The Chinese economy, the second largest in the world, will still expand at a relatively high rate, albeit slightly slower than prior years. Investors can also tap into the rising growth story through China A-share related exchange traded funds.
On the recent webcast, Where can investors find opportunities in China?, Anson Chow, V.P. of Passive Asset Management for Asia Pacific at Deutsche Asset & Wealth Management, argues that China economy will continue to expand and largely avoid a so-called hard landing that many pessimists are wary about.
“China’s economy is expected to decelerate gradually, but it should still be amongst the highest in the world in terms of GDP growth rate,” Chow said. “However, DB Research does not expect a hard landing, because it is well managed by authorities. Expected further monetary and fiscal easing, alongside aggressive privatization programs, should also help avoid a hard landing.”
Moreover, Chow pointed to a number of factors that will help support growth ahead.
For instance, consumption could account for a greater portion of gross domestic product growth. China added 13.2 million urban jobs last year, which suggests increased urbanization and potential for continued consumption growth. The greater migration into cities would add to economic growth on increased demand for infrastructure and services. Meanwhile, the investment-to-GDP ratio has edged lower, indicating that the Chinese are buying more instead of saving.
Additionally, many investors and portfolio managers remain underallocated to mainland China, but Chinese equities could find further support once demand picks up. Specifically, Chow said that foreign ownership as a percentage of domestic market was 1.5% for China excluding securities listed overseas or 11.4% including securities listed overseas.
“Due to foreign investment restrictions, China remains underrepresented among global investors’ portfolios,” Chow added.
Arne Noack, Exchange Traded Product Development at Deutsche Asset & Wealth Management, tried to better explain the Chinese stocks and foreign investment restrictions placed on the market.
“Due to foreign investment restrictions in China, there are multiple shares classes of Chinese companies floating around on various exchanges: A-Shares, H-shares, Red Chips, P Chips and B-Shares,” Noack said. “This allows investors different ways to access this complex market. A-Shares and H-shares make up the majority.”
A-shares refer to renminbi-denominated onshore Chinese stocks that are traded on the Shanghai and Shenzhen stock exchange. The A-shares are also limited to foreign investors who have gained regulatory approval to trade the securities. H-shares are Chines companies stocks listed on the Hong Kong exchange.
“Assuming full inclusion of China A-Shares, for example, China’s weight in the MSCI Emerging Markets Index could increase from its current 19% to more than 31%,” Noack added. “Deutsche Bank research also predicts that China could witness inflows of more than $180 billion as a result of this change. In addition to driving up share prices, these inflows would likely improve market liquidity and stability, which could in turn potentially attract $500 billion to $1.5 trillion of inflows in the medium to long term.”
More global investors may soon increase allocations to China if MSCI begins including A-shares into its benchmark emerging market index. While MSCI is still working out the details, FTSE global equity indices have started including A-shares.
In the mean time, ETF investors have a number of China A-shares options to track stocks that trade in Shanghai or the Shenzhen indices. For instance, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, targets the 300 largest and most liquid stocks in the China A-shares market.
The Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS), which track more mid-sized Chinese A-shares, includes Chinese A-shares taken from the China Securities 500 Index, stocks listed in Shanghai and Shenzhen.
Additionally, the Deutsche X-trackers Harvest MSCI All China Equity Fund (NYSEArca: CN) allows investors to track mainland Chinese stocks, with a 46.7% position in ASHR and 16.3% in ASHS, and the fund holds Chinese stocks listed in the U.S. and Hong Kong. For instance, CN includes 3.5% in Tencent, 1.9% in Baidu and 1.8% in Alibaba Group.
Financial advisors who are interested in learning more about China’s market can listen to the webcast here on demand.