Another way to measure the impact of China’s stock market performance on its overall economy is to compare the size of its capital markets to the size of its GDP. The following table shows that China has a relatively low market cap to GDP ratio.

CountrySize of Stock Market (Market Cap)GDPMarket Cap/GDP Ratio
U.S.$25.18 trillion$17.42 trillion145%
China$6.83 trillion$10.36 trillion66%
Japan$5.05 trillion$4.60 trillion110%
U.K.$3.83 trillion$2.94 trillion130%
Germany$1.94 trillion$3.85 trilllion50%
Switzerland$1.74 trillion$685 billion254%

Market Cap Data from Bloomberg as of 6/30/2015. GDP data from the World Bank as of 12/31/2014

Misconception 4: The pullback undermines the reform agenda

China’s policymakers are transparent about their 2015 goals: Renminbi internationalization, continued opening of the capital markets to foreign investors, and streamlining state owned enterprises.

In order to achieve these goals, China wants to maintain a strong stock market to allow Chinese companies to tap equity capital markets for asset raising as opposed to issuing new debt. In line with opening onshore markets to the world, the People’s Bank of China, China’s central bank, announced on July 14th that China’s $6.5 trillion bond market would be opened to central banks, sovereign wealth funds, and international finance institutions17.

Additionally, on July 9th, the Chief Executive of Hong Kong, Zhenying Liang, commented in a speech that the Shenzhen–Hong Kong Stock Connect is still on track to be launched “on time.”18 While he did not specify the date, high ranking officials associated with the Hong Kong Stock Exchange previously stated that the program would launch around October 1st, China’s National Day19.

Misconception 5: Onshore Chinese equities are no longer on track to be included into global indices

Most investors outside of China define China’s stock market by the 145 Chinese companies listed in Hong Kong ($2.24 trillion market cap)20. This number excludes the 2,883 stocks listed in the onshore exchanges ($4.76 trillion market cap)21. Historically, these onshore companies have been excluded from the definition of China within international indices due to access restrictions placed on foreign investors. This will all be changing soon.

In June, MSCI, a leading provider of index solutions globally, completed a review of the inclusion of onshore Chinese equities into its definition of China within its broad based international indices. MSCI announced that the onshore markets would be included upon the resolution of three outstanding issues: quota caps, beneficial ownership, and quota being based on firm size. Despite the pullback, we believe these issues are not insurmountable and MSCI is proactively working with Chinese regulators to amend them.

While the amount of halts and suspensions are currently higher than usual, they are a regular part of trading activity in China’s onshore markets. MSCI is likely to discuss this practice in its dialogue with Chinese regulators. Moreover, China’s leadership is not alone in intervening in its markets, many other developed markets have required government interventions during periods of volatility. As mentioned, the launch of the Shenzhen–Hong Kong Stock Connect program and the resulting increased access to the onshore markets should accelerate the MSCI inclusion process.

Inclusion will have a dramatic effect on international indices. Currently, these indices have an underweight to China despite the size of its GDP and market cap. China’s weight will rise from 25% to over 40%22 in MSCI’s Emerging Market Index upon full inclusion and could potentially rise to over 60%23 if South Korea and Taiwan are upgraded to developed market status.

We believe that while there are some misconceptions about the onshore markets proliferated in the news, the increased media attention will ultimately be beneficial to China’s goal of opening up its markets to international investors. Before the pullback, few investors in the U.S. realized that the vast majority of their investments in China were limited to Hong Kong-listed Chinese companies only, and that they were missing out on the much larger onshore Chinese market. Now that this disparity has gained national awareness, U.S. investors will be paying much greater attention to the performance of the onshore markets going forward.


  1. Price to Earnings ratio is a valuation ratio of a company’s current share price compared to its per-share earnings. It is calculated as: Market Value per Share / Earnings per Share (EPS).
  2. Data from Bloomberg as of 7/28/2015
  3. Data from Bloomberg as of 7/28/2015
  4. Data from Bloomberg as of 7/28/2015
  5. Data from Bloomberg as of 7/28/2015
  6. Data from Bloomberg as of 7/28/2015
  7. Data from Bloomberg as of 7/28/2015
  8. Data from Wind as of 7/28/2015
  9. Data from Bloomberg as of 7/28/2015
  10. Data from Bloomberg as of 7/28/2015
  11. Data from Bloomberg as of 7/28/2015
  12. Data from Bloomberg as of 7/28/2015
  13. Data from Bloomberg as of 7/28/2015
  14. China Daily article titled “Chinese stock volatility’s family wealth limited: CICC” on July 21, 2015
  15. William Hess of PRC Macro, report titled “Revisiting Trends in Urban Income and Wealth Distribution” released on May 13, 2015
  16. Data from the National Bureau of Statistics of China released on July 14, 2015
  17. Data from People’s Bank of China from 7/17/2015.
  18. Wang Muguang, article titled “Zhenying Liang Discusses Shenzhen Hongkong Stock Connect: ‘Endeavors to launch on time’,”Nanfang Metropolis Daily from 7/10/2015.
  19. Zhidong Qiao, article titled “Hongkong is Ready: Shenzhen Hongkong Stock Connect Expected to Launch Around October 1st,” CCSTOCK from 7/13/2015.
  20. Data from Bloomberg as of 7/28/2015
  21. Data from Bloomberg as of 7/28/2015
  22. Data from MSCI as of June 30, 2015
  23. Calculation by KraneShares of taking South Korea and Taiwan’s weight’s within MSCI Emerging Markets as of 6/30/2015 and adding to China’s weight upon full inclusion of the onshore equity market.