Bringing Their “A” Game: The China A-Share Equity Market and Foreign Investors

One of the largest stock markets in the world is opening up to foreign investors. Chinese officials have taken significant steps to make China’s mainland equity market, represented by A-shares, much more accessible. As a result, major index providers are incorporating them into their passive indices, and non-Chinese institutional investors are adding them to their portfolios.

Before investors take advantage of this extraordinary opportunity, however, they should do their due diligence. Chinese companies can be characterized as part of "Old China” or "New China”—a distinction that offers insights on individual companies, their place in the economy, and their outlook. New China consists of companies that benefit from the current lower GDP growth era (about 6% per year), in which China is upgrading its living standards. These companies address untapped demand in areas such as technology, the environment, health care, and education. Due to the structural change in GDP, these industries are characterized by rapid margin or volume expansion. A comparison of China’s sector composition over the past two decades shows the growth of New China companies in the economy.

Investors should also consider the current participants in China's A-share market, including retail and institutional investors as well as government regulators. An understanding of their expectations and goals can help investors more effectively balance risk and reward in this growing, and increasingly important, market.

The Chinese Economy Is Evolving toward "New China” Companies

Sector Composition (MSCI China)

As of 31 October 2018
Sources: MSCI, FactSet

The preceding is an excerpt from Bringing Their “A” Game: The China A-Share Equity Market and Foreign Investors. Read the full paper.

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