United Kingdom, Intermediaries

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A is for allocation: the rationale for increasing exposure
to China

Allocations to China equity are widely recommended, but how much is appropriate and why? We consider several reasons why this may make sense for offshore investors.

Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only. Your capital may be at risk. Please refer to any investment risks noted near the end of the content available for download below.

Key points

  • 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…

To read more, please click the download link below.

1MSCI, Wellington Management

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