Increasingly, international investors want to invest in China because of the compelling case for future growth in the country. In July, according to the National Bureau of Statistics of China, the Chinese economy saw the real growth of total value added of the industrial enterprises above designated size reach 6.4 per cent compared with a year ago.
In July, the manufacturing PMI was 51.4 percent, staying above the 50-point mark separating growth from contraction for 12 months in a roll. China’s rapid rise to become a major economic power has taken about three decades, with an annual GDP rate over that time period of close to 10 per cent.
On a purchasing power parity basis, the World Economic Forum now deems China to be the world’s largest economy. And there is more to come as, relative to developed economies, domestic Chinese investors are under invested in stocks, with equity investments representing 9 per cent of Chinese household assets.
The growth of the capital markets in China is driving more investment into the country, both domestic and international and retail and institutional. China’s A share market is large, deep, volatile and dominated by retail investors. It is capitalised at USD9 trillion.
Investors who want to capture the growth opportunities in China could make use of the range of indexes that track the performance of Chinese companies. Taking the Hang Seng China A Industry Top Index (HSCAIT) as a reference, it has achieved a return of 28.99 per cent in the first nine months of 2017. The index represents a strong reference tool with superior China A shares companies for domestic and international investors alike.
The HSCAIT is designed to differ from other blue-chip indexes as it combines exposure to market capitalisation in the blue-chip companies, with fundamental factors such as highest revenues and net profits, and so offers investors diversification across the top Chinese companies.
The industry distribution of the index is more balanced. As at the end of September 2017, the financials industry has had the largest weighting in the HSCAIT. This industry constituted around 22 per cent of the HSCAIT while it constituted from around 35 per cent- 60 per cent in other popular A-share indexes. The HSCAIT offers diversified exposure to the A-share market as it includes a maximum of five industry leaders from each of the 11 industries in the China A-shares market, with its additional factors of the market cap at 50 per cent, revenue at 20 per cent and net profit, 30 per cent, of those companies. It offers a good snapshot of the overall China A-share market.
The design of the Index allows peer to peer comparison and a filter, which allows a range of companies in China to be included through factors including revenue and net profit. For example, in terms of the Materials industry, in the index review for the second quarter of 2016, the largest and the fourth-largest companies in terms of market capitalisation were not selected as constituents because of their negative average net profit in the past two fiscal years.
Instead, companies that were more financially sound, high-ranking in revenue and net profit, with relatively smaller market capitalisations, were selected.
In terms of achieving a good representation of the market, this approach to weighting created a better proxy for the overall China A-share market, allowing investors to focus on researching the companies that offer the best access to the China growth story.