Recent adjustments in Chinese regulation allow foreign investors to invest directly in A-shares. Inefficiencies in the market and access to new sectors are the most attractive arguments for Stephen Kam of Schroders.
With the increasing opening of A-shares these are securities of mainland Chinese companies (in renminbi) to foreign investors, the importance of the Chinese onshore market is increasing. As Stephen Kam, Co Head of Product Management, Asia ex Japan Equities, Schroders, noted at Finanz'19, the Chinese onshore market is underrepresented in global indices. However, with ten trillion US dollars in market capitalization and 4500 listed companies, it is the world's second largest equity market.
Inefficient onshore market offers opportunities
A-Shares are listed on the Shanghai and Shenzhen stock exchanges. Companies listed in Shanghai are majority large caps and state-owned, according to Kam. In contrast, companies listed in Shenzhen are small/medium caps and are, for example, in the technology and media sectors. In general, A-shares are dominated by small cap companies, with corporate governance requirements barely met in many cases, Kam explained in his presentation.
Due to the high participation of retail investors, the A-shares market is inefficient and volatile, he said. In turn, opportunities for alpha generation would arise. Prior to 2014, investors had to be qualified by the Chinese government, which made access difficult. Then came the transition period, where onshore markets could be accessed via Hong Kong. Today, investors can invest directly in A-shares, for Kam "a game changer".
New access to attractive sectors
Through A-shares, investors can access sectors in the onshore market that were previously out of reach. As examples, Kam cited the military sector, electronic vehicles, the media sector and the healthcare sector. "People are becoming wealthier. Therefore, they are upgrading the goods they buy", he explained. This would increase the attractiveness of goods such as "white goods", Furniture and alcohol. Opportunities would therefore also arise for the luxury sector.
The tourism sector would also face a promising future. Rising incomes would turn into rising spending, and domestic travel (to Beijing and Shanghai) in particular would increase in China. "Only 9% of the Chinese population has a passport", Kam said. In comparison, 42% of the population in the U.S. and 76% in the U.K. would have a passport.
Although there are factors that would reduce the attractiveness of Chinese A-shares, trade conflicts, economic slowdown and political uncertainties, most of the bad news is already priced into the onshore market.