By Emerald Yau, Head of Equity Index Product Management, Asia
China’s equity market is huge. It’s the second largest in the world by total market capitalisation. With such a large market, diverse opportunities abound.
To determine which part of the market is best suited for an investor’s portfolio, one needs to understand what’s on the table in the onshore (A Share) market vs. the offshore (non-A Share) market. While opportunities can be complementary, there are different exposures available. To examine this exposure in more detail, let’s look at FTSE Russell’s two flagship China equity indices – the FTSE China A50 Index and the FTSE China 50 Index.
The FTSE China A50 Index represents the 50 largest Chinese A Share companies with constituent weightings adjusted for foreign ownership limits. The FTSE China 50 Index represents the 50 largest Chinese companies listed in Hong Kong in the form of P Chips, H Shares, and Red Chips. The constituents are subject to weight capping mechanisms to avoid over-concentration. Both indices are subject to the treatment of sanctioned equity index constituents.
FTSE China A50: transforming with China’s growth
Perhaps the picture of China being a financial-heavy, state-owned enterprise-controlled economy is still imprinted in some investors’ mind, but China has changed.
In fact, only two of the top ten constituents in the FTSE China A50 Index are banks or insurance companies. Meanwhile, six companies across the Consumer Staples and the Consumer Discretionary industries are among the top 10, which equates to over 30% of the index. This includes Kweichow Moutai, a leading baijiu producer company that holds the largest weight in the index.
More distinctively, the financial weighting in the FTSE China A50 peaked at around 67% in 2014, but has since been treading downwards and as of March 2023, sits at below 27% reflecting China’s transformation from an investment-driven, to a consumption-driven economy. Together with this shift, the rise of middle-income families has further led to a consumption upgrade in China, with a focus on premium domestic brands.
As a result, consumer companies are increasingly making up a larger portion of the FTSE China A50 Index. This includes distiller companies such as Kweichow Moutai, Wuliangye Yibin and Luzhou Laojiao, that are not available outside of the A Share market, as well as a large food product provider and a household appliance company.
But the A Share market represents more than just increased consumption exposure. The market is transforming in lock step with China’s direction of growth. Healthcare development is being reflected in the FTSE China A50 Index’s composition, but so are China’s decarbonisation goals.
The growth of healthcare spending and the advancement of healthcare technology has supported the growth of innovative biotech companies and pharmaceutical companies in China. Healthcare exposure in the FTSE China A50 Index has risen from 0% in 2012 to 7% as at March 2023.
On the other hand, China aims to become carbon neutral by 2060. The political push to become “greener” translates into a heavier reliance on renewable energy, electric vehicles, and rechargeable battery technology. Top constituents in the FTSE China A50 index include strategic hydropower company China Yangtze Power, solar solutions supplier LONGi Green Energy Technology, battery technology leader Contemporary Amperex Technology, and electric vehicle company BYD.
While the A Share market still has a 27% weighting to financials, evidently, this significant market offers far more interesting opportunities. The FTSE China A50 Index remains a relevant index to the broader A Share market that helps investors tap into China’s growth focus and potential including consumption, healthcare, and decarbonisation.
FTSE China 50: a new economy play
In the offshore market, (largely Hong Kong-listed and US-listed Chinese companies), a similar shift from financials and real estate towards consumptions can be observed. However, the composition in the offshore market is rather different, in the sense that it provides access to some of China’s fastest growing digital consumer companies and technology companies such as Tencent, Alibaba, Meituan Dianping and JD.com.
Zooming in to the Hong Kong-listed China companies across P Chips, H Shares and Red Chips, China’s new economy exposure has risen sharply in recent years, particularly because of the growth of such companies and the homecoming of the heavily technology focused N Shares.
Technology advancement progress is exceptional in China. The rising focus on technology R&D investment translates directly into innovation. For example, Tencent, the largest constituent in the FTSE China 50 Index, offers so much more than the WeChat messenger app. Tencent is the creator of the super app trend and its service is used by over 92% of China’s population – or 1.3 billion people.3
Riding on the global digitalisation trend, e-commerce is another fast-developing area in China that is well-represented by the FTSE China 50 Index. Alibaba and JD.com are the leaders in the field, and both have a staple place amongst the index’s top 10 constituents.
While there is a lack of large renewable energy companies listed in the offshore market, there has been a significant decline in non-renewable energy exposure in the FTSE China 50 Index, from an exposure of 23.5% in 2008 to below 5% as at the end of March 2023.
It is true that many of the new economy companies have been hurt in the past few years due to stricter measures, which were put in place to help China pursue its policy of common prosperity. However, in the National People's Congress (NPC) held in March 2023, the message was clear: a firm commitment to pursuing the state’s opening-up policy. The pro-business pragmatism can mean a much-needed breather for new economy companies from the stricter policies seen in recent years.
The environment has therefore turned to become more supportive of digital consumption and technology companies. The valuation of the FTSE China 50 Index is low with a P/E ratio of 8.73 compared to its 20-year average of 10.43, which provides a reasonable entry point.
China A50 + China 50 = complementary exposure
The exposure offered by China’s onshore and offshore markets has transformed. Investors are no longer only getting exposure to large banks via the FTSE China A50 Index and the FTSE China 50 Index. Rather, consumption, technology, healthcare, and decarbonisation are the new normal.
While each market offers unique exposure that can suit different investors’ needs, together, the FTSE China A50 Index and the FTSE China 50 Index paint a complementary picture of the most powerful companies in China.
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 Source: Statista; as of October 2022. Includes stocks listed on the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the Hong Kong Exchange and Clearing.[
3 Source: Tencent 2022 Q4 annual results: For Immediate Release (tencent.com)
1] Source: Statista; as of October 2022. Includes stocks listed Shanghai Stock Exchange, Shenzhen Stock Exchange, and Hong Kong Exchange and Clearing.
 N Share homecoming refers to companies used to trade in the US only are now also listed in Hong Kong as P Chips.
3 Source: Tencent 2022 Q4 annual results: For Immediate Release (tencent.com)
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