"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. As of the end of 2021, the Hong Kong Stock Exchange is the seventh-largest in the world by market capitalization. Here are some direct and indirect routes for investors to gain exposure to the Hong Kong market.
- Investing in exchange traded funds (ETFs) is a simple way for investors to gain exposure to Hong Kong securities without being exposed to currency risk.
- Investors in the United States can purchase from a limited number of Hong Kong stocks listed as American depository receipts (ADRs) on the New York Stock Exchange, Nasdaq, and over-the-counter exchanges.
- Investors can also trade Hong Kong stocks by opening an account with a brokerage firm that offers an international trading platform.
Trading on the Hong Kong Stock Exchange
Since the British handoff 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 (SAR) and is free to pursue capitalism and manage its own taxes, money, trade, foreign exchange, and currency: the Hong Kong dollar.
In November 2014, the Shanghai-Hong Kong Stock Connect was launched establishing a cross-border channel for access to stock markets and investment. This arrangement allowed investors in mainland China and Hong Kong to trade specified companies listed on each other’s stock exchange through their local securities firm. The following are a few ways that investors can trade directly or indirectly on companies listed on the Hong Kong Stock Exchange.
Exchange-Traded Funds (ETFs)
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. Popular exchange traded funds in the category include iShares MSCI Hong Kong ETF and Franklin FTSE Hong Kong ETF.
The iShares MSCI Hong Kong ETF (EWH) is invested primarily in large- and mid-cap companies in the financial and real estate space. The fund, launched in 1996, is diversified across 42 holdings and, as of March 21, 2022, manages net assets worth $855 million. It has an expense ratio of 0.50%.
Franklin FTSE Hong Kong ETF (FLHK), launched in 2017, also provides exposure to large- and mid-cap companies in Hong Kong. The fund has 90 holdings and as of March 21, 2022, manages $17.5 million in assets. It has a low expense ratio of 0.09%.
American Depository Receipts
Investors in the United States can select Hong Kong stocks listed as American depository receipts (ADRs) on their home stock exchanges like the New York Stock Exchange (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 Hong Kong stocks are registered as ADRs on U.S. exchanges. As of March 20, 2022, the number is eight. There are more in the OTC markets. As of March 20, 2022, the number is 117.
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. 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.
Foreign companies must register with the U.S. Securities and Exchange Commission (SEC) to be offered as ADRs.
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 the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).
Invest Directly Through a Hong Kong Based Broker
Investors from across the globe can invest online through local stockbrokers 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 States, for example, financial institutions not registered with the SEC cannot solicit U.S. citizens as clients.
In addition, the Foreign Account Tax Compliance Act (FATCA) placed additional restrictions, and, due to this, some Hong Kong brokers avoid U.S. clients; however, residents of other nations may not face the same issues.
Can I Trade Hong Kong Stocks?
Yes, as a U.S. investor, you can trade Hong Kong stocks. It is possible to gain exposure to Hong Kong stocks through exchange traded funds (ETFs), though you do not own the stocks outright. Conversely, you may purchase American depository receipts (ADRs) of Hong Kong companies trading on U.S. exchanges or OTC markets. Furthermore, you can invest directly with brokers in the U.S. that are allowed to do so or directly with brokers in Hong Kong. All aspects must be in regulatory compliance.
Is the Hong Kong Stock Exchange Part of China?
The Hong Kong Stock Exchange traded separately outside of China as Hong Kong was a British territory. In the late 1990s, when Hong Kong was handed back to China, China has been incorporating it back into China, which means that the Hong Kong Stock Exchange is part of China, though not fully part of China's stock market, of which the Shanghai Stock Exchange is the largest.
What Is the Largest Stock Exchange in the World?
The New York Stock Exchange is the largest stock exchange in the world. As of December 2021, the exchange had a market capitalization of a little over $27.7 trillion.
The Bottom Line
The Hong Kong Stock Exchange can be a great alternative for investors looking to diversify their portfolio from U.S. or European stocks. 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.