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Index investment in China

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The complicated concept of investing in ‘China’ – In the investment world, “China” can be a complicated investment concept. It can be divided into onshore China, represented by A-shares listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE), and offshore China, represented by shares listed on the Stock Exchange of Hong Kong (SEHK) and on stock exchanges in other countries.  For a long time, international investors have invested in offshore China by investing in the Hang Seng China Enterprises Index (HSCEI).  

China’s different segments

The size of the China stock market in terms of market capitalisation has grown by 540 per cent in the past decade – from USD 1.1 trillion in 2006 to USD7.4 trillion as of August 2016. As at 31 August 2016, the SSE and the SZSE respectively ranked as the fourth and the seventh largest stock exchanges in the world. Turnover of A-share trading amounted to USD39 trillion in 2015, about 18 times that recorded for the Hong Kong stock market in the same year. 

The development of offshore China started with the first listing of an H-share company in Hong Kong in 1993. As at 30 September 2016, there were more than 200 H-share companies listed in Hong Kong, with a total market capitalisation of about USD680 billion, representing 21 per cent of the Hong Kong stock market.  

However, H-shares are only part of the offshore China investment picture in Hong Kong. As at 30 September 2016, there were more than 100 Red-chips and 700 P-chips listed on the SEHK, with a total market capitalisation of USD600 billion and USD850 billion respectively.  Overall, H-shares, Red-chips and P-chips jointly accounted for 65 per cent of the Hong Kong stock market.

Another route to gaining offshore China exposure

Launched in 1994, the Hang Seng China Enterprises Index (HSCEI) has become well known as one of the leading indexes for reflecting the overall performance of H-share companies.  

However, as at 30 September 2016, H-shares only accounted for 32 per cent, in terms of market capitalisation, of offshore China listings in Hong Kong.  In the past decade, international investors have demonstrated increasing interest in other offshore China shares, such as Red-chips and P-chips.  The Hang Seng Mainland 100 (HSML100) index – which covers the 100 largest H-shares, Red-chips and P-chips – is a good proxy for tracking the overall performance of offshore China listings in Hong Kong.  As at 30 September 2016, there were 41 H-shares, 23 Red-chips and 36 P-chips in the HSML100, with index weightings of 51 per cent, 24 per cent and 25 per cent respectively. Financials was the largest industry in the HSML100, accounting for 39 per cent index by weight, followed by Information Technology (13 per cent) and Telecommunications (12 per cent).

An efficient channel for investing in China A-shares market

As with stock markets in other countries, the financial industry is usually overweighted in traditional China indexes as the market values of financial companies are generally larger than those for many companies in other industries. As at 30 September 2016, the financial industry accounts for around 70 per cent of the HSCEI in terms of index weighting.  

If the constituents of an A-shares index were identified solely based on market capitalisation, the selection of the largest 50 A-shares stocks would lead to exposure to financials of as high as 70 per cent.  The Hang Seng China A Industry Top Index (HSCAIT) addresses this issue by selecting five constituents in each industry sector in order to achieve a more even industry distribution.  

The result is that the industry exposure provided by the HSCAIT is relatively balanced relative to traditional China indexes. Financials account for 25 per cent of the index weighting, followed by Consumer Goods and Properties & Construction, accounting for 19 per cent and 14 per cent respectively. Moreover, the HSCAIT adopts a fundamental approach to constituent selection, filtering on the basis of constituents’ financial soundness, giving consideration to revenue, net profit and market capitalisation. As a result, financially sound companies have been selected as constituents despite their market capitalisations being relatively small. 

China performance

Even under the same ‘China’ concept, onshore China and offshore China can perform differently.  Comparing the performances of the HSCAIT and the HSML100, the correlation between the two indexes increased from 0.2887 in 2006 to 0.5751 in 2016.  For four of the past 10 years, the HSCAIT and the HSML100 moved in opposite directions. As a result, the HSCAIT recorded an overall performance of 112.4 per cent, which was 47.9 percentage points higher than that of the HSML100 during the past 10 years.


The article above was prepared by Hang Seng Indexes Company Limited.

Disclaimer
Investments involve risks. Information provided herein is for information and reference only and does not constitute nor is it intended to be construed as any professional advice, offer or solicitation to deal in any of investments mentioned herein. The past performance is not indicative of future performance.

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