China Trading Strategy: Backtesting and Insights with a Focus on FXI

Globalization has made it possible for investors to tap into investment opportunities around the world, and as the second largest economy in the world, the Chinese stock market provides opportunities. But what is your China trading strategy?

You can also trade Chinese stocks listed on Chinese exchanges, especially the Hong Kong Exchange. However, you would have to open a brokerage account with an international broker with a presence in the Chinese market, such as Interactive Brokers. Alternatively, you can invest in mutual funds or exchange-traded funds (ETFs) that track the Chinese stock exchanges, for example FXI.

In this post, we take a look at how to trade Chinese stocks. At the end of the article, we present a backtested China trading strategy (FXI trading strategy).

How can you trade Chinese stocks?

Apart from trading the American Depositary Receipts (ADRs) of Chinese stocks listed on US exchanges, you can also trade Chinese stocks listed on Chinese exchanges, especially the Hong Kong Exchange. However, you would have to open a brokerage account with an international broker with a presence in the Chinese market, most likely Hong Kong. One popular broker that offers trading in the Hong Kong stock market is Interactive Brokers (is Interactive Brokers safe?).

An easier way to invest in Chinese stocks is to invest in mutual funds or exchange-traded funds (ETFs) that track the Chinese stock exchanges (please read our take on ETFs vs futures). These instruments don’t just offer you exposure to the Chinese stock market but also offer you a diversified portfolio by spreading out your investment across hundreds or even thousands of companies.

China ETFs

If you want to trade Chinese stocks we recommend the following ETFs:

  • FXI: Chinese large caps
  • MCHI: iShares China
  • YANG: Direxion Daily FTSE China Bear 3X Shares

There are any more ETFs, but these are the most liquid ones (FXI the most liquid and the one we trade ourselves).

How many Chinese stocks are there?

China’s three main stock exchanges host one of Asia’s largest collections of listed companies in terms of market cap. But how many Chinese stocks are there?

Well, it is difficult to know the total number of Chinese stocks, as they increase all the time. However, we can estimate that by checking the number of stocks listed on the three Chinese stock exchanges:

  • Hong Kong Stock Exchange: As of 2021, over 2,572 companies were listed on the Hong Kong Stock Exchange.
  • Shanghai Stock Exchange: The Shanghai Stock Exchange is the second largest stock exchange in the world in terms of capital raised. At the end of 2021, there are over 2,037 companies with a total of 2,079 stocks listed on the Shanghai Stock Exchange (SSE).
  • Shenzhen Stock Exchange: There are over 2,672 companies listed on the Shenzhen Stock Exchange, as of December 2021.

So, in total, there are 7323 listed stocks on the three Chinese stock exchanges. However, some of those stocks may have been listed on more than exchanges — for example, some mainland Chinese stocks listed on Shanghai Stock Exchange may also be listed on the Hong Kong Stock Exchange. To get access to Chinese stocks we recommend using Interactive Brokers.

What are the biggest Chinese companies or stocks?

Some of the biggest Chinese companies are as follows:

  • Tencent: This is a Chinese multinational technology and entertainment conglomerate and holding company headquartered in Shenzhen. It is one of the highest-grossing multimedia companies in the world based on revenue. It is also one of the largest video game companies in the world.
  • Kweichow Moutai: This is a state-owned enterprise, specializing in the production and sales of the spirit Maotai baijiu, together with the production and sale of beverage, food and packaging material, and the development of anti-counterfeiting technology. It is listed on the Shanghai Stock Exchange.
  • Alibaba: Alibaba Group Holding Limited is a Chinese multinational technology company specializing in e-commerce, retail, Internet, and technology. The company provides consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) sales services via web portals, as well as electronic payment services, shopping search engines, and cloud computing services.
  • ICBC: This is a state-owned commercial bank. With capital provided by the Ministry of Finance of China, it is ranked the largest bank in the world by total assets, with over US$4 trillion as of December 2020. It is considered a systemically important bank by the Financial Stability Board.
  • CATL: Contemporary Amperex Technology Co. Limited is a Chinese battery manufacturer and technology company founded in 2011 that specializes in the manufacturing of lithium-ion batteries for electric vehicles and energy storage systems, as well as battery management systems (BMS). It is the biggest lithium-ion battery manufacturer for EVs in the world.
  • China Construction Bank (CCB): It is one of the “big four” banks in China. Its headquarters is in Xicheng District, Beijing, but it has branches in major cities around the world. It is considered a systemically important bank by the Financial Stability Board.
  • Meituan: This is a Chinese shopping platform for locally found consumer products and retail services, such as entertainment, dining, delivery, travel, and other services. The company was founded in 2010 and is headquartered in Beijing. It operates different apps and websites for different services.
  • China Mobile: The company provides mobile voice and multimedia services through its nationwide mobile telecommunications network across mainland China and Hong Kong. It is the largest wireless carrier in China, with 945.50 million subscribers as of June 2021, making it the world’s largest mobile network operator by total number of subscribers. The stock is listed on the Hong Kong Stock Exchange.
  • Agricultural Bank of China (ABC): Also known as AgBank, ABC is one of the “Big Four” banks in China. It was founded on 10 July 1951 and has its headquarters in Dongcheng District, Beijing. It is considered a systemically important bank by the Financial Stability Board.
  • PetroChina: This is a Chinese oil and gas company. It is the listed arm of state-owned China National Petroleum Corporation, which is headquartered in Dongcheng District, Beijing. The stock is listed on the Hong Kong and New York stock exchanges.

However, keep in mind that the flux of the market is huge. Those companies “hot” today might be gone tomorrow. To better understand this we recommend reading our article do stocks outperform Treasury bills(?). In the stock market, very few companies contribute to the overall gains.

How is the Chinese economy?

The Chinese government is an authoritarian system, under the exclusive political leadership of the Chinese Communist Party (CCP), and consists of legislative, executive, military, supervisory, judicial, and procuratorial branches. There are no freely elected national leaders, and political opposition is VERY suppressed.

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