Why It's Crucial To Rethink China ETFs

July 09, 2014

Investors need to know that, for now, not all China-focused equity investments are created equal.

[Editor’s Note: This is the first of a two-part blog discussing the need to rethink “China investing” as the country transitions from an export- to consumption-led growth model and issuers launch innovative new ETFs. Part I will discuss the fragmented Chinese equity market, while Part II will discuss attractive alternatives to broad, cap-weighted ETFs for China 2.0 investing.]

China’s economy is at a crossroad, leaving investors confused about its future. Some predict a real estate debacle and a hard landing, while others predict a soft landing and see value in Chinese shares.

Goldman Sachs, Morgan Stanley and Citigroup see Chinese equities rebounding in the second half of 2014, but they’re mostly talking about Hong Kong-listed Chinese shares. What about mainland-listed shares?

With issuers launching innovative new ETFs and China’s fragmented equity markets producing significantly differing returns, it’s time to rethink China ETFs.

China’s multishare class equity structure looks complicated and intimidating on the surface, but it doesn’t have to be. For a fine overview, check out our China ETF Guide for a deep dive.

A simplified way to look at Chinese equities is to separate them into two distinct markets: “onshore” and “offshore.”

The onshore—or mainland—market consists of Shanghai- and Shenzhen-listed shares that are still largely off limits to global investors, except through quota programs like QFII and RQFII. (Those are the acronyms for the “qualified foreign institutional investor” program and the “qualified foreign institutional investor” program.)

Meanwhile, the offshore market consists of “investable” shares traded in Hong Kong and the U.S.

China is truly the tale of two markets, as they have historically shown different returns and correlations with each other.

Onshore Vs. Offshore: Returns And Correlations

Here we have the S&P China BMI Index—tracked by the SPDR S&P China ETF (GXC | B-41)—to represent the offshore market. We’ll use the CSI 300 Index—tracked by the db X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-51)—to represent the onshore market, and the MSCI All China Index—tracked by the newly launched db X-trackers Harvest MSCI All China Equity ETF (CN)—to represent “total” China.

China Index Returns

Source: Bloomberg

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