Tapping into Asia’s booming consumer
Among the biggest changes to emerge in the investment landscape over the past 10 years is the vast...
Given how easily we can access the products and services China has to offer, you could be forgiven for thinking that investing in its companies would be just as straightforward.
However, it is only recently that the country has started to open up its financial markets to foreign investors, and even now there are limits. We take a look at the different types of Chinese shares you can buy.
The main difference between the Chinese share classes is who is able to purchase them.
Mainland China has two stock exchanges, one of which is in Shanghai and the other is in Shenzhen. Both of these have ‘A’ and ‘B’ markets. A-Shares are priced in the Chinese currency renminbi and B-Shares are priced in either US dollars if they are listed in Shanghai, or Hong Kong dollars if they are listed in Shenzhen.
The Chinese A-Share market was originally for Chinese investors only and B-Shares were for foreign investors. Since 2001, however, the government has gradually been opening both markets to a broader scope of investors, in order to increase investment in Chinese businesses.
So where do H-Shares come into play? H-Shares are Chinese companies that are listed on the Hong Kong Stock Exchange and are traded in Hong Kong dollars. Because H-Shares are available to a broader range of investors, they tend to be more liquid. This means they can be bought and sold more easily.
Not all Chinese or global funds invest across all Chinese share classes, as only some have the necessary licence to invest in domestic Chinese shares. For the funds that do, it means they have a wider range of stocks to choose from.
For example, Fidelity has an investment licence allowing its manager to purchase a certain amount of domestically-listed Chinese companies. Dale Nicholls’ Fidelity China Special Situations investment trust, currently holds around 10% in A-Shares*. Dale looks for undervalued companies which reside further down the cap spectrum, as he believes smaller firms tend to be less well researched and therefore mispriced. He has extensive knowledge of the Far East and the support of a large and well-resourced team on the ground in China.
Elsewhere, First State Greater China Growth currently has a 14.3%** weighting to China A-Shares, as well as 7.7%** in China H-Shares and 0.9%** in China B-Shares. It also has 17.1%** in Hong Kong companies and 22.7%** in Taiwan. Managers Martin Lau and Sophia Li run a relatively concentrated portfolio which currently stands at 55 holdings. The stocks are chosen with a bias towards quality and responsible stewardship, with an absolute return mindset.
Before investors decide to up their exposure to Chinese A-Shares, however, they should note that there are also some concerns regarding the assets, because a lot of the companies are state owned enterprises (SOEs). This means they can be more volatile and less transparent compared to privately-owned companies.
That said, in 2017, global index provider MSCI announced that it will include China A-Shares in its All Country World and Emerging Markets indices, both of which only currently include offshore-listed Chinese stocks. This means that, from June 2018, a further 222 companies will be phased into the indices.
The initial move will see a 5% inclusion of the Chinese A-Shares available, which will mean the MSCI Emerging Markets index will have a 0.7% weighting to them. If A-Shares reach their full weight in the index, however, they will eventually account for 12.8%.***.
Fidelity’s Dale Nicholls said the inclusion of China A-Shares into the MSCI indices could mark one of the greatest global asset allocation shifts over the next decade.
“If you look at China’s representation in global markets now, it’s probably less than 3%, yet its global GDP as a percentage is around the mid-teens. It’s therefore natural that this gap will close over time. You will see an increasing representation of China in global markets,” he said.
“All investors globally will find themselves under pressure to understand these companies and be invested. I think this will drive much greater capital flows into China as a result.”
* Source: Fidelity China Special Situations factsheet, as of 31 January 2018.
** Source: First State Greater China Growth factsheet, as of 28 February 2018.
***Source: Fidelity China Special Situations presentation, February 2018.