China’s equity markets have grown into the second largest financial market in the world, after the US. This is a US$17 trillion market that is both deep and liquid. There are more than 5,000 Chinese companies listed onshore in mainland China and offshore, mostly in Hong Kong and the US, presenting vast opportunity.
Chinese markets are also becoming large and growing components of major global indices. For instance, Chinese equities now make up 33% of the MSCI Emerging Markets Index. If China A Shares (the shares of mainland China-based companies that trade on the two Chinese stock exchanges) were included fully (from the current 20%), this would push the overall weighting of Chinese equities to 53%.
A big driver of growth has been the Stock Connect programme, which was launched in 2014. This opened direct trading links connecting Shanghai and Shenzhen with Hong Kong, making A Shares more accessible to institutional investors outside the mainland. These days, any investor with a brokerage account in Hong Kong can invest in over 2,000 companies listed in Shenzhen and Shanghai. Two-way investor flows between mainland China and Hong Kong have flourished as a result.
Another draw is the low correlation of Chinese equities and other asset classes. In other words, A Shares provide a great opportunity to diversify portfolio risk and potentially enhance returns.
Investing in both the onshore and offshore markets offers an extensive range of opportunities across these markets. With the onshore market, investors gain greater exposure to unique sectors such as baijiu (a popular liquor), as well as the faster growing new economy ones like electric vehicles and batteries, specialist technology and niche industrial areas. As for the offshore market, investors gain more access to internet and e-commerce companies, along with investment opportunities in telecoms.
More broadly, China’s financial reforms continue to improve the accessibility and liquidity of the domestic market. With more international investors’ participation in the A-share market, it could shine a light on global best practice and help to raise governance standards of local companies over time.
abrdn sees tremendous opportunity in China, and the portfolio is well positioned to capitalise on key areas of structural growth.
- Aspiration: As incomes increase and living standards improve in China, rising affluence is leading to fast growth in premium, or higher value, goods and services in areas including cosmetics, travel and food and beverage. The consumer story is attractive because boosting domestic spending forms a central component of China’s reform agenda.
- Digital: Growing integration amid the widespread adoption of technology means a bright future for plays on e-commerce, cybersecurity and data centres supporting cloud services.
- Green: Policy makers globally are committing to a greener and lower carbon world and China is expected to have a transformational role to play. Investments in renewable energy, batteries, electric vehicles, related infrastructure, and environmental management all have a bright future. Grid parity will be game-changing.
- Health: Rising disposable incomes are driving demand for healthcare products and services. The opportunity set is diverse. The proposed holdings include a leading hospital, contract research providers and an internet healthcare platform.
- Wealth: Growing prosperity means structural growth for consumer finance, such as wealth management and insurance protection, as well as increasing investor participation on stock exchanges.
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