The low foreign ownership levels may be attributed to investment restrictions in China, notably Chinese A-shares that trade on the mainland and are only available to Chinese residents or foreign institutional investors.
Nevertheless, China is opening up its market to foreign investors, and some ETFs have gained access to the Chinese A-shares market. More recently, FTSE’s benchmark emerging market index is shifting toward China A-shares inclusion. MSCI also expects to include China A-shares to its global benchmarks – with a full inclusion of China A-shares, MSCI Emerging Markets Index’s China weight could rise to over 31% from 20%.
In the meantime, ETF investors can add China A-shares exposure to their portfolios through ETF options, including the Deutsche X-trackers Harvest MSCI All China Equity Fund (NYSEArca: CN), Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) and recently launched Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (NYSEArca: ASHX).
ASHR is the largest U.S-listed A-shares ETF and targets CSI 300, which includes the 300 largest and most liquid stocks in the China A-shares market. Nick Baseel, ETF Regional Vice President at Deutsche Asset & Wealth Management, points out that the underlying China index may help an investor diversify his or her portfolio since the CSI 300 Index has a 0.019 correlation to the S&P 500.
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. Baseel also noted that the CSI 500 Index has a 0.015 correlation to the S&P 500.
CN has a broader portfolio, including allows investors to track mainland Chinese stocks, with a 45.2% position in ASHR and 16.4% in ASHS, and the fund holds Chinese stocks listed in the U.S. and Hong Kong.
The recently launched ASHX tracks the CSI 300 USD Hedged Index, which is designed to provide direct access to China A-shares while diminishing the negative effects of a depreciating Chinese yuan currency against the U.S. dollar – a weaker foreign currency means that returns are also lowered when converted into U.S.-dollar-denominated returns. The ETF basically acts like a hedged version of ASHR. [2 New Currency-Hedged China A-Shares ETFs]
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