On a year-to-date basis, China A-shares, the stocks trading on mainland bourses in Shanghai and Shenzhen, have scuffled while other emerging markets equities have rallied.
Weighing on A-shares and exchange traded funds, such as the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), are China’s attempts to keep a lid on the value of the yuan.
However, ASHR, the largest US-listed ETF tracking stocks trading on mainland China, is up more than 3% this month and that could be a sign stocks in the world’s second-largest economy are poised to deliver more upside into year end.
The Chinese currency will strengthen when the yuan enters the International Monetary Fund’s basket of reserve currencies as it joins the dollar, euro, pound and yen. With the importance of the yuan growing as an alternative to the U.S. dollar, investment flows into China could help support Chinese markets and country-specific exchange traded funds.
SEE MORE: China A-Shares ETFs Climb on Anticipated Shenzhen-Link
Chinese A-Shares are a specific class of equity securities issued by Chinese companies and denominated in RMB. Under current Chinese regulations, foreign investors may access A-Shares if they are a designated foreign institutional investor or gained access through either the Qualified Foreign Institutional Investor (QFII) or a Renminbi Qualified Foreign Institutional Investor (RQFII) programs.
ASHR’s recent strength is prompting bears to run for cover while bullish traders reconsider the fund. Industrial and materials stocks have been leading Chinese equities higher in recent sessions.
“Industrial metals have rallied impressively this month since Donald Trump‘s surprise win on November 8. In addition, China’s central planner the NDRC has released infrastructure projects worth a total of 338 billion yuan this month, already exceeding October’s total of 299 billion yuan. As we head into the year-end, Beijing needs to make sure the economy is on track to hit its 6.5%-7% GDP growth target. And don’t forget China will undergo its once-every-five-years power transition next year. If anything, Beijing needs to make sure the economy is stable,” reports Shuli Ren for Barron’s.
The inclusion of the yuan in the SDR basket may push Beijing to implement further forms in China, including advances in its capital account liberalization. For instance, China recently implemented the Shenzhen-Hong Kong Stock Connect program to expand lists of mainland-listed companies that foreign investors can access.
SEE MORE: Yuan Could Support China ETFs
Earlier this year, China A-shares, the stocks trading on mainland exchanges in Shanghai and Shenzhen were boosted by speculation index provider MSCI could add those stocks to its international indices, including the widely followed MSCI Emerging Markets Index.
MSCI opted against that inclusion, but that does not mean A-shares are off the index provider’s radar. The opposite is true as MSCI remains actively engaged in client discussions regarding what steps need to be taken for A-shares to become appropriate fits for MSCI benchmarks. More than $1.5 trillion in global assets are benchmarked to the MSCI Emerging Markets Index.
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Deutsche X-trackers Harvest CSI 300 China A-Shares Fund
