Investing in China: The how and why of it

Over the past 10 years, the Shanghai SE Composite Index rose just 2.5%. However, the Chinese government’s stimulus measures to boost domestic consumption and DeepSeek’s AI model lifted the sentiment. China’s benchmark index has delivered 12.55% returns over the past one year compared with a 1.8% rise in the Nifty 50 during the period in terms of local currency.

Trading volumes of iShares China Large-Cap ETF, which tracks Chinese blue-chip stocks, swelled 2.8 times in February, according to data from global investing platform Vested Finance.

In this series on global investing, we explore how Indians can invest in different geographies. Here is a look at the investment routes available for local investors looking to participate in the Chinese markets.

Mutual funds

The Edelweiss Greater China Equity Off-shore Fund and Axis Greater China Equity FoF are two funds of funds open for Indian investors.

For Edelweiss’s fund, the lumpsum investment limit is ₹1 lakh a day, per PAN (permanent account number) and that also applies to monthly systematic investment plans (SIPs). The fund had assets under management (AUM) of ₹1,946 crore as on 13 February 2025.

The Axis Greater China Equity FoF is fully open without any investment limits. Its AUM stood at ₹445 crore as of 12 February 2025.

As an FoF, Edelweiss fund feeds into JPMorgan Greater China Fund, while the Axis fund feeds into the Schroder International Selection Fund Greater China.

Capital gains from these funds will be taxed as long-term capital gains at 12.5% if the investment is held for more than two years. If the investment is held for a lesser period, short-term gains are taxed at the income tax slab rate applicable to an investor.

Meanwhile, China-focused ETFs on domestic exchanges are trading at a premium to their iNAVs (indicative NAVs or the fair value of the ETF) due to overseas investing limits. Market makers can’t buy foreign stocks to create new units, restricting supply.

Nippon India ETF Hang Seng BeES was trading marginally at a premium to its iNAV at market close on 13 March, while Mirae Asset Hang Seng TECH ETF was trading at a 17.2% premium. The premiums vary, depending upon the ETF’s price movement on exchanges versus its iNAV movement. Mirae Asset MF has issued an advisory to investors to check the iNAV of the ETF before investing.

Long-term capital gains on these ETFs also get taxed at 12.5% if the holding period is more than one year.

LRS route

Investors looking for more options can directly invest in Chinese ETFs listed on US stock exchanges. For this, they can use the liberalized remittance scheme (LRS), which allows a remittance of up to $250,000 ( ₹2.17 crore) per individual per financial year.

Fintech platforms allow investing in Chinese ETFs such as iShares MSCI China, iShares China Large-Cap ETF and Invesco China Technology ETF, which are among the largest China-focused ETFs.

To start your investment journey through these platforms, you first need to sign up and complete your KYC (know your customer). Then link your Indian bank account. The platform will also have a US wallet, which is used by the US broker to fund your purchases on US exchanges.

An investor needs to transfer funds from an Indian bank account to the US wallet via LRS. Once initiated, the fund transfer typically takes 24 hours to show in the US wallet. The rupee-dollar conversion fee charged by the bank is around 1% of the transaction value. This is also applicable at the time of dollar-rupee conversion on withdrawal.

These platforms also charge a brokerage fee. It can be as low as 0.05% or 0.25%. The fee is applicable on both buying and selling. Some platforms even charge a withdrawal fee, which can be as high as $5 per withdrawal.

If the holding period is more than two years, a long-term capital gains tax rate of 12.5% is applicable. If the holding period is less than two years, gains are slabbed at an investor’s tax rate.

There are some more tax implications. If the LRS transfer exceeds ₹10 lakh in a financial year, TCS (tax collected at source) of 20% is applicable. Remember, TCS can be adjusted against TDS (tax deducted at source) on salary income.

In the US, the practice is to keep the ETFs and stocks in the broker’s ‘street name’. Investments lie with the custodian, but in broker’s name. The ETFs are linked to investor’s broking account on the broker’s books.

To address the risk of broker default, the US government mandates that securities are covered under SIPC (Securities Investor Protection Corporation), which covers a portfolio of up to $500,000 ( ₹4.34 crore).

The platforms offering LRS-based international investing include Vested Finance, Appreciate, Interactive Brokers, INDMoney and India INX Global Access, among others.

Should you take China exposure?

Every economy has different dynamics. Another country might do well when one’s home country underperforms and vice-versa. Hence, geographical diversification is as important as asset class diversification.

“We recommend 10-20% exposure to global markets as part of one’s overall portfolio,” said Kavitha Menon, founder of Probitus Wealth.

Investors with a higher risk appetite can consider Chinese exposure, she said, adding that at reasonable valuations and pro-business policies of the government, fears of China being “uninvestable” may be unfounded.

Even after the recent rally, Hang Seng Index traded at 11.8-times trailing 12-month earnings as of 14 March, close to its 10-year average price-to-earning valuation multiple.

According to Ashish Gupta, chief investment officer at Axis MF, “Concerns around China stemmed from two sources. The first was the business downcycle with real estate at the epicentre. Real estate had been a big part of their economic growth for over five-seven years before the crisis in 2021. The second was stemming from the political situation where, for social and political reasons, the environment was becoming minimally supportive of business.” 

The Chinese economy was already dealing with US tariff hikes back in 2018, but its resilience got masked amid all the other issues, he said. “New capacities were built on several high-growth industries like renewables, nuclear, electric vehicles, etc. From the US, the export market was diversified to emerging markets. Now, there seems to be some bottoming out of the real estate cycle as well.”

Amid a new round of trade pressures and tariff hikes from the US, China’s political leadership appears to be focused on stimulating the domestic economy rather than clampdown growth, said Gupta. “The current president’s recent meeting with Chinese tech leaders is also a positive signal. The composition of Chinese markets has changed. Their current market valuations of 9-10-times should be seen in the context of a large part of its earnings coming from their tech companies.”

While the US market is also facing a period of volatility after President Donald Trump’s tariff hikes, it remains the world’s largest economy that can’t be ignored. Investors can consider a mix of China and US exposure to geographically diversify their portfolio.