Diversifying to China Stocks
(Discussion draft February 22, 2025)
Disclaimer: This article reflects personal opinions and is not financial advice. Many of my investments carry high risks and may not be suitable for the general public. However, I want to share the rationale behind my decision to shift toward Chinese stocks.
I have reallocated 50% of my portfolio to Chinese stocks and index funds, such as FXI, KWEB, and ASHR.
For years, China’s stock market has been perceived as a “casino,” designed more to provide liquidity for state-owned enterprises than to foster private ownership. Even as someone with deep knowledge of the market, I largely avoided it over the past decade. After the property bubble burst during the COVID-19 pandemic, the government was slow to introduce stimulus policies, and a major effort in October 2024 failed to impress investors. The Shanghai Stock Exchange Composite Index remained range-bound between 3,000 and 3,500 for the last decade, driving many domestic investors away. The political environment has also been unfavorable for foreign investors, with the expansion of the Counter-Espionage Law creating additional risks for foreigners in China. Combined with ongoing geopolitical tensions, foreign investment has steadily declined.
What remains unchanged, however, is China’s dominance in cost-efficient manufacturing. As of 2023, China accounted for roughly 30% of global manufacturing output—far outpacing the United States, which stood at just 12%—with further growth expected. No country in history has established such a comprehensive advantage in producing everything from labor-intensive goods to high-tech equipment.
Deutsche Bank’s recent report, provocatively titled “China Eats the World,” argues that China’s rising military strength and technological advancements will shift its current asset price discount into a premium. The emergence of Deepseek has accelerated this transformation and reignited domestic investor interest. China domestic investors seem to be abandoning medical and high-dividend stocks in favor of technology stocks. As a result, we are likely to see a surge in both the China A-share and Hong Kong stock markets.
For U.S. investors, the easiest way to gain exposure to China is through the Hong Kong stock market, where many of the country’s top internet and technology firms are listed:
- Tencent (0700.HK) – also traded OTC as TCEHY
- Alibaba (9988.HK) – also traded as BABA in the U.S.
- Xiaomi (1810.HK) – also traded as XIACY
- Pinduoduo (PDD)
- BYD (1211.HK) – also traded as BYDDY
- Bilibili (BILI)
For those who prefer diversification, ETFs provide a simpler alternative:
- KWEB – China Internet ETF
- FXI – Large-cap China ETF, primarily internet and banks
- MCHI – More diversified than FXI
More aggressive investors may consider direct investments in China’s A-share market. However, due to their relatively small size, some of these ETFs could trade at a premium above net asset value over time:
- KSTR – The most aggressive option, tracking the top 50 companies in China’s STAR Market (similar to NASDAQ)
- ASHR – Tracks the top 300 A-shares
- Other smaller options: CNYA, KBA, XINA
For those willing to take on higher risk, call options present another opportunity. Following Alibaba’s earnings report on February 20, 2025, implied volatility in related indices finally dropped to a reasonable level. For instance, the FXI $37 Mar25 call is priced at $0.95, with an implied volatility of 26%—a reflection of historical trends, but one that has yet to fully price in recent developments.
Given the current landscape, it may be time to take a serious look at Chinese stocks.