China has been one of the biggest growth stories of the year for…years now. The thing is, playing the local Chinese stock market has always been off limits to foreign investors. But it turns out that doesn't matter much. Chinese ADRs have lately outperformed the local Shanghai Composite Index, according to Bespoke Investments, an equity research firm that has been tracking a basket of Chinese ADRs. While the Shanghai Composite Index rose 79.8 percent in 2009, their basket of Chinese ADRs shot up 127.3 percent. (See Charticle on page 18.) We spoke to Paul Hickey, an analyst at Bespoke about it.
Registered Rep.: Why are Chinese ADRs outperforming the local Chinese market?
Paul Hickey: One of the potential reasons is that generally speaking, U.S. exchanges have more stringent listing requirements. So companies that list on the U.S. exchanges may be more reputable and have tighter controls on their finances.
RR: This wasn't always the case though, right, that the ADRs performed better?
PH: We only really started tracking it in the most recent leg up. The further you go back there weren't as many companies listed as ADRs. It's relatively new, in the last 5 years or so. There were some but now there are hundreds
RR: Are there any downsides to investing in Chinese ADRs?
PH: Even if you're looking at an ADR, if it is domiciled in a foreign country, then you're subject to the rules of that country. China still is a communist country. The government can dictate the terms of business. Google is a perfect example.
RR: Would there be any advantage, if it were possible, to invest directly in the Chinese market?
PH: It's still impossible for the average investor to invest directly in the Chinese market. One primary advantage is you would have a lot more choice. Your choices are relatively limited by looking at the ADRs but there are still hundreds of choices. The major Chinese companies are listed in the U.S. If you're looking at a mutual fund, that's someone who knows more about the Chinese market, so that could be a good move. But you could also just choose a basket of ADRs across numerous sectors so you're not dealing with foreign listings or foreign taxes or any of that.