It’s tempting to think of China’s stock market crash this summer as just a faraway problem. It’s not.
If you have a 401(k) or IRA, odds are good that you have at least a sliver of your savings in Chinese companies. The lure of China’s potential is so strong that more than half of all stock mutual funds have at least one Chinese company in their portfolio, and that includes hundreds categorized as U.S. stock funds.
Of course, it’s important to keep the figures in context. Chinese stocks account for a small portion of most portfolios. Among the international stock funds that own Chinese stocks, the median investment is 4.2 percent of the fund’s assets, according to data from Morningstar. For U.S. stock funds, it’s 0.7 percent.
Plus, there are many types of Chinese stocks, and government restrictions bar most mutual funds from owning stocks traded in mainland markets, which are the ones that had the steepest drops.
The Shanghai composite index plunged 30 percent in less than four weeks after setting a peak June 12, for example. Stocks traded in Shenzhen, another major market in southeast China, lost 40 percent. But most U.S. funds own stocks that trade in Hong Kong or New York, not Shanghai or Shenzhen.
Here’s what’s going on in China.
What is a Chinese stock?
This question isn’t so simple. When investors talk about Chinese stocks, they could be talking about a number of things.
The recent focus has been on “A-shares.” These are shares of companies incorporated in China, listed in Shanghai or Shenzhen and traded in yuan.
The Chinese government has long restricted foreign ownership of A-shares, although it has been loosening the limits recently. That means the market is dominated by mom-and-pop Chinese investors, and many U.S. mutual-fund managers are essentially bystanders.
Most mutual funds instead invest in mainland Chinese companies that are listed in Hong Kong — “H-shares.” This market didn’t rise as fast as A-shares in the months leading up to the crash. H-shares also didn’t get as expensive relative to their earnings and didn’t fall as much as A-shares subsequently.
How much do mutual funds invest in China?
It can be a lot. Emerging-markets funds have been popular, growing to a total of $410 billion in assets. Many of these funds benchmark themselves against the MSCI Emerging Markets index, and roughly a quarter of the index is in China.
Even investors who haven’t sought out international stock funds likely have some exposure to Chinese stocks. Virtually all target-date funds own some Chinese stocks. Vanguard is the largest provider of target-date funds, and its funds generally have well below 2 percent of their portfolios in Chinese stocks.
Will more U.S. funds own A-shares?
The trend is heading that way.
Vanguard said in early June that its Emerging Markets Stock Index fund will begin tracking a new index, one that includes A-shares.
