Dispersion in China’s Onshore Equity Market
Perhaps looking for potential opportunity from China's reopening and its low historical correlation with global equity markets, foreign investors have reentered the China onshore market in droves. The net foreign inflows to China A shares through Stock Connect, in the year to date through April 28, exceed the total annual net inflows of 2022 — with January's USD 19.4 billion of inflows almost 50% higher than the previous monthly record set in 2017.1
Were stock-picking opportunities more apparent in certain parts of the market?
We found that the small- and mid-cap segments of the China onshore market had a higher dispersion of returns (as measured by cross-sectional volatility, or CSV) historically, compared to larger size segments. Moreover, while smaller stocks in the onshore market historically were much riskier than larger stocks, they had similar levels of volatility as the mega- and large-cap segments, as of the end of April.
Tracking these potential opportunities could help investors as they determine how best to allocate assets to and within China.
China A equity market’s CSV by size segments
Based on weighted cross-sectional standard deviation of trailing-three-month returns from Nov. 30, 2012, to April 30, 2023. The MSCI China A Onshore Small Cap Index is used to represent China A small caps.
China A-share annualized rolling volatility by size segments
Based on daily returns from Nov. 30, 2012, to April 30, 2023. The MSCI China A Onshore Small Cap Index is used to represent China A small caps.
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The Integration of China Onshore and Offshore Equities
While the MSCI China Index declined 21.8% in 2022 and underperformed the MSCI EM ex China Index by 3%, the return dispersion within the Chinese equity market was also noticeable.
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1 ”Foreigners Scoop Up China Shares with January Inflow at Record.” Bloomberg News, Jan. 30, 2023.
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