How to trade China

Written by: Ioan Smith | Expert Financial Writer

Reviewed and Edited by: Maria Stylianou | Senior Copywriter

Over the past two decades, China’s stock market has seen significant growth, with government-led initiatives such as the Stock Connect programmes and the launch of the STAR Market opening up even more investment opportunities. With its increasing global economic integration, China has become more connected and accessible to the global economy, with more stock market opportunities available. If you are looking to gain exposure to the country’s growing economy, it's essential to consider unique factors like state influence, regulatory unpredictability, and the dominance of retail investors.

Types of financial markets in China

China’s financial markets are highly regulated and operate differently from Western markets, limiting access to certain asset classes. While stocks and indices prevail, traders can also trade bonds, forex, and commodities, though these instruments come with regulatory constraints, liquidity issues, and accessibility challenges:

• Stocks: China’s equity markets are divided into A-shares (mainland-listed, Shanghai, Shenzhen), H-shares (Hong Kong-listed), and US-listed ADRs (American Depositary Receipts), each with distinct risks and opportunities. A-shares offer exposure to domestic growth but are subject to capital controls and government interventions, while H-shares and ADRs provide easier foreign access but face risks such as delisting, heightened scrutiny and geopolitical tensions.
• Bonds: China’s government, corporate, and municipal bonds offer fixed-income opportunities, but capital controls restricting the movement of money in and out of China, along with credit risks and limited foreign access, reduce their appeal. The onshore bond market (bonds issued and traded within mainland China) is one of the largest globally; however, it remains difficult for foreign investors to navigate.
• Forex: The Chinese Yuan (CNY) is heavily regulated and subject to strict capital controls, limiting its use in global trade and investment. Offshore markets (CNH) like Hong Kong, Singapore, and London offer more flexibility, but government intervention in exchange rates makes speculative trading riskier compared to currencies like the USD or EUR.
• Commodities: China’s commodity markets are among the largest in the world, with futures and options on metals, energy, and agriculture offering greater transparency and regulatory control. However, domestic exchanges (eg, Shanghai Futures Exchange, Dalian Commodity Exchange) pose foreign access restrictions. Liquidity is often concentrated among local investors, making them harder to trade than global benchmarks like WTI crude oil or COMEX copper.

China’s major stock exchanges

Foreign investors face restrictions when trading China’s mainland A-share markets. A-shares represent some of China’s giant firms across technology, finance, energy, and consumer goods. Listed on the Shanghai (SSE) and Shenzhen (SZSE) stock exchanges, there are over 3,000 A-shares with a total market capitalisation of approximately $10 trillion. This makes China’s A-share market one of the largest globally, ranking third after the NYSE ($28.5 trillion) and NASDAQ ($13.5 trillion).

For many years, international investors gained exposure to Chinese stocks through H-shares, mainland Chinese companies listed on the Hong Kong Stock Exchange (HKEX).  Today, there are approximately 370 H-shares (companies like China Construction Bank and Ping An Insurance Group), with a combined market capitalisation of around $1.1 trillion.

Both Shanghai (SSE) and Shenzhen (SZSE) exchanges play a crucial role in the country’s financial markets, supporting large state-owned enterprises and high-growth private companies:

Shanghai Stock Exchange (SSE)

The Shanghai Stock Exchange is China’s largest and most influential stock market, known for listing major SOEs (state-owned enterprises) and blue-chip firms. It provides two primary trading platforms:

• Main Board: The primary market, home to well-established, financially stable companies, including many of China’s largest banks, energy firms, and industrial giants.
• STAR Market: Often compared to the Nasdaq, this market focuses on high-tech and innovative enterprises, offering a more flexible listing process to attract startups in sectors such as AI, biotech, and semiconductor manufacturing.

Shenzhen Stock Exchange (SZSE)

The Shenzhen Stock Exchange features a diverse mix of privately owned and tech-driven companies. It is known for its dynamic and volatile trading environment due to high participation from retail investors. The SZSE operates three key boards:

• Main Board: Includes large-cap companies from various industries.
• SME Board: Designed for small and medium enterprises with strong growth potential.
• ChiNext: A market for startups and high-growth firms, similar to the Nasdaq, with a focus on technology, biotech, and emerging industries.

Key differences compared to Western markets

Understanding these differences can help you adapt your strategy and navigate the risks and opportunities unique to China.

Financial instruments to trade China

Since access to mainland China’s A-shares is still highly restricted for non-Chinese citizens, global investors can trade Chinese stocks and equity indices listed on overseas exchanges. Brokers like Pepperstone offer competitive pricing, multilingual support and access to advanced trading platforms to trade a range of China-related assets through CFDs on indices, ETFs, individual stocks, and currency pairs:

• CN50: Based on the FTSE China A50 index, it tracks the 50 largest Chinese companies on the Shanghai and Shenzhen exchanges, offering direct exposure to mainland China’s equity markets.

HK50: A proxy for Chinese market performance with fewer restrictions, as Hong Kong-listed stocks are accessible to global investors.

• CHINAH (Hang Seng China enterprises index): Also known as the H-Share Index, comprising the 50 largest H-shares (Chinese companies listed in Hong Kong).
• FXI (iShares China large-cap ETF): A highly liquid Chinese stock ETF listed on the New York Stock Exchange (NYSE), tracking the largest 50 Chinese stocks listed in Hong Kong.
• USDCNH (offshore Chinese yuan): The Renminbi (RMB) has become the fourth most active currency in global payments. Notably, over 50% of China's cross-border trade was conducted in RMB as of 2024, underscoring the RMB’s growing international presence.
• Individual stocks: Major Chinese blue-chip companies like Alibaba, Baidu, and DiDi are available on international platforms.

Trading Hong Kong Share CFD with Pepperstone

Indirect exposure to China’s economy

For investors looking to gain exposure to China’s economic growth without directly trading Chinese assets, certain commodities and currencies offer indirect ways to tap into the country’s economic trends. As a leading global consumer of raw materials and a major driver of global trade, China’s demand significantly impacts the prices of key commodities and currencies tied to its economic cycles:

• Commodities: Assets like copper and crude oil are highly correlated with China’s industrial demand and economic growth, allowing you to indirectly invest in the raw materials or goods that underpin economic activity.
• Currency markets: The Australian Dollar (AUD) is also highly correlated with China’s trade and commodity cycles, making it an effective way to gain exposure. This is because Australia is a major exporter of raw materials to China, so fluctuations in Chinese demand impact Australia’s economy and, in turn, the value of the AUD.

Cultural and economic factors in Chinese markets

Retail investors who play a big role in China’s stock markets are often driven by short-term gains. According to various studies, this leads to speculative trading and “herding” behaviour, where people blindly follow market trends based on emotion or hype rather than solid analysis, causing sharp price swings and increased volatility.

Social media platforms, such as Weibo and Douyin, often fuel speculative activity affecting the social sentiment, with retail investors reacting to viral trends, which can immediately impact stock prices.

Overview of China’s regulatory landscape

China Securities Regulatory Commission (CSRC)

The CSRC oversees China’s securities and futures markets, ensuring fairness, transparency, and investor protection. It regulates stock exchanges (SSE & SZSE), supervises financial products, and enforces rules to prevent market manipulation and insider trading. Sudden regulatory shifts, such as IPO suspensions or new margin trading rules, can drive significant buying or selling.

State Administration of Foreign Exchange (SAFE)

SAFE manages China’s foreign exchange system and controls the Renminbi (RMB) exchange rate. It regulates capital flows, oversees foreign investment approvals, and manages China’s foreign reserves, ensuring currency stability and balancing foreign capital inflows and outflows. Adjustments to the RMB’s exchange rate or restrictions on capital outflows can trigger fluctuations in forex markets and influence investor confidence.

Rules and restrictions for foreign investors

China’s financial markets remain only partially open to foreign investors, with access controlled through specific regulatory programmes. Understanding these frameworks is crucial for navigating Chinese markets:

QFII & RQFII programmes

The Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes grant institutional investors access to China's A-share market under regulatory oversight.

• QFII: Allows foreign investors to trade A-shares in RMB after meeting eligibility criteria.
• RQFII: Enables investments using offshore RMB (Chinese currency held outside China), offering greater flexibility.
• 2020 reform: China removed investment quotas for QFII/RQFII, simplifying market access, though registration and compliance remain mandatory.

Stock Connect programmes (Shanghai-Hong Kong, Shenzhen-Hong Kong)

Launched in 2014 (Shanghai-HK) and 2016 (Shenzhen-HK), these schemes provide global investor access to A-shares via Hong Kong, without needing QFII/RQFII licences.

Stock Connect

Advantages:

✔ No foreign ownership quotas

✔ Simplified access with faster execution

Limitations:

✖ Only approved "northbound" A-shares are available for trading

✖ Daily trading limits restrict foreign purchases

✖ Frequent suspensions due to policy changes or liquidity concerns

How to analyse China’s markets

Navigating China’s stock markets effectively requires a combination of fundamental, technical, and sector-specific analysis to identify investment opportunities and manage risks.

Fundamental analysis

Evaluating financial statements: Chinese companies follow Chinese GAAP (generally accepted accounting principles), which differ from international financial reporting standards (IFRS) in areas such as revenue recognition, asset valuation, and government subsidies. Investors should be cautious of state-owned enterprises (SOEs), companies that are owned or controlled by the government, which may prioritise government objectives over shareholder returns.

Key macroeconomic indicators: China’s economy is a major driver of global markets, influencing commodities, trade, and financial flows. Five-year plans set long-term priorities, shaping investment in key sectors like technology, manufacturing, and infrastructure. Government-backed industries, such as renewable energy and electric vehicles, often see strong policy-driven growth.

Understanding macroeconomic data is crucial for anticipating price movements, policy shifts, and sector performance. These indicators directly impact stock indices, commodities, and forex markets:

Essential economic indicators

GDP (Gross domestic product) growth rate

• Impact: China’s GDP drives market sentiment, with strong growth fuelling equity rallies and commodity demand, while slower growth often triggers government stimulus. When the economy slows down, governments tend to increase spending to boost growth, usually focusing on infrastructure and housing, which can impact the relevant stocks.
• Official data release: National Bureau of Statistics of China – GDP Revision Bulletin

Purchasing managers’ index (PMI)

• Manufacturing PMI: Signals factory output and supply chain health, influencing industrial and export-related stocks.
• Services PMI: Tracks consumer demand, impacting e-commerce, retail, and tech stocks.
• Impact: A PMI below 50 can prompt monetary easing, by lowering interest rates or injecting liquidity—adding money into the financial system to encourage lending and investing. These actions can influence bond yields and boost market liquidity.
• Official data release: S&P Global – PMI Releases

Industrial production

• Impact: Directly affects commodity prices (steel, copper, coal) and stock sectors like energy, mining, and construction.
• Official data release: National Bureau of Statistics of China

Fixed asset investment (FAI)

• Impact: Heavy investment in infrastructure and real estate supports materials and construction firms. Slowing FAI can signal tightening credit and weaker property demand, affecting banking stocks.
• Official data release: National Bureau of Statistics of China – Investment in Fixed Assets

Retail sales and consumer spending

• Impact: Strong retail data boosts e-commerce giants (Alibaba, JD.com) and luxury brands. Weak consumption may lead to stimulus measures or interest rate cuts.
• Official data release: National Bureau of Statistics of China – Retail Sales

Inflation (CPI & PPI)

• Consumer price index (CPI): Rising inflation can pressure interest rates, impacting borrowing costs and growth stocks.
• Producer price index (PPI): High producer prices affect manufacturing profits and export competitiveness.
• Official data release: National Bureau of Statistics of China

Trade balance & export data

• Impact: A strong trade surplus supports the yuan (CNY) and benefits exporters like tech and industrial firms. Declining exports weaken growth stocks and may lead to government intervention in trade policies.
• Official data release: General Administration of Customs – China Trade Statistics

Foreign exchange reserves

• Impact: High reserves signal economic stability, while sharp declines may trigger currency interventions and capital controls.
• Official data release: International Monetary Fund – COFER Database

Interest rates & credit policies

• Impact: Lower rates encourage borrowing and investment, driving equities higher. Tightening credit conditions can slow growth and negatively impact property and banking stocks.
• Official data release: People's Bank of China – Monetary Policy Report

Unemployment rate & labour market trends

• Impact: Rising unemployment weakens consumer spending and investor sentiment. Government job support programmes often lead to stimulus measures that affect multiple sectors.
• Official data release: World Bank – China Unemployment Data

PBOC monetary policies: The People’s Bank of China (PBOC) plays a central role in managing liquidity, inflation, and credit growth through interest rate adjustments, reserve requirements, and open market operations. Investors closely monitor PBOC policy shifts, as easing measures can fuel stock market rallies, while tightening can slow economic growth and impact corporate earnings.

• Interest rate policies: Lower rates encourage borrowing and investment, boosting equities, while higher rates tighten liquidity and can weigh on market performance.
• Reserve requirement ratio (RRR): A key tool the PBOC uses to control bank lending. A lower RRR boosts liquidity, supporting markets, while a higher RRR restricts credit growth.
• Liquidity injections (OMO & MLF): The PBOC regularly injects liquidity into the system through tools like Open Market Operations (OMO), which involve buying or selling government bonds, and the Medium-Term Lending Facility (MLF), which provides longer-term funding to banks.

Sector analysis

China’s diverse economy presents a range of opportunities across various sectors. Understanding the dynamics of key industries is crucial for navigating the market effectively:

• Technology: Companies like Tencent, Alibaba, and Huawei drive China’s digital economy, benefiting from policy support in AI, semiconductors, and 5G.
• Consumer goods: Rising middle-class spending fuels growth in retail, luxury goods, and e-commerce.  Cyclical trends play a significant role in shaping China’s financial markets, with both seasonal patterns and government policies driving price action.  Consumption spikes during the Chinese New Year and Singles’ Day impact retail and e-commerce stocks.
• Real estate: Property market trends influence economic cycles, as real estate accounts for a large portion of China’s GDP.

Technical analysis

As China’s stock markets exhibit distinct characteristics with high retail investor participation, government influence, and evolving regulations, technical indicators are particularly valuable for identifying trends, breakouts, and potential reversals:

• Volume analysis: Sudden spikes in trading volume often indicate policy-driven market reactions or shifts in retail investor sentiment. A rise in volume without a corresponding price movement may signal accumulation (investors quietly buying) or distribution (investors gradually selling), hinting at potential future price movements.
• Gap analysis: Price gaps are frequent after government interventions, particularly in A-shares and tech stocks. A breakaway gap may indicate the start of a strong new trend, while an exhaustion gap suggests the current trend is weakening and a reversal may be near.
• Moving averages (MA): 50- and 200-day MAs help identify long-term trends and momentum shifts.  Shorter-term 20-day EMAs are more responsive to China's often volatile price movements, especially in tech and small-cap stocks, making them useful for identifying short-term trading signals.
• Relative strength index (RSI): Measures overbought (the price has risen too quickly and may soon fall) and oversold conditions (the price has dropped too much and may soon rise), particularly useful for tracking high-volatility sectors like technology and energy.
• Bollinger bands: Helps manage risk and identify breakout points, basically moments when prices move sharply beyond their usual range, in volatile indices like the SZSE (Shenzhen Stock Exchange) and ChiNext. This can signal the start of a strong price trend, helping traders anticipate market shifts.
• Parabolic SAR: Identifies potential price reversals, particularly in speculative markets like the STAR Market and ChiNext, where rapid price swings are common and can help traders take timely entry and exit decisions.
• Ichimoku cloud: Offers a comprehensive view of support, resistance, and trend direction, making it valuable for breakout stocks influenced by policy shifts.
• Candlestick patterns: Doji formations often signal market indecision, commonly appearing before and after major government announcements or regulatory changes.

Risk management techniques

How to identify and mitigate risk while trading China

Investing in China’s markets requires a well-structured trading plan to navigate high volatility, regulatory shifts, and government intervention. A disciplined approach helps manage risk, define entry and exit points, and prevent impulsive decisions driven by sudden market swings. With a large retail investor base, price movements can be unpredictable, making stop-loss orders, diversification, and hedging strategies essential.

Key market risks

Government policy and regulatory risks

The Chinese government plays a pivotal role in shaping markets, with policy changes directly affecting stock prices and industry outlooks.

Risk example: Crackdowns on technology, real estate, and education sectors in recent years triggered significant market downturns.

How to manage: Monitor updates from the CSRC and official government announcements to anticipate regulatory shifts. Diversifying across industries can also reduce sector-specific risks.

Currency fluctuations and capital controls

The CNY operates under a managed float system, meaning authorities actively guide its exchange rate.

Risk example: A depreciating CNY impacts firms with high foreign debt, as repayment costs increase, while an appreciating yuan puts pressure on exporters as products become more expensive for foreign customers.

How to manage: Track US-China trade relations, interest rate differentials, and capital control measures to anticipate CNY movements. Hedging strategies like USD/CNH positions can help mitigate currency risks by locking in exchange rates, protecting you against adverse yuan movements.

Market liquidity and volatility

China’s high retail investor participation leads to sharper price swings than in Western markets.

Risk example: The SZSE, especially the ChiNext board, often sees speculative trading, creating sudden price spikes and crashes.

How to manage: Implement stop-loss orders to limit downside risk and monitor liquidity levels. Be vigilant of any trading suspensions or capital control policies, which can disrupt normal market operations.

By understanding these risks and applying proactive risk management strategies, you can better navigate China’s unique market environment while making the most of its opportunities.

Why tracking margin lending in China matters

Margin lending (borrowing funds to trade stocks) amplifies market volatility, influencing both bull and bear cycles. China’s A-shares have a lower free float* (30-60%), making margin-driven movements more extreme than in the US (80-90% free float).

*Free float is the portion of a company’s shares that are available for public trading on the stock exchange. In a low free float market, even a small increase in buying (or selling) can cause large price swings that can cause more intense rallies or crashes.

China’s historic margin-driven events:

Source: Chinese Stock Market Sets New Record for Single-Day Net Stock Purchase via Margin Financing

In October 2024, China’s margin debt hit CNY 1.54 trillion (USD 218 billion), the highest since January 2023. However, the next day, the market saw a sharp decline, highlighting the volatility and risks associated with margin-driven rallies. Historically, excessive margin lending also triggered China’s 2015 stock crash, with forced liquidations leading to sharp declines.

Tracking margin lending levels helps anticipate risks, adjust strategies, and navigate China’s volatile stock market more effectively. This practice serves as:

• Early warning indicator: Rising margin debt signals potential market bubbles.
• Volatility predictor: High leverage increases the risk of rapid sell-offs.
• Market stability tool: Authorities monitor margin lending to prevent destabilising crashes.

Conclusion

China’s financial markets present a mix of opportunity and complexity. As the world’s second-largest economy, its rapid growth, evolving sectors, and increasing global integration offer traders access to diverse investment themes and sectors. Yet, these opportunities come with distinct challenges and risks, from regulatory unpredictability and capital controls to high retail investor influence and limited foreign access. Hence, understanding the dual nature of China’s financial landscape is essential for building a robust strategy with informed risk management.