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Unearthing China's hidden gem through A–shares

15 Oct 2019
aberdeen_china_banner

1.  What is the China A–share market?

A/B/H shares... Investors who venture into the world of Chinese equities face an alphabet soup of seemingly random letters. There are A–shares, H–shares, S–chips and P–chips to name just a few (see Chart 1).

These letters represent various attempts to develop the equity market in a country where people traded the first shares as long ago as the 1860s.

china-a-chart01

2.  Why China A–share?

China's consumption story
China is the world's second–largest economy, one that is set to overtake that of the US within a generation. It has created wealth and enriched its people in an unprecedented manner. In doing so, the Chinese have become one of the most powerful forces shaping consumption behaviour in the world today. A–shares offer unrivalled access to these historic changes.

The A–share market is a broad and deep one (see Chart 2). There are approximately 3,420 A–shares listed in mainland China1 (see Chart 3). These are renminbi–denominated shared traded on the Shanghai and Shenzhen exchanges. They boast a combined market capitalization of some US$5.6 trillion2. In many cases, this market offers the only way for foreign investors to access the sort of companies that form the backbone of China's consumption story.

Some firms may engage in familiar activities. For example, China International Travel Service runs duty free shops set to profit from more tourism. Foshan Haitian Flavouring & Food makes condiments and is the world's largest manufacturer of soya sauce.

Others are in more unusual businesses, such as traditional Chinese medicine (e.g. Beijing Tongrentang) and Chinese baijiu liquor (e.g. Kweichow Moutai). These are hard to find outside China. Market leaders at home, they also have the potential to dominate in international markets when their products head overseas in the footsteps of the Chinese diaspora.3

Chart 2: MSCI China A sector breakdown

china-a-chart02

china-a-chart03

Past isolation means low correlation

For decades the onshore market developed in isolation. Few foreign investors followed A–shares. Even today, an unsophisticated local investor base that reacts to domestic rather than external factors, drives this market.

As a result, the A–share market tends not to transmit global shocks with the same intensity as markets elsewhere. The onshore market has therefore been an effective way for foreign investors to diversify a portfolio.

A review of the 15–year relationship between the MSCI China A index and five other indices shows the lowest correlation with MSCI World Index4 (see Chart 4). The highest correlation, perhaps unsurprisingly, is with MSCI China. The other indices were MSCI Emerging Markets, MSCI Emerging Markets Asia and MSCI Asia ex–Japan.

china-a-chart04

3.  Investing in China A–shares needs expertise

Investing in A–shares may be riskier than investing in more established equity markets. But it is no more risky that investing in other emerging markets. They deserve, at the very least, careful consideration.

But identifying truly world–class companies in this vast and very mixed universe demands an active investment approach and a partner with proven experience.

Aberdeen Standard Investments has been investing in Chinese equities since 1992. With a large local China team and a robust, governance-focused research process, we're dedicated to finding the highest quality companies the market can offer.

For those with a longer–term view, there are hidden gems to be unearthed so you can start opening up your portfolio to China's real potential with A–shares.



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All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

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This article has not been reviewed by the Monetary Authority of Singapore.

Information is correct as of 15/10/2019.



  • 1  Aberdeen Standard Investments, 31 Dec 18

    2  Bloomberg, 10 Jan 19. For illustrative purposes only. No assumptions regarding future performance should be made

    3  Information of specific securities mentioned is for reference only. It does not constitute a solicitation or recommendation to purchase or sell any securities.

    4  Aberdeen Standard Investments, 31 Dec 18