China has enacted financial reforms to help open up its markets to the global community, raising the exposure of Chinese equities in emerging market indices, but most exchange traded fund investors may still be underallocated to this market country.
“You have new China and old China, and you want to get all China. I think making sure you get part of that new China as part of the portfolio is important,” Jeremy Schwartz, Director of Research for WisdomTree, said in a note.
Considering the global market capitalization breakdown today, a global market portfolio would look something like 50% U.S., 40% developed international and 10% emerging markets. Given this float restrictions enacted by Beijing, China is only about 3% of that total global weight. However, when thinking about China’s total size, which includes all state ownership, Chinese equities could make up 15% of a global portfolio if the country fully opened access to foreign investors.
“You probably should have more China than 3% in terms of a global market portfolio,” Schwartz said. “Getting that total representative China exposure with new China in addition to old China is really an important part of how to get access to that part of the market.”
Michael Orzano, S&P’s senior director of global equity indexes, pointed out that when investors think of Chinese equity market exposure, many are looking at offshore shares, particularly those listed in New York, which largely include technology companies. On the other hand, those listed onshore, or more commonly known as A-shares, are more heavily concentrated in banks and financial institutions.