Best Chinese ETFs

[LearningMachine]

It came up at the Berkshire AGM yesterday that the number of Chinese companies in the top 20 list will probably be higher than 3 thirty years from now.  Their valuation will likely be also order(s) of magnitude higher than today's valuations.  However, there is good probability that the actual Chinese companies will be different from the ones that are in the top 20 list today.  

Even though Chinese economy will be much larger than the U.S. economy by then, Buffett thought U.S. companies will still outnumber Chinese companies in the top 20 list then, presumably because of the legal framework and the overall system we have in place in the U.S. 

To still have some benefit from Chinese growth, wondering if folks have looked into Chinese ETFs from the perspective of expense ratio, composition, securities lending practices, whether they are at risk of ADRs being delisted, whether they have exposure to VIE structure issues, etc. 

Regarding composition, S&P 500 might work fine for U.S., but I'm wondering if top 50-100 would be better for China because of higher chance of fraudulent accounting with smaller companies.  On the other hand, even though the top few companies will probably have the biggest extraction power from the economic value flowing through them, but unlike U.S., Chinese regulators will probably keep them in check most as well to make sure their extraction power is limited. 

What do folks think would be the best ETF to take a cut of Chinese economic transactions, and grow along with the Chinese economy? 

Edited May 3, 2021 by LearningMachine

[Lakesider]

I just went with a low cost one, Vaguard total china. 

[LearningMachine]

Vanguard Total China ETF (9169.HK) traded in USD on the Hong Kong Exchange does have lower expense ratio at 0.40%.  However, one potential issue with it is that it also includes Chinese companies listed outside China, which might have more accounting issues than those listed inside China. 

 

FXI on the other hand does include only those companies that are listed in Hong Kong, but has expense ratio of 0.74%.

 

Any other ETF similar to FXI with a lower expense ratio that anyone has considered?

Edited July 3, 2021 by LearningMachine

[LearningMachine]

Turns out Vanguard Total China Index ETF option will no longer be available as it is being delisted.  See https://www.ft.com/content/e4390695-99ba-4fa7-987d-787bfc0a530c.

 

0.74% expense ratio on FXI is too much! 

[thowed]

I'm not sure about ETFs - I think China currently has relatively inefficient indices, so you're arguably better off going Active.

 

There are some interesting boutiques (most that I know are non-US), but JP Morgan have a solid team - their China fund is a bit like a Growth ETF (i.e. not that concentrated) but most holdings are decent quality.  I see it as a decent high-ish beta play.

Baillie Gifford have, I think, a new-ish mutual fund in China A-Shares which looks really interesting - concentrated portfolio.  They are a Growth house, just set up an office in Shanghai, & while I sometimes disagree with their thinking, overall they're a pretty decent firm.

[LearningMachine]

Has anyone looked into HangSeng Tech Index ETF, e.g. BlackRock 9067.HK with 0.25% Management fee? 

 

It doesn't include China Mobile.  However, I noticed other HangSeng Index ETFs do include China Mobile, which we are not allowed to own. 

 

What happens if a Hong Kong based ETF you have a position in owns a Chinese company that we are no longer allowed to own in the future?  I know U.S. based indexes remove those from the index.  However, looks like Hong Kong based indexes don't. 

 

Has anyone looked into the details of the law here?  Last time I read it, it was so vague that brokerages were having a hard time interpreting it.

Edited July 8, 2021 by LearningMachine

[TwoCitiesCapital]

1 hour ago, LearningMachine said:

Has anyone looked into HangSeng Tech Index ETF, e.g. BlackRock 9067.HK with 0.25% Management fee? 

 

It doesn't include China Mobile.  However, I noticed other HangSeng Index ETFs do include China Mobile, which we are not allowed to own. 

 

What happens if a Hong Kong based ETF you have a position in owns a Chinese company that we are no longer allowed to own in the future?  I know U.S. based indexes remove those from the index.  However, looks like Hong Kong based indexes don't. 

 

Has anyone looked into the details of the law here?  Last time I read it, it was so vague that brokerages were having a hard time interpreting it.

 

I don't know if the ETFs are forced to sell, rather just not buy more. 

 

I own China Mobile via IB and am an American citizen. I can't add to the position, but wasn't forced to sell it. I would assume ETFs might be similar in that they could just direct new flows to all the names that aren't China Mobile. Though, operationally they may just choose to sell it to avoid the headache

[LearningMachine]

28 minutes ago, TwoCitiesCapital said:

 

I don't know if the ETFs are forced to sell, rather just not buy more. 

 

I own China Mobile via IB and am an American citizen. I can't add to the position, but wasn't forced to sell it. I would assume ETFs might be similar in that they could just direct new flows to all the names that aren't China Mobile. Though, operationally they may just choose to sell it to avoid the headache

This is not legal advice, but my understanding is that you have to divest direct ownership in certain companies, e.g. China Mobile. 

 

Here is the executive order Trump signed: https://home.treasury.gov/system/files/126/13959.pdf

Biden expanded the EO: https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/

 

Here is an interpretation by a law-firm: https://www.akingump.com/en/news-insights/new-executive-order-restricts-us-persons-from-trading-in-publicly-traded-securities-and-derivatives-of-certain-communist-chinese-military-companies-effective-january-11-2021.html

 

Edited July 8, 2021 by LearningMachine

[TwoCitiesCapital]

40 minutes ago, LearningMachine said:

This is not legal advice, but my understanding is that you have to divest direct ownership in certain companies, e.g. China Mobile. 

 

Here is the executive order Trump signed: https://home.treasury.gov/system/files/126/13959.pdf

Biden expanded the EO: https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/

 

Here is an interpretation by a law-firm: https://www.akingump.com/en/news-insights/new-executive-order-restricts-us-persons-from-trading-in-publicly-traded-securities-and-derivatives-of-certain-communist-chinese-military-companies-effective-january-11-2021.html

 

 

We'll see. I'll rely on IB to notify me if forced sale. They'll be the ones held accountable for enforcement. So far, I've just been told I can't buy more. 

 

Though it looks like from what you've linked that owners are provided 365 days to divest so we'll see. That'll be coming up in the next 4 months or so. 

 

Also, to clarify, I own the Hong Kong shares directly and not a US traded ADR so maybe that matters as well. 

Edited July 8, 2021 by TwoCitiesCapital

[LearningMachine]

Turns out some ETFs trading in Hong Kong that are sponsored by U.S. companies, e.g. BlackRock iShares Hang Seng Tech ETF with 0.29% management fee, and iShares Core Hang Seng Index ETF with 0.09% management fee, chose to abide by the executive order and stopped buying Chinese securities called out by the Executive order, helping U.S. folks stay in compliance: 

 

https://www.blackrock.com/hk/en/literature/shareholder-letters/20210129-ishares-hang-seng-tech-etf-announcement-hk-en.pdf

https://www.blackrock.com/hk/en/literature/shareholder-letters/20210108-ishares-asia-trust-announcement-hk-en.pdf

[CGJB]

I reside in the US and use Charles Schwab. They told me you can buy China Mobile, CNOOC, etc. in Hong Kong but you can't sell them after Biden's executive order expires, unless he extends it. IIRC, his order expires on August 2, though I could be wrong.

[UK]

https://www.bloomberg.com/news/videos/2021-08-05/kraneshares-cio-on-alibaba-tech-shares-video

[formthirteen]

Here's an interesting comparison between KraneShares top holdings and comparable U.S. businesses:

 

 

Tencent owns shares in at least three of those companies...

 

Link to video:

 

 

[LearningMachine]

Thanks @formthirteen and @UK for sharing.

 

The biggest issue with KraneShares is they are holding U.S. listed Chinese stocks.  Because Chinese law doesn't prevent lying to U.S. investors, higher chance of picking up something fraudulent through KraneShares.  Related to that, risk of delistings is real.  Also, expense ratio is not cheap. 

 

9067.HK likely resolves those issues to some extent, but it also has inflated companies like Sunny Optical as a top weighting. 

 

Want to know one thing common among Meituan, JD, PDD, KE Holdings, Trip.com and TAL Education group in your list above? 

 

Tencent helped build all of them by giving them capital and WeChat traffic (that no other VC can give), after taking a stake in them for really cheap, and still has a stake in them!

 

Edited August 5, 2021 by LearningMachine

[flesh]

Tal not doing so well. 

[LearningMachine]

3 hours ago, flesh said:

Tal not doing so well. 

 

 That is only one company among Tencent's diversified portfolio of ~800 companies.  There will always be some companies not doing so well. 

[UK]

I have no issues with going just with Alibaba and Tencent, especially for the long term, however, sometimes and when market dislocation is strong, it just makes sense to go for lower quality. Somebody very accurately has pointed in different topic, that simplest way to go in spring of 2020 (or 2009), was just by buing some small cap or small cap leveraged etf for US and not blue chip stuff. And perhaps later you can switch back. I am not sure this situation is the same, but simply by looking at price you can see, that KWEB is off more. Edutech is presumably toast but prices of those companies are like -90. I wouldnt touch any of them in meaningful way, but as a small diversified basket now comprising only few percent of that ETF, I donnt know. Also there are conflicting ideas who would benefit more (or better to say lose less?) from more regulations, presumably smaller companies would win, thought i am not sure.

Edited August 6, 2021 by UK

[LearningMachine]

6 minutes ago, UK said:

I have no issues with going just with Alibaba and Tencent, especially for the long term, however, sometimes and when market dislocation is strong, it just makes sense to go for lower quality. Somebody very accurately has pointed in different topic, that simplest way to go in spring of 2020 (or 2009), was just to by some small cap or small cap leveraged etf for US and not blue chip stuff. And perhaps later you can switch back. I am not sure this situation is the same, but simply by looking at price you can see, that KWEB is off more. Edutech is presumably toast but prices of those companies are like -90. I wouldnt touch any of them in meaningful way, but as a small diversified basket comprising now comprising only few percent of that ETF, I donnt know. Also there are conflicting ideas who would benefit more (or better to say lose less?) from more regulations, presumably smaller companies would win, thought i am not sure.

 

Probability of delistings within the next 3 years is high.  So, you would also want to calculate the total weight of those securities in KWEB that can't be exchanged for Hong Kong shares. 

 

Also, you would want to consider whether it is for tax-exempt account or taxable account, where switching would cost you taxes.  

[UK]

Re delisting: I donnt know if it is high, maybe I am making a mistake here, but I donnt see delisting worries as material, at least comparing to other issues:). And if it is real, then why US listed Chineese company cannot list in HK, like Alibaba did?

 

You are right, I didnot consider this, because I was talking from a different tax regime point of view:), but if you etf will perform better and after switching you have to pay some more taxes is it a big problem if in the end you still are left with larger profit?

Edited August 6, 2021 by UK

[LearningMachine]

56 minutes ago, UK said:

Re delisting: I donnt know if it is high, maybe I am making a mistake here, but I donnt see delisting worries as material, at least comparing to other issues:). And if it is real, then why US listed Chineese company cannot list in HK, like Alibaba did?

 

Hong Kong exchange is harder to list in. They didn't let Didi list because apparently Didi wasn't fully compliant with some local laws.  They also have requirements regarding making profit for some amount of time, etc.   Also, I think it might be a little harder for Chinese companies to make false statements when listing in Hong Kong exchange compared to when listing in the U.S. because Hong Kong exchange listing requires more paperwork for approval, while Chinese companies are not punished for making false statements when listing in the U.S.

Edited August 6, 2021 by LearningMachine

[LearningMachine]

23 minutes ago, UK said:

You are right, I didnot consider this, because I was talking from a different tax regime point of view:), but if you etf will perform better and after switching you have to pay some more taxes is it a big problem if in the end you still are left with larger profit?

 

I think you have to do the math based on your tax rate and your sense of how often high-quality companies are available for sale.

 

For some folks, it might make sense to buy high quality companies that can grow at 15-20% when they are 30% off vs. buying low quality companies that can grow at 8-10% when they are 50% off. 

Edited August 6, 2021 by LearningMachine

[TwoCitiesCapital]

On 7/8/2021 at 3:16 PM, TwoCitiesCapital said:

 

We'll see. I'll rely on IB to notify me if forced sale. They'll be the ones held accountable for enforcement. So far, I've just been told I can't buy more. 

 

Though it looks like from what you've linked that owners are provided 365 days to divest so we'll see. That'll be coming up in the next 4 months or so. 

 

Also, to clarify, I own the Hong Kong shares directly and not a US traded ADR so maybe that matters as well. 

 

Just following up here - 

 

We're passed the 365 day limit and IB still has not enforced sales in my account.