Embracing the globalization of Chinese equities

For being the second largest capital market and the second largest economy in the world, China is underrepresented in most of the international benchmarks, which is unparalleled with its significance to the world economy. With increased access to the Chinese domestic equities market, one of the largest index compilers received broad support from international investors with whom they consulted and recently announced it would include China A-shares into its benchmark indexes.

  1. Liberalization of capital markets fostering globalization of China assets

The impact of the inclusion in the initial stage is expected to be modest, due to the limited inclusion factor. Nevertheless, the decision shows that the China A market has gained recognition from international investors and cannot be neglected. The globalization of Chinese securities is inevitable and in progress. The opening up of China’s capital market has been accelerated in the past few years, as evidenced by the launch of QFII, RQFII and Stock Connect programs. CSRC Vice Chairman Mr. Fang Xinghai mentioned that they would consider increasing the Connect daily quota and reforming the QFII quota system for better foreign access[1].

Once the capital market of China is liberalized, it is believed that Chinese equities will become more prominent in the portfolios of global assets allocators in order to reflect the importance and influence of its economy and financial markets. With the expectation of China’s gradual increase in weighting in international benchmarks, global investors are called to pre-position themselves for the irreversible trend of China assets globalization. A broad-based index and related investment products which can better represent the Chinese economy would be an ideal building block of global and/or regional equity portfolios.

  1. S&P China 500 – in response to increasing market demand for a “Total China” index

Against the backdrop of broadened capital flows between domestic China and international markets, the demand for benchmarks that integrate the China onshore and offshore listings has been increasing. In response to market demand, the S&P China 500 was launched to offer more complete China coverage by including both onshore and offshore Chinese equities.

The S&P China 500  covers the 500 largest and most liquid Chinese companies, regardless of their listing venue, including the entire universe of Chinese equities, such as A, B, H, Red Chip, P Chip and Chinese securities listed in the U.S. or any other overseas exchanges.

Compared to other major China indices, the S&P China 500 offers a more diversified sector exposure (Figure 1). It is much less concentrated in financials (23%) compared to FTSE A50 (64%), CSI 300 (35%), MSCI China (25%) and HSCEI (72%) as of May 31, 2017. More weight is distributed to new economy sectors, such as I.T. (19%) and consumer discretionary (13%).

Benefiting from its diversification in markets and sectors exposure, the S&P China 500 has demonstrated better risk-adjusted returns (Figure 2). During the period from Dec. 31, 2008, to May 31, 2017, the S&P China 500 generated an annualized return of 10.9% and Sharpe ratio of 0.48; both are the highest among the major China indices.

The S&P China 500 offers more comprehensive market coverage while approximating the sector composition of the broader Chinese equity market, and this makes it a better proxy for the Chinese economy.

[1] Source: Ming Pao, 22 June, 2017. https://news.mingpao.com/pns/dailynews/web_tc/article/20170622/s00004/1498067626316

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