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- Offshore investors increasingly have an opportunity to participate directly in a broadening array of China A-shares.
- Offshore ownership of A-shares remains low, but this has been changing in recent years as investors build up their knowledge of this market.
- We think a primary focus of offshore interest will be in three areas: diversification, risk-adjusted return benefits, and increased alpha potential.
- Prudently increasing allocation to China, with an emphasis on A-shares now may help shift portfolios toward what the major indices may look like in the future.
AMID THE UNCERTAINTY OF THE US-CHINA CONFLICT AND TENSIONS FROM THE GLOBAL COVID-19 PANDEMIC, the last few years have still witnessed an unprecedented rise in institutional interest in Chinese equities. This has continued to escalate since the inclusion of A-share stocks in MSCI indices began in 2018. A-shares are renminbi-denominated stocks of Chinese companies that trade on the Shanghai and Shenzhen Stock Exchanges. Following MSCI’s decision to add them to its Emerging Markets (MSCI EM) Index, FTSE Russell and S&P Dow Jones followed suit, adding China A-shares to their respective indices in 2019. These inclusions were direct responses to the Chinese government’s earlier foreign investor access initiatives (since extended to bond markets): the Hong Kong-Shanghai Connect and the Hong Kong-Shenzhen Connect.
Today, offshore investors have a growing opportunity to participate directly in a broadening array of China A-shares. These securities continue to be phased into indices gradually, with the number of stocks to choose from increasing. In 2019, MSCI’s A-share exposure accelerated across their indices, with the index inclusion factor expanding from 5% to 20% in three steps throughout the year.1 Future A-share inclusion will likely…
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1MSCI, Wellington Management