The Outlook for China

Now, over the years, that’s changed a bit. There’s been a relaxation of those foreign investment restrictions. So, sitting there today, it’s more sensible to look at China from a total China framework. Now, a lot of existing indexes that are widely used continue to look specifically at either offshore listings or onshore listings.

With the S&P China 500, the main goal was to create an index that would be representative of the complete Chinese equity market. First of all, from a completeness standpoint, that’s important. But possibly even more important is that there are material differences in the types of companies that are listed in different locations.

For example, onshore markets are heavily concentrated in banks and financial institutions. And then offshore, particularly in New York, most of the large technology companies are listed. So, it’s really important to have that total comprehensive look at China.

Q: How do you view market participants who want to access China? Where does China fit within global allocation strategies, in your view?

Jeremy Schwartz: What Michael talked about there, getting the representative portfolio, 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. When we think about where the global market cap is today, a global market portfolio is roughly 50% U.S., 40% developed world and 10% emerging markets.

That’s partly because of the float restrictions, and China is only about 3% of that total global pie. When you think about China’s total size if you included all the state ownership, if they opened access to foreign investors, you could see a global portfolio that was really 15% China and had twice as much weight as in Japan, which is right now one of the biggest countries outside of the U.S.

You probably should have more China than 3% in terms of a global market portfolio. 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.

This article was republished with permission from Wisdom Tree.