investors may want to watch include Market Vectors ChinaAMC A-Share ETF (NYSEArca/PEK) and KraneShares Bosera MSCI China A ETF (NYSEArca/KBA).