How To Trade In The Hong Kong Stock Exchange (ETFC,SCHW …
“If you want to see capitalism in action, go to Hong Kong.” ~ Milton Friedman
Hong Kong has come a long way. As a British colony, it was described as a “barren rock” by former British foreign secretary and prime minister Lord Palmerston. Today, the Hong Kong Stock Exchange is the fourth-largest in the world. It will likely soon be the third largest by riding on the demand for Chinese shares as well as huge investments coming from mainland China. But how do foreign investors trade on the Hong Kong Stock Exchange? In this article, we will explore direct and indirect routes to gain exposure to the Hong Kong market.
But First, Some History
Since the British hand off in 1997, Hong Kong and mainland China have operated under the principle of one country, two systems. Hong Kong is called a special administrative region and is free to pursue capitalism and manage its own taxes, money, trade, foreign exchange, and currency–the Hong Kong dollar. In mid-November 2014, a program titled “Shanghai-Hong Kong Stock Connect” was launched, which establishes a cross-border channel for access to stock markets and investment. This arrangement will allow investors in these regions to trade specified companies listed on each other’s stock exchange through their local securities firm. With this plan, around 568 companies in mainland China will be available through the Hong Kong Stock Exchange. (Related reading Hong Kong And China’s Touchy Ties)
Ways to Trade on the Hong Kong Stock Exchange
Besides the growing presence of mainland Chinese companies, the Hong Kong Stock Exchange is also propelled by the region’s highly developed financial services sector which is backed by trade, tourism, logistics and professional services. The region was engulfed in the Asian financial crisis almost two decades ago. Since then, Hong Kong has enhanced its regulatory framework to promote stability. The following are a few ways that investors can trade directly or indirectly on companies listed in the Hong Kong Stock Exchange.
1. Exchange-Traded Funds
The easiest way for U.S. investors to gain exposure to Hong Kong’s securities is through exchange-traded funds (ETFs). These provide diversification as well as ease of trading without the currency risk. Some of the popular exchange-traded funds in the category are iShares MSCI Hong Kong Index Fund, Hong Kong AlphaDEX Fund, and iShares MSCI Hong Kong Small-Cap ETF.
The iShares MSCI Hong Kong Fund (NYSE: EWH) is invested in large-cap and mid-cap stocks mostly from the financial space. The 19-year-old fund is diversified across 40 holdings, managing assets worth $3.57 billion. The next one, First Trust Hong Kong AlphaDEX Fund (NYSE: FHK) is a 3-year-old fund that seeks to track the Hong Kong stock markets by matching up with the Defined Hong Kong Index. The fund works on an indexing approach and has assets to the tune of $177 million under management. The third one is the iShares MSCI Hong Kong Small-Cap ETF (NYSE: EWHS) which invests in the small-cap stocks on the Hong Kong exchange, it has a spread of about 90 stocks with $9.10 million worth of assets under management.
2. American Depository Receipts
Investors in the United States can select Hong Kong stocks listed as American Depository Receipts (ADR) on the home bourses like the NYSE or NASDAQ or from over-the-counter (OTC) exchanges. ADRs are a hassle-free way to own foreign stocks as they are traded on U.S. exchanges and can be bought just like common shares through a brokerage account. The drawback here is the limited choice—only a few foreign stocks are registered as ADRs.
Some popular Hong Kong ADRs include: AIA Group Ltd. (US OTC: AAGIY), Sun Hung Kai Properties Limited (US OTC: SUHJY), Hutchison Whampoa Ltd. (US OTC: HUWHY), Hong Kong Television Network Limited (NASDAQ: HKTV), and Melco Crown Entertainment Limited (NASDAQ: MPEL).
3. Invest Directly Through a Broker in Your Country
ETFs are an indirect way to hold stocks on the Hong Kong Stock Exchange; ADRs are a direct way to own, but choices are seriously limited (foreign companies must register with the U.S. Securities and Exchange Commission (SEC) to be offered as ADRs). Investors who are keen on participating directly and widely on the Hong Kong stock exchange should open a brokerage account with a brokerage firm in their own country that offers a platform for international trading.
Brokerage firms that offer international access generally offer many international exchanges, including Hong Kong’s. Make sure to research brokers thoroughly before trading with them. Check the account type (discretionary or non-discretionary), the commission structure, and regions and countries covered. In the United States, look for SEC registration along with membership in SIPC and FINRA. Some of the prominent U.S. brokerage firms for trading foreign stocks are Euro Pacific Capital Inc., E*Trade (NASDAQ: ETFC), Interactive Brokers (NASDAQ: IBKR), EverTrade, Fidelity, and Charles Schwab (NYSE: SCHW).
4. Invest Directly Through a Hong Kong-Based Broker
Investors from across the globe can invest online through local stock brokers based in Hong Kong. However, there are restrictions on residents of certain countries and certain hurdles Hong Kong brokers must clear to offer services. In the United State, for example, financial institutions not registered with the SEC cannot solicit U.S. citizens as clients. In addition, the Foreign Account Tax Compliance Act of 2010 (FATCA) placed additional restriction. Check here for a list of financial institutions in approved status. Because of restrictions, some Hong Kong brokers avoid U.S. clients. However, residents of other nations may not face the same issues.
The Bottom Line
The Hong Kong Stock Exchange has been soaring with huge Chinese investments flowing into the markets. Investors keen on playing long term must remember that the recent price appreciation and accompanying volatility is not based on fundamentals. Investors should take care to base decisions on company earnings and economic factors and not just on price fluctuations. On the whole, investors should choose their preferred route to the Hong Kong Stock exchange after understanding the costs, risks, tax considerations, and regulatory compliance involved.
*The writer does not hold any of the stocks mentioned in this article.
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How To Trade In The Hong Kong Stock Exchange (ETFC,SCHW …
