Investing In The 'New China' With ETFs

August 15, 2014

Investors can take full advantage of China’s next stage of growth with a number of old and new ETFs.

[Editor's note: This is the second part of a previous blog, where I introduced the idea of rethinking China ETFs as the country transitions from an export- to a consumption-led growth model and issuers launch innovative new ETFs.]

Last month, I discussed the need to rethink China ETFs, as new and innovative products now target pockets of the Chinese markets that only a few years ago were inaccessible to global investors.

This week, I’m going to highlight a few alternative ETF options to the older veterans, positioned to target China’s ongoing market transformation.

I see two major shifts occurring in China’s equity markets in the coming years.

The first is the globalization of China’s mainland market, or the opening up of China’s onshore, or “A-share” market to global investors and indexes.

The second is the rise of the Chinese consumer. In the coming decade, a different set of companies could lead China’s next growth phase, instead of the major state-owned enterprises (SOEs) that powered China over the past few decades.

Therefore, as a China investor, I ask myself two questions: Does it still make sense to ignore China’s $3 trillion onshore market (roughly 50 percent of China’s total equity market)? Does it make sense to diversify outside of indexes that are overly concentrated in China’s SOEs that dominate the financial, energy and telecom sectors?

Onshore Market Globalization

While the recent surge in China’s mainland markets is likely due to a series of announcements around SOE reforms, China’s onshore market could remain in play for several years.

China is now in the midst of opening its mainland shares to global investors through a series of programs, dishing out renminbi qualified foreign institutional investor (RQFII) quotas left and right. Beyond Hong Kong, several other cities are now RQFII hubs, with many more likely to come.

The gradual inclusion of A-shares into some of the most widely tracked indexes will also be a multiyear process. MSCI, S&P and FTSE are all reviewing A-share inclusion into their global indexes.

I personally like that mainland securities are less correlated to global equity markets, mainly because they are still largely off limits to global investors. This offers diversification benefits.

Three-Year Weekly Correlations

INDEX CSI 300 S&P China BMI S&P 500
CSI 300 1
S&P China BMI 0.532 1
S&P 500 0.099 0.529 1





Source: Bloomberg


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