By: Christopher Vass, senior product manager, and Alex Chen, associate director
The China equity markets have changed dramatically since FTSE Russell became the first international index provider to launch mainland indexes back in 2001. This shifting landscape has made it difficult for international investors to consistently target comprehensive China exposures. To help investors address these challenges, we’ve developed the Total China Concept, designed to provide a mechanism to gain access to Chinese listed equities globally.
The number of Chinese listings domestically and abroad has grown rapidly in recent years, as has its share of emerging market equity portfolios. But the problem for international investors has been the Chinese equity market consists of numerous share classes with a history of restricting foreign investors. As such, the majority of them have historically only been able to access China via Hong Kong and overseas listings.
However, as the mainland China equity market continues to open to overseas investment, the ability for international investors to gain access to this large and growing market has become easier. Perhaps most notably, Chinese regulators have eased restrictions on foreign investment in China A shares, which were China’s first domestic equity listings and have grown to represent a considerable portion of the China equity market.
A key question has therefore emerged: Do international investors need to include China A shares in their existing China portfolios? This is perhaps best answered by taking a closer look at the A shares market size and composition. As shown below, the A shares market represents over half of the China equity opportunity set and offers investors a rich and diverse opportunity set in terms of industry representation.
The size and breadth of the A shares market might give investors good reason to consider including them in their China equity allocations. However, the data above also indicates that complete China equity representation can’t be found in A shares alone. This is because while A shares do provide broad exposure across various industries, there are some that are underrepresented. For example, the Oil & Gas and Telecommunications industries only comprise a fraction of the A shares market, with greater representation in other share classes. This suggests that a more complete representation of China can be achieved by aggregating the seven share classes.
If we compare the risk and return characteristics of each China equity share class, we find further support for combining the share classes for complete China exposure. As shown below, the volatility and performance of each share class has varied significantly over the past 12 years, and the combination of the share classes has resulted in improved risk-adjusted returns relative to the majority of the individual share classes. Diversification benefit is especially valuable given the historical volatile nature of Chinese equities.
This complete picture of the different share classes presents us with the potential benefits of a Total China Concept. By diversifying across all the different China share classes—rather than only including one share class of a company over another—we effectively capture the overall investable market capitalization of each constituent company.
Please download our Total China Concept paper to learn more about China’s evolving economy and how to best capture its changing equity market landscape.
© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE GDCM”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE GDCM, MTS Next Limited, Mergent, FTSE FI and YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “WorldBIG®”, “USBIG®”, “EuroBIG®”, “AusBIG®”, “The Yield Book®”, and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE GDCM, Mergent, FTSE FI or YB. “TMX®” is a registered trademark of TSX Inc. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Products or the fitness or suitability of the FTSE Russell Products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this communication or links to this communication or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this communication or accessible through FTSE Russell Products, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE GDCM, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.