Will your exposure to China unwittingly increase this year?

Investing in China can be a bit complicated, as it has so many different types of shares available to different investors.

For example, it’s A Shares are listed on the mainland, priced in the Chinese currency the Renminbi, and have historically only been available to Chinese investors. B Shares are also listed on the mainland, are for foreign investors and priced in US dollars or Hong Kong dollars.

Meanwhile, H Shares are Chinese companies that are listed on the Hong Kong Stock Exchange and are traded in Hong Kong dollars and P Shares are Chinese companies listed on the Hong Kong Stock Exchange which are incorporated in the Cayman Islands, Bermuda and the British Virgin Islands, with operations in mainland China, and are run by private sector Chinese businessmen.

See what I mean?

But the Chinese government has started to open up the A Share market in particular to more investors.

Last year, index provider MSCI added 239 large-cap China A Shares to its indexes. That equates to around 5% of the some 3500+ companies available in that particular market. The allocation represented around 0.8% of the MSCI Emerging Market Index. It doesn’t sound a lot, but it is a significant step and the amount has been added to the 30% already allocated to Chinese companies via other stock markets in this index.

More China A Shares to be added

This year is shaping up to be an even busier one for Chinese expansion. Starting in May 2019, a three-step implementation process will increase the inclusion factor of A Shares from 5% to 20% (a total of 421 securities) by the end of the year. Importantly, the final stage will also include 168 medium-sized companies, bringing with them some welcome diversification.

The overall increase will result in the weighting of China A-shares more than trebling in many of the MSCI’s indexes, and a potential $13 billion of foreign inflows into A Shares in 2019 from passive funds alone. So if you invest in an emerging market tracker, you’ll be getting more A Shares whether you like it or not.

Assessing the best opportunities

The mix of China A Shares in international indexes is a welcome addition, but investing blindly in them is not the way to go in the view of the FundCalibre research team. One of the reasons we favour active over passive funds is that the managers can choose which companies they invest in – hopefully picking the best – and are not obliged to invest in the bad ones too.

Many Chinese companies still have opaque ownership structures and do not adhere to the same standards of reporting or regulation we are used to in the West. So on-the-ground presence and an experienced research team will be vital to separate the wheat from the chaff.

Elite Rated managers such as Dale Nicholls, who runs Fidelity China Special Situations; Martin Lau, manager of First State Greater China Growth; and Matthews Asia Pacific Tiger manager, Sharat Schroff, have all used special investment licences in China for some time, offering investors access to carefully selected A Shares, as well as the other varieties.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.