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Oleg Ruban

Oleg Ruban

Head of Analytics Applied Research for Asia Pacific

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The rise of fundamental factors in China A shares


  • Our research suggests fundamental factors gained traction in China-A-share strategies.

  • For factors such as value and quality, risk-adjusted returns for China A shares and global equities converged over the last two years.

  • Institutional investors’ increased presence likely helped to tip the scales away from local, sentiment-driven retail investors.


“Crazy casino.”1 “Dominated by retail investors.”2 The market for China A shares has been labeled with many epithets by the financial press. Commonly held perceptions about China A shares — along with their historically higher volatility and shorter, sharper bull-bear cycles relative to developed and other emerging markets — have influenced institutional investors to think that fundamental factor strategies may not work in the Chinese equity markets. Our research suggests this may be changing.


Value and quality performance strengthened

Value and quality are well-known fundamental factor strategies widely used by institutional investors in portfolio design. Last year, we found that these, and other factors, had weaker long-run return premia in China A shares, compared with emerging and developed markets.

One year later, we found that the book-to-price (a value factor) and earnings quality (a quality factor) were among the top-performing style factors in China A shares for full-year 2018 and in the year to date, despite the transition from a bear to a bull market.


Factor information ratios: top-performing style factors in the China A Long-Term Model  
2018     2019 year to date  
Dividend Yield 2.40   Momentum 1.33
Investment Quality 2.27   Earnings Variability 1.18
Book-to-Price 1.59   Beta 0.91
Profitability 1.41   Book-to-Price 0.77
Earnings Quality 1.40   Earnings Quality 0.45
Long-Term Reversal 1.27   Investment Quality 0.11
Beta 1.24   Long-Term Reversal 0.03
Momentum 0.57   Liquidity 0.02
Leverage 0.53   Dividend Yield 0.01
Size 0.05   Growth -0.10

Data as of June 4, 2019.

Further, we observed convergence between China A shares and global market returns for book-to-price and earnings quality.


China A shares’ risk-adjusted factor returns converged with global results

Data from January 2009 to March 2019. The graphs illustrate risk-adjusted returns of the book-to-price ratio, earnings quality and profitability, respectively, in the China model and the MSCI Global Total Market Equity Model for Long Term Investors (GEMLT).


Structural trends helped drive change

Local institutional investors in China A shares are aware of these strategies: Bloomberg recently reported how some funds generated strong outperformance by pursuing value strategies. As institutional investors establish a stronger foothold in this market, we might expect a wider adoption of fundamental factor strategies.3

Additionally, the convergence of value and quality returns between China A shares and global markets may be related to the growing participation in the A-shares market by international investors who follow these strategies. Galaxy Securities, citing data from the People’s Bank of China, recently reported that foreign investors now hold CNY 1,684 billion of China A shares, while local mutual funds hold CNY 1,946 billion. The numbers were CNY 344.8 billion and CNY 1,315 billion, respectively, in December 2013.4

Despite retail investors’ enduring influence, fundamental factors were increasingly important return drivers in China A shares. Recent return patterns suggest that gradual institutionalization and internationalization of the A-share market may further increase the importance of systematic, factor-based investment strategies.



1S.R. and C.C.W. “A crazy casino.” The Economist, May 26, 2015.

2Lockett, H. “Chinese stock rebound has fingerprints of retail investors.” Financial Times, March 14, 2019.

3Wang, A., Lu, M., Pei, S., Wang, C. and Chang, R. “Top Fund Proves Value Investing Works in China with 159% Return.” Bloomberg News, Dec. 24, 2018.

4“Foreign-invested A shares of 1,668.88 billion yuan directly to the public funds of 1,945.796 billion.” Galaxy Securities Fund Research Center, March 2019.



Further Reading

Vive la différence: Active factor strategies in China A shares

Which factors mattered in China?

Can your investment strategy work with China A shares?