What does the chart show?
As the Chinese new year celebrations begin, this chart shows how the restricted nature of China’s stock market has resulted in vastly different returns for investors over the past year depending on the kind of investments they bought.
Chinese companies can issue different types of shares depending on where they list and the kind of investor allowed to buy them. Companies listed onshore in Shanghai or Shenzhen are called A-shares and China has historically imposed tight quotas on foreign investors wanting to buy them. Generally, it has been easier to buy into Chinese stocks listed in Hong Kong (known as H-shares) though many Chinese companies have dual A- and H-share listings.
How do China’s main indices differ?
The Chinese A-share market is far larger than the H-share market, and there are big differences between the two. About 80 per cent of the A-share market is made up of private investors, making it very volatile and prone to stock suspensions if prices drop by a large amount in a short time. But some of the most exciting stocks in China are listed on China’s domestic exchanges and do not have equivalent listings in Hong Kong.
Since 2014, foreign investors have been able to access A-shares through the Shanghai-Hong Kong stock market connect programme, which has also enabled Chinese investors to access Hong Kong’s H-shares stocks which have provided a more stable ride and tend to trade at lower prices than their A-share equivalents.
The H-share market tends to be dominated by large-cap stocks and has a technology bias, while the A-share market contains smaller stocks and is more concentrated in financials and industrials.
Investors buying Chinese stocks either through active fund managers or an exchange traded fund (ETF) have taken home very different returns based on the quantity of A-shares, H-shares or other varieties of Chinese shares they hold.
Which Chinese shares have performed the best?
Over the long term, the best performing of the major benchmarks has been the MSCI China index. This covers 85 per cent of Chinese stocks listed on foreign exchanges and is made up of 152 large- and mid-cap stocks, including major internet companies Tencent and Alibaba.
Over 10 years, the MSCI China index has delivered a total return of 135.8 per cent. Information technology makes up more than 40 per cent of the index.
The lowest return of the major benchmarks over 10 years comes from the MSCI China A index, made up of large- and mid-cap stocks listed in Shanghai and Shenzhen. It has just under 800 holdings but is dominated by banks such as Ping An Insurance and China Merchants Bank (the two largest holdings).
Darius McDermott, managing director at Chelsea Financial Services, says: “Most fund managers investing in China are wary of financials, and in particular the big banks, because you just don’t know what you’ve got — they’re so opaque.”
However, over shorter time periods, A-share stocks have outperformed H-shares. Over five years, the best-performing index is the FTSE China A50, a blue-chip index of the largest 50 Chinese domestic stocks. The CSI 300, another A-share index but with a higher weighting towards technology-focused stocks, has also performed well over that period. But over one year, MSCI China is still the best.
“China is a rollercoaster ride and impossible to time,” says Shaun Port, chief investment officer at Nutmeg, the online wealth manager. “The determining factor of which index has done best has been which have the greatest exposure to technology stocks [which have rallied strongly in recent years].”
One thing is for certain: A-share investors have had the rockier ride over the short and longer term. All three of the indices mentioned above have displayed far higher fluctuations over three, five and 10 years than their H-share counterparts according to data provider FE Analytics.
Will that continue to be the case?
China’s stock market is gradually opening up to foreign investors, which could alter performance trends.
MSCI’s decision to include Chinese A-shares in its flagship emerging market index from June 2018 will oblige the passive funds tracking the MSCI Emerging Markets index to buy A-shares for the first time. Over time, this could reduce the disparity, although A-shares are likely to remain volatile in the short term.
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