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Chin Ping Chia

Chin Ping Chia
Head of Research for Asia Pacific

CHINA A-SHARES: TOO BIG TO IGNORE

China A-Shares are too big to be ignored but remain difficult for many institutional investors to access. How can global investors avoid a stock market that is now the world’s third-largest, with a total market value of nearly USD 4 trillion, putting it just behind the United States and Japan?

 

World's largest exchanges by market cap

Source: World Bank. As of June 2014

In the 2014 consultation on the potential inclusion of China A-shares in the MSCI Emerging Markets Index, most investors supported their inclusion. However, accessibility constraints imposed by the current quota system make many uncomfortable with their inclusion right now. The most common approach is to do nothing until access to the A-share market is further liberalized.

This strategy leaves many global investors with incomplete exposure to Chinese equities. MSCI examined the opportunity costs of not having an A-shares allocation in a global equity portfolio. While restrictions currently pose operational challenges to institutional investors, strong arguments remain for capturing a comprehensive China investment opportunity set. Given the profoundly important role of A-shares to global investors, key issues include:

  • China A-shares – along with frontier markets – historically have demonstrated relatively low correlations with the rest of the world, leading to potential diversification effects at the total portfolio level. This benefit persisted against a backdrop of rising correlations between developed and emerging markets equities that have diminished the diversification effect of emerging markets investing in general. At the country level, China A-shares constitute the only market among the major developed and emerging countries that has historically enjoyed such a low correlation with global indexes.
  • While the market accessibility of A-shares is similar to that of frontier markets, A-shares are far more investable in terms of capacity, concentration, liquidity and cost of replication.
  • China, despite its recent slowdown, was still the largest contributor to global economic growth in 2013, accounting for more than half of the world’s GDP growth that year. Investors may find it difficult to capture China’s long-term economic expansion without the A-shares market. Part of the reason is that, compared to the MSCI China Index, the MSCI China A Index has three times the number of total constituents. Furthermore, the two indexes have very different sector concentrations; combining them may provide a better representation of the long-term growth of China’s domestic economy.

Ultimately, each investor needs to assess the tradeoffs between A-shares’ market accessibility — and their legal, tax, compliance and other operational requirements —  and the potential long-term strategic value of having a more representative and comprehensive China allocation in their equity policy portfolio.

Read the paper, “China A-Shares: Too Big to Ignore.”

 

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