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  • ETFs

    China: Accessing Its Transforming Economy

    John Patrick Lee, CFA ,Associate Product Manager
    March 22, 2019
     

    China’s representation in broad global benchmarks is increasing as index providers initiate or increase the inclusion of Chinese assets, opening up new opportunities for investors to gain exposure to Chinese equities.

    Last month, global index provider MSCI announced plans to increase the weight of China A-shares in their flagship indices. By the end of 2019, the weighting of onshore equities in the flagship MSCI Emerging Markets Index should grow from 0.72% currently to around 3.3% and potentially result in inflows as high as $67 billion from foreign investors.1

    One critical development is that securities on the ChiNext board of the Shenzhen Stock Exchange are set to be included this year, in addition to mid-cap A-share companies. These types of companies are generally smaller and operate in consumer-led sectors, so they have exposure to the segments of the Chinese economy that we believe are expected to drive growth going forward.

    Chinese Equities Start Strong in 2019

    Chinese onshore equities have outperformed broad emerging markets and offshore Chinese equities by a wide margin thus far in 2019, as seen in the table below.

    Name/Ticker

    YTD Return (%)

    Classification

    SME-ChiNext 100 Index

    28.9

    Chinese onshore

    CSI 300 Index

    25.3

    Chinese onshore

    MSCI China Index

    15.7

    Mostly Chinese offshore

    FTSE China 50 Index

    12.7

    Chinese offshore

    MSCI Emerging Markets Index

    9.3

    Broad EM

    As of 2/28/19. Source Bloomberg. Past performance is no guarantee of future results. Index performance is not representative of fund performance. For fund performance current to the most recent month end, visit vaneck.com.

    Factors that are contributing to Chinese onshore equity strength include:

    ChiNext and Mid-caps Arrive

    After initially limiting inclusion to large-cap stocks trading on the Shanghai and Shenzhen exchanges to ensure that inflows from foreign investors could be accommodated, MSCI will be expanding eligibility in 2019 to both mid-cap names and stocks trading on the ChiNext board. FTSE Russell, which will begin adding Chinese-listed stocks to its global equity indices in the summer of 2019, will include companies of all sizes from the start.2

    The inclusion of mid-caps and ChiNext securities adds a new opportunity set into global benchmarks. Mid cap companies may provide investors a different risk/reward profile than large cap companies. ChiNext board companies represent about one-fifth of the market cap of China A-share companies, with a tilt toward technology firms, and may also provide differentiated exposure compared to large cap Chinese companies.

    Accessing Differing Onshore Equities Exposures

    With growing Chinese representation in broad global benchmarks, ETFs may offer investors an efficient way to gain exposure to Chinese assets.

    The CSI 300 Index provides exposure to the 300 largest and most liquid stocks in the Chinese A-share market, which are also increasingly being added to global benchmarks. It also includes state owned enterprises (SOE), which are companies owned in part or entirely by the government. VanEck Vectors® ChinaAMC CSI 300 ETF (PEK®) seeks to track the CSI 300 Index.

    In contrast, the SME-ChiNext 100 Index provides access to a different opportunity set of generally smaller, non-SOE companies with less leverage. VanEck Vectors® ChinaAMC SME-ChiNext ETF (CNXT®) seeks to track this index, which includes 100 companies with exposure to China’s growing consumer-based economy. We believe this sector will continue to play a larger role in China’s economic growth. Additionally, with increased representation of ChiNext-listed stocks and mid-cap names in global benchmarks, foreign investment in these companies is expected to increase.

     

    Characteristic

    CSI 300 Index (PEK)

    SME-ChiNext 100 Index (CNXT)

    Benefits

    Weighted Average Market Capitalization

    Large cap tilt ($49B)

    Mid cap tilt ($11.7B)

    • Different capitalizations may provide differentiated performance

    Comparative Debt Levels

    Aggressive leverage

    Conservative leverage

    • Diversification benefits in light of the Chinese government’s deleveraging initiative

    State Owned Enterprises (SOE)

    Higher representation

    Lower representation

    • SOEs can provide exposure to traditional EM companies backed by the gov’t (industrials, financials)

    Small and Medium Enterprises (SME)

    Lower representation

    Higher representation

    • SMEs can provide exposure to “new economy” companies driven by consumers (IT, Healthcare, Cyclicals)

    Correlation to MSCI EM

    0.45

    0.38

    • Low correlation against broad EM indices point to differentiated performance and risk/return profile

    Source: VanEck, Bloomberg. As of 2/28/2019.

    Opportunities for Investors

    The increased representation of Chinese equities to global benchmarks suggests, in our view, that the market liberalization of onshore Chinese equities is continuing and further inclusion is coming. The size and diversity of the onshore market may present different opportunities for investors depending on the exposure they are seeking. While the initial inclusion wave in flagship indices was limited strictly to large cap stocks, the addition of more types, such as mid-caps and ChiNext stocks, may provide investors access to Chinese companies with different risk/return profiles.

    IMPORTANT DISCLOSURE  

    1Source: Bloomberg. “Here’s What Analysts Are Saying About MSCI's Latest China Move.” March 1, 2019.

    2Source: 2018 FTSE Annual Country Classification Review.

    The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

    The SME-ChiNext 100 Index tracks the performance of the 100 largest and most liquid China A-share stocks listed and trading on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange.

    The CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.

    The MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe.

    FTSE China 50 Index includes the largest 50 Chinese stocks (H-shares, Red Chips, and P Chips) listed on the Hong Kong Stock Exchange, ranked by full market capitalization.

    This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    CSI 300 Index and its logo are service marks of China Securities Index Co., Ltd. ("CSI") and have been licensed for use by Van Eck Associates Corporation. The VanEck Vectors ChinaAMC CSI 300 ETF is not sponsored, endorsed, sold or promoted by CSI and CSI makes no representation regarding the advisability of investing in the VanEck Vectors ChinaAMC CSI 300 ETF.

    SME-ChiNext 100 Index and its logo are service marks of Shenzhen Securities Information Co., Ltd. ("SSI") and have been licensed for use by Van Eck Associates Corporation. The VanEck Vectors ChinaAMC SME- ChiNext ETF is not sponsored, endorsed, sold or promoted by SSI and SSI makes no representation regarding the advisability of investing in the VanEck Vectors ChinaAMC SME-ChiNext ETF.

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