Position for the next phase of China investment
Mar 11, 2022
Co-Head of Equities Product Development, Markets, HKEX

After decades of opening-up initiatives, China has seen accelerated foreign inflows into its investment markets in recent years. According to the 14th five-year plan, attracting foreign investment and strengthening the connectivity between on- and offshore capital markets remain a central government priority. China-bound investment is entering a new phase, prompting investors to reassess their China strategies.


China’s role in global portfolios

Supported by China’s growing economic influence, the A-share market continues to expand with market capitalisation exceeding US$14 trillion, second only to the US and accounting for approximately 11.5% of the world’s equity market capitalisation. In 2021, average daily turnover of the A-share market has surpassed RMB 1 trillion, making it one of the most liquid equity markets in the world.

Given its sheer size and liquidity, the Chinese market is too big to ignore. However, China A-shares remain remarkably underrepresented in global portfolios. By the end of 2021, foreign ownership of China’s onshore equity, at RMB 3.94 trillion, was a mere 4% of A-share market capitalisation.


Increasing inflows into A-shares

Accessibility of China A-shares has been significantly lifted by the landmark launch of Stock Connect in 2014. The northbound channel of Stock Connect is contributing approximately 6% of China A-share turnover and underscores years of consistent growth in foreign inflow. In 2021, global investors net bought a record RMB 432 billion worth of A-shares via the channel, versus RMB 209 billion in 2020.

In addition, the successful implementation of MSCI China A-share inclusion in 2018-19 has brought a wider investor base to A-shares and triggered meaningful inflows into this space. However, the weighting of China A-shares, at around 5% of the MSCI Emerging Markets Index, remains low relative to the size of the Chinese market. That entailed little motivation for investors to build a standalone portfolio around China A-shares.

This is about to change as the opening up of the China A-share market and HKEX’s Stock Connect enhancement measures (such as the Master SPSA service and Synapse, an enhanced settlement platform under planning) continue to facilitate foreign inflows. The growth in foreign inflows is complemented by the launch of HKEX’s MSCI China A 50 Connect (USD) Index Futures, the first A-share futures constructed on Stock Connect eligible stocks, in October 2021. The new offshore risk management tool provides catalysts for further MSCI A-share inclusion. At hypothetical full inclusion, China A-shares could account for 20% of the MSCI Emerging Market Index, which could translate into significant inflows in the years to come.


China’s economic transformation

Growing awareness around the uniqueness of the A-share market could contribute to increased China allocation as well. China’s transformation from a manufacturing-based to a service-led economy is reflected in the A-share market. Using the CSI 300 Index as a gauge, the sector weights of service sectors such as financials, consumer staples, information technology and healthcare have increased while that of industrials and materials have decreased. The new MSCI China A 50 Connect (USD) Index Futures were launched to provide global investors with a new tool to gain a diversified exposure to China’s transforming economy. Learn more about the new contract at the dedicated HKEX product page.


The Chinese translation of this article first appeared in HKET on 1 Mar, 2022