As Chinese economy matures, Beijing is adapting and enacting reforms to bolster the markets and country-related exchange traded funds.
On the recent webcast, Deciphering Asia: Pinpointing Potential Opportunities, Michael Jones, Chairman and Chief Investment Officer at RiverFront Investment Group, explains that China has been following the Asian Development Model of growth that helped lift millions out of poverty. However, like Japan witnessed, the model may lead to excessive debt and economic stagnation.
Jones, though, argues that China has a plan to beat the so-called Japan syndrome of slow growth, pointing to aggressive economic reforms that could help China become an attractive place to invest.
“With reforms to support private companies, liberalize markets and open the financial sector, the Chinese government intends to boost the market economy and strengthen the drivers of economic growth,” according to Deutsche Asset & Wealth Management.
While China has been following an export-oriented economic model, Anson Chow, Vice President of Passive Asset Management for Asia Pacific at Deutsche Asset & Wealth management, and Peng Wah Choy, Vice Chairman and CEO of Harvest Global Investments Limited, point out that the Chinese government has begun bolstering domestic consumption, liberalizing markets and opening the financial sector to fuel further growth.
“Consider state-owned enterprise reform, which may expedite given tighter local government fiscal conditions and their ambitious securitization targets,” according to DeAWM. “China’s grand ‘One Belt and One Road’ initiative will bring more infrastructure projects, benefiting related construction materials, machinery, railway and utilities projects, and such. In regard to financial reform, further interest-rate liberalization bodes ill for bank earnings; brokers are set to benefit from capital market reform and the potential Shanghai Hong Kong Stock Connect. Finally, land and Hukou reform is a critical and long-term step to improve China’s growth potential.”
Meanwhile, increased urbanization will add to continued consumption growth. Anson and Peng also point out that given the country’s high personal-income growth, consumption will also likely rise as well. China added 13.2 million urban jobs last year. Additionally, consumption rose 3% to 51.2% in 2014 and reached 58.4% in Q3 2015.
While China’s economy has experienced some growing pains lately, Deutsche Bank research projects Chinese gross domestic product to rise up toward 7.2% in the fourth quarter, anticipating stronger fiscal stimulus in the coming months to boost growth.
Many investors have been able to gain exposure to potential growth opportunities in China through country-specific ETFs. However, China remains underrepresented in global portfolios. Specifically, foreign ownership as a percentage of domestic markets is only 1.5% of mainland China securities and 11.4% of China including securities listed overseas.
The low foreign ownership levels may be attributed to investment restrictions in China, notably Chinese A-shares that trade on the mainland and are only available to Chinese residents or foreign institutional investors.
Nevertheless, China is opening up its market to foreign investors, and some ETFs have gained access to the Chinese A-shares market. More recently, FTSE’s benchmark emerging market index is shifting toward China A-shares inclusion. MSCI also expects to include China A-shares to its global benchmarks – with a full inclusion of China A-shares, MSCI Emerging Markets Index’s China weight could rise to over 31% from 20%.
In the meantime, ETF investors can add China A-shares exposure to their portfolios through ETF options, including the Deutsche X-trackers Harvest MSCI All China Equity Fund (CN) , Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) , Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) and recently launched Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (ASHX) .
ASHR is the largest U.S-listed A-shares ETF and targets CSI 300, which includes the 300 largest and most liquid stocks in the China A-shares market. Nick Baseel, ETF Regional Vice President at Deutsche Asset & Wealth Management, points out that the underlying China index may help an investor diversify his or her portfolio since the CSI 300 Index has a 0.019 correlation to the S&P 500.
ASHS which track more mid-sized Chinese A-shares, includes Chinese A-shares taken from the China Securities 500 Index, stocks listed in Shanghai and Shenzhen. Baseel also noted that the CSI 500 Index has a 0.015 correlation to the S&P 500.
CN has a broader portfolio, including allows investors to track mainland Chinese stocks, with a 45.2% position in ASHR and 16.4% in ASHS, and the fund holds Chinese stocks listed in the U.S. and Hong Kong.
The recently launched ASHX tracks the CSI 300 USD Hedged Index, which is designed to provide direct access to China A-shares while diminishing the negative effects of a depreciating Chinese yuan currency against the U.S. dollar – a weaker foreign currency means that returns are also lowered when converted into U.S.-dollar-denominated returns. The ETF basically acts like a hedged version of ASHR. [ 2 New Currency-Hedged China A-Shares ETFs]
Financial advisors who are interested in learning more about Asia market opportunities can listen to the webcast here on demand.