Chinese A-Shares: a Once-in-a-Lifetime Opportunity
China’s A-shares market currently has a total market capitalization of USD 7.4 trillion and an average daily turnover of more than USD 60 billion.
The China A-shares market
Established in the late 1980s, China’s A-shares market, comprised of the Shanghai Stock Exchange and the Shenzhen Stock Exchange, was once closed to foreign capital. The opening of these stock exchanges to foreign investors has been carefully managed through the introduction of the quota-based Qualified Foreign Institutional Investor (QFII) program back in 2002 and the Renminbi Qualified Foreign Institutional Investor (RQFII) program in 2011. Under both programs, foreign investors are subject to license approval and restrictions by the Chinese government.
With the aim of further liberalizing China’s A-shares market, the first “through-train” program – Shanghai-Hong Kong Stock Connect – was launched in 2014, enabling foreign investors to invest in eligible stocks under the Stock Connect program. This significantly lowered the accessibility barrier for foreign investors wishing to invest in stocks listed on the Shanghai Stock Exchange. Then came the long-awaited Shenzhen-Hong Kong Stock Connect (SZHKSC) program launched in December 2016.
The Shenzen Stock Exchange – the largest untapped market
The Shenzhen Stock Exchange is characterized by high-growth companies (e.g. high tech, healthcare and “green industry” companies), small and midsize enterprises, and the ChiNext board, known as the “Chinese Nasdaq”. Over 50% of the stocks listed in Shenzhen engage in the “new economy” of China (versus only 20% listed in Shanghai), and over 75% of the Shenzhen stocks are privately owned (versus the 70% of Shanghai stocks that are state-owned). The SZHKSC definitely offers unique opportunities for portfolio diversification and chances to buy a range of stocks currently unavailable on the Hong Kong SAR and Shanghai markets.
According to the China Securities Regulatory Commission (CSRC), foreign ownership of Shenzhen-listed A-shares amounted to less than 1.2% and foreign ownership of total Chinese A-shares added up to less than 1.5% in 2016. This is strikingly far lower than foreign ownership of stocks in Korea (30%), Brazil (30%) and Russia (23%), for example (source: Bloomberg, HSBC, Credit Suisse, as of December 2016). We therefore believe that Shenzhen is the world’s largest untapped market, and not surprisingly, global investor knowledge about this market is fairly limited.
Potential inclusion of Chinese A-shares in MSCI indices in 2017 – an opportunity of a lifetime
An impactful event will be the eventual inclusion of Chinese A-shares in the MSCI index series. We believe this represents a once-in-a-lifetime opportunity. Chinese A-shares could account for 20% of the MSCI Emerging Markets Index once they are fully included, but even a half inclusion would represent a significant weight in the MSCI Emerging Markets Index. Global equity managers, particularly institutional investors, index trackers and ETFs may have to pump USD 300 billion into the market in the years ahead to match benchmark positions.
When Korea, a far smaller market, was included in MSCI’s emerging markets index, foreign ownership spiked from 16.5% to 40% from 1999 to 2004, and the full inclusion spanned six years. Taiwan (Chinese Taipei) took even longer, ten years, but saw a similar jump in overseas interest. It is expected that the inclusion of Chinese A-shares would take far less time and may coincide with upgrades to developed status for Korea and Taiwan (Chinese Taipei).
China’s GDP is still growing rapidly and Chinese “new economy” companies listed in Shenzhen are projected to post double-digit earnings growth in 2017
A variety of data indicate that economic activity in China is improving. The December Caixin PMI beat the consensus estimate, coming in at a reading of 51.9 points. Other growth indicators are also encouraging. The producer price index has continued to rise, reaching a five-year high of 5.5% in December. Even though skeptics point out that China’s growth trajectory is declining, its projected GDP growth above 6% for 2017 still compares extremely favorably to GDP growth in the Eurozone or in the USA.[ Source: International Monetary Fund, data as of October 2016].
China’s government is striving to find a balance between renminbi stabilization, real economic growth, containing asset bubbles and deleveraging the real economy. Infrastructure investments and new real estate development starts were backed by supply-side reforms in 2016. Domestic and overseas consumption stayed at a high level, indicating that aggregate demand from the real economy was in an uptrend. The effects of the growth stabilization policies of the past few years will gradually surface and lead to an earnings recovery.
Credit Suisse Asset Management’s Chinese equities capabilities – focus on A-shares and collaboration with our joint venture ICSBCCS in Beijing
Credit Suisse Asset Management’s Asian equities team was set up in Singapore in 2012 and expanded to Hong Kong SAR in 2016 as new strategies were added to the range. The Chinese A-shares strategy using the QFII quota is accompanied by a China Connect managed account program and by an Asian dividend income strategy with large investments in Chinese equities.
Since its establishment, the team has been advised by ICBCCS in Beijing for its Chinese A-shares strategy using bottom-up strategies with very active management and high tracking errors. Our joint venture ICBC Credit Suisse Asset Management (ICBCCS), which has one of the largest equity teams onshore in the People’s Republic of China, provides the local investment expertise, with around 80 equity investment professionals on the ground.
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