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Here's how to access China A-shares ahead of MSCI decision

Arian Neiron  |  22 May 2017Text size  Decrease  Increase  |  

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The inclusion of China A-shares in the MSCI Emerging Markets Index would result in investors benefitting from the performance of some of China's most important companies.


MSCI, one of the world's largest index companies, will make a decision in June regarding whether it will include mainland China A-shares in one of its most traded indices.

For the past few years, MSCI has postponed its decision to add China A-shares market to its MSCI Emerging Markets Index. While the probability of inclusion in June is reported to be anywhere between 0-75 per cent, investors can capitalise on the opportunity in China A-shares now.

The China A-shares opportunity

In what has been an extraordinary year for global markets, China's economy is still growing at a rate above 6.5 per cent.

Many of China's most important companies can only be accessed through A-shares. China A-shares are shares of mainland China-based companies that are traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange.

The Shanghai and Shenzhen exchanges combined are the second largest share markets in the world after the US, yet China only represents between 1 and 2 per cent of global stock indices.

There is a mismatch between the size of China's economy and its representation in global indices. China contributes 13 per cent of global GDP, yet represents only 2.4 per cent of the MSCI AC World Index.

Currently, the difficulty in getting hold of China A-shares means they are under-represented in worldwide indices and institutional portfolios.

As China's capital markets free up and their shares become more accessible, index companies will start to add China to their indices and institutional investors will follow.

Institutional investors often construct their portfolios to hold positions similar to recognised indices, otherwise they are seen as taking a big risk. If markets go against them and they drastically underperform the index, the underperformance could be perceived unfavourably. Therefore, it is usually better to be just above or below the index.

Once China A-shares are included in the MSCI Emerging Market Index, many global fund managers, including superannuation funds and insurers, will likely add mainland China A-shares to their portfolios. This would mean hundreds of millions of dollars would be instantly mandated into China.

Chinese authorities have been lobbying MSCI to include China A-shares for years. One of the major obstacles has been the recollection of the 2015 market crash when more than a thousand companies suspended trading of their shares. Other hurdles include liquidity and ownership.

As a result of these challenges, MSCI has significantly watered down its China ambitions. In March, MSCI released a consultation paper which outlines its new proposal to reduce the number of companies MSCI wants to include in its EM Index from 448 to 169--a third of what it had suggested in 2016.

This only gives Chinese A-shares a 0.5 per cent weighting in the EM Index (previously it was 1 per cent of the index).

Effectively, only the biggest companies will be included. MSCI has also pledged it will remove shares from its index if they have been frozen for more than 50 days.

Gree Electric Appliances

Gree Electric is an example of a China A-shares company that has been difficult for Australian investors to access. Gree Electric Appliances Inc of Zhuhai ("Gree Electric") is listed on the Shenzen Stock Exchange.

It is a Chinese major appliance manufacturer and is the world's largest residential air conditioner manufacturer. It sells its products in more than 180 countries and has manufacturing facilities in China, Brazil, and Pakistan capable of producing 10 million air conditioning units per year.

When it comes to air -conditioners most Australians are familiar with Japan's Daikin Industries, however, Gree Electric has a market capitalisation of around US$29 billion, compared to Daikin Industries' market capitalisation of around $28.5 billion.

In 2016, Gree Electric was in discussions for the acquisition of electric vehicle maker Yinlong New Energy Co, which would have signalled its entry into the electric car market. The firm has been expanding its manufacturing facilities for several years and continues to explore new areas to innovate.

Gree Electric recently saw a 27.05 per cent year-on-year rise in first quarter 2017 profit and the share price has returned around 31 per cent per year over five years, a total five-year return of 287.5 per cent (to 30 April 2017).

The inclusion of China A-shares in the MSCI EM Index would result in investors benefitting from the performance of companies such as Gree Electric.

Access China A-shares now

The inclusion of China A-shares is going to happen, it is just a question of when. Whether it will be in June is up for debate, but importantly, investors are able to capitalise on this major event by investing in China A-shares early.

VanEck's partnership with China Asset Management Company (ChinaAMC) has enabled it to be the only Australian ETF issuer to make a portfolio of A-shares available to investors using a single trade on the ASX.

VanEck Vectors ChinaAMC CSI 300 ETF (ASX: CETF) tracks China's CSI 300 Index, which represents the largest and most liquid shares listed on mainland China's two stock exchanges, Shanghai and Shenzhen, including Gree Electric.

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Arian Neiron is the managing director of VanEck Australia. VanEck is a leading global provider of exchange traded funds (ETFs). This is a financial news article to be used for non-commercial purposes and is not intended to provide personal financial advice to any person.

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