Investing In China? Not All China Funds Give You The Same Exposure

China is home to some of the world’s largest technology, electric vehicle and consumer companies. From Alibaba and Tencent to BYD, Chinese businesses have become increasingly prominent in industries shaping the global economy. Yet despite these opportunities, many investors remain cautious about putting their money into China.

Concerns over economic growth, regulatory uncertainty and geopolitical developments have made Chinese equities a complicated investment proposition. Even investors who recognise the country’s long-term potential may struggle to decide where to begin.

One important consideration is that not all China funds invest in the same markets or companies. A fund tracking mainland Chinese equities can look very different from one investing in Hong Kong-listed companies or the broader Greater China region.

For Singapore investors, understanding these distinctions may be just as important as deciding whether China is an attractive investment market.

In our recent DollarsAndSense Podcast episode, we spoke with Paul, Regional Head of Asia Equity and Head of Investment Technology, and Shankar, Senior Director for Regional Business Development, from UOB Asset Management (UOBAM), about the differences between Chinese equity markets, how these can affect investment returns, and the role of artificial intelligence in identifying investment opportunities.

Why Investing In China Isn’t As Straightforward As It Sounds

When investors think about the Chinese stock market, they may immediately associate it with familiar companies such as Alibaba, Tencent or BYD.

However, these companies represent only a fraction of the available investment universe.

Chinese businesses are listed across different stock exchanges, including those in mainland China and Hong Kong. Depending on where they are listed and how a fund is constructed, investors may gain exposure to very different industries. Mainland Chinese stock markets include companies operating in manufacturing, financial services and domestic consumer industries. Hong Kong provides access to major Chinese financial institutions, technology businesses and companies with international operations.

The distinction becomes more significant when investors consider Greater China, which generally includes mainland China, Hong Kong and Taiwan. Taiwan introduces another important component to the investment mix, particularly through its globally significant semiconductor industry. As a result, two funds marketed around Chinese equities can have different major holdings, sector concentrations and sources of investment returns.

The Different Ways Investors Can Invest In China

There are several commonly used approaches to gaining exposure to Chinese equities, each covering a different investment universe.

Mainland China A-shares

A-shares are shares of companies listed on mainland Chinese stock exchanges, primarily Shanghai and Shenzhen. These companies provide exposure to businesses operating across China’s domestic economy, including consumer products, manufacturing, industrials and financial services.

Hong Kong-listed Chinese equities

Hong Kong provides access to Chinese companies listed outside mainland China’s domestic exchanges, including major internet platforms, financial institutions and established businesses. Although many operate extensively in mainland China, their shares are traded in Hong Kong and may be influenced by different market conditions and investor flows.

Broad Chinese equity indices

Indices such as MSCI China combine different categories of Chinese companies, including eligible mainland-listed shares and Chinese companies listed in Hong Kong and overseas. The resulting portfolio can have a different industry composition from an A-share-only or Hong Kong-focused investment.

Greater China equities

Greater China funds extend the investment universe to include Taiwan alongside mainland China and Hong Kong. Given that Taiwan is home to major technology companies, including Taiwan Semiconductor Manufacturing Company (TSMC), it plays an important role in the global semiconductor supply chain.

Depending on the fund’s strategy, Greater China exposure can provide access to both Chinese domestic businesses and Taiwanese technology companies.

Why Two China Funds Can Deliver Very Different Returns

The performance of an equity fund depends not only on which country it invests in, but also on the industries and individual companies it holds.

One invests primarily in mainland Chinese consumer businesses and financial institutions. The other has substantial exposure to technology companies listed in Hong Kong and Taiwan. Even if both are classified as China-related investments, their returns could differ significantly.

An increase in demand for artificial intelligence infrastructure, for example, may benefit semiconductor manufacturers without having the same impact on domestic consumer businesses. Similarly, policies aimed at encouraging household spending in China could support certain consumer companies without necessarily benefiting Taiwanese technology manufacturers.

Shankar highlighted during the podcast how the largest holdings and sector allocations of different Chinese equity markets can substantially influence their performance. He also pointed to differences in historical returns between Greater China, mainland China and Hong Kong-focused investments.

While past outperformance does not guarantee future returns, these differences illustrate why choosing a China fund involves more than forming an opinion about China’s economic prospects. Investors also need to understand which companies and industries are expected to drive their returns.

Why Greater China Funds Offer A Different Investment Mix

One reason investors may consider Greater China funds is their exposure to businesses operating across different parts of the region.

Mainland China offers opportunities in domestic consumption, electric vehicles, manufacturing and technology. Hong Kong provides access to major Chinese companies, while Taiwan contributes significant exposure to the global semiconductor industry. This combination can potentially reduce reliance on developments within a single market or industry, depending on the fund’s allocation.

For example, weaker consumer spending in mainland China may affect domestic businesses, while Taiwanese semiconductor manufacturers could be influenced more heavily by global technology demand.

The United Greater China Fund, managed by UOBAM, is one example of a fund that invests across these markets. The fund aims to achieve long-term capital growth by investing primarily in companies with assets or revenues derived from mainland China, Hong Kong and Taiwan.

Unlike funds restricted to mainland Chinese equities, it has the flexibility to invest across the broader Greater China region, including companies operating in different sectors and industries. However, broader geographical exposure does not automatically mean lower investment risk.

A Greater China fund with substantial technology holdings may still experience significant volatility if sentiment towards the sector deteriorates. Political developments, currency fluctuations and global economic conditions can also affect multiple markets simultaneously.

Investors should therefore examine a fund’s actual holdings rather than assuming that a broader geographical mandate automatically makes it more diversified.

Can AI Help Fund Managers Navigate China’s Markets?

Another challenge of investing in China is the speed at which market conditions and investor sentiment can change.

Technology companies may perform strongly during one period, only for financial or consumer businesses to lead the market later. Policy announcements can also trigger significant movements in particular sectors.

Paul explained how the asset manager incorporates artificial intelligence into its investment research process. Rather than relying solely on analysts to identify potential investments, its AI system examines market data to help narrow down a larger universe of companies.

Human analysts then conduct further research to assess whether the shortlisted investments have a sound investment case. According to Paul, the AI model’s prediction accuracy is approximately 55% to 60%. While far from perfect, even a modest improvement in identifying opportunities could be useful when combined with investment analysis and risk management.

However, prediction accuracy alone does not establish that a strategy will outperform the market. Transaction costs, the magnitude of gains and losses, and portfolio construction also matter. UOBAM applies its AI-Augmentation investment framework to funds including the United Greater China Fund, combining data-driven research with human judgement in its investment process.

What Should Investors Check Before Buying A China Fund?

Before investing in a China-focused fund, investors should understand what they are purchasing.

A useful starting point is reviewing its geographical allocation. Does it invest exclusively in mainland China, include Hong Kong-listed companies or extend into Taiwan?

Next, consider its sector exposure and largest holdings.

A fund concentrated in technology companies may behave differently from one focused on financial institutions or domestic consumer businesses. Investors should also examine the fund’s investment strategy, management fees and historical performance relative to an appropriate benchmark.

An actively managed fund may attempt to identify opportunities beyond those represented by a market index, but this generally comes with management costs and no guarantee of outperformance. For Singapore investors, currency exposure is another consideration. Exchange-rate movements can affect returns when overseas holdings are valued in Singapore dollars.

Ultimately, an appropriate investment depends on individual financial objectives, risk tolerance, investment horizon and existing holdings.

Understanding Your China Exposure Before Investing

China offers investment opportunities across established financial institutions, consumer businesses and emerging technologies. However, investing in the region is not simply a matter of deciding whether the Chinese economy will perform well. The specific companies, markets and sectors held within an investment can substantially affect its returns.

Rather than asking whether China is a good investment, it may be more useful to ask which part of the Chinese market aligns with your investment objectives. For investors considering Greater China exposure, UOBAM’s United Greater China Fund focuses on companies across mainland China, Hong Kong and Taiwan. Those who prefer a wider regional allocation can also look at the United Asia Fund, which invests across Asia excluding Japan.

The two funds have different investment mandates and may serve different purposes within a portfolio. Reviewing their geographical allocations, underlying holdings, fees and risks is therefore important before making an investment decision.

Read Also: Growth Or Income: How Singapore Investors Can Get The Best Of Both Worlds When Investing In Asia