Is the Chinese economy still an emerging market — or something different altogether?
While the nation has long been tagged with the “emerging market” label, its peculiar role in the world economy has prompted an increasing number of investors to question the strategy of simply lumping Chinese allocations in with other EM investments. For one, the world’s second-largest economy contributes 19 percent to the world’s GDP, a share that falls only 4 percentage points short of the contribution made by the U.S. And the A-share market, which refers to stocks that trade on China’s domestic exchanges in Shanghai and Shenzhen, is also the world’s second-largest equity market.
Yet popular EM indices have not given the A-share market a fair weight. The MSCI EM Index, for example, only provides investors with a 5 percent exposure to the A-share market, according to Shuo Xu, v.p. of MSCI’s research department. The benchmark setter now offers separate China A-share indices and encourages investors to treat the Chinese onshore market as a distinct EM investment opportunity.
Index providers aren’t the only ones jumping on the separation bandwagon. “We’ve already started to see institutional investors separating China out from the EM bucket themselves, even before the index providers do,” Gabriela Santos, global market strategist at J.P. Morgan Asset Management, told II in an interview.
Santos said that a separate allocation to China A-shares has two benefits. First, it helps investors diversify their EM portfolios. Second, the sheer size of China’s A-share market has not been well represented in the construction of EM indices by the major index providers. “By breaking [China] out, an investor can right-size the weight of the A-share market to its actual representation in the EM universe,” Santos said.
Brendan Ahern, chief investment officer at KraneShares, a New York-based investment manager, is more direct. “China is becoming an asset class in and of itself,” he said, adding that the A-share market differs from offshore markets in that it reflects the consumer confidence of the Chinese people themselves. The H-share market in Hong Kong and Chinese companies listed in the United States, on the other hand, are heavily influenced by investment sentiments outside of China.
Ahern and Santos both believe that China will probably evolve in much the same way that the Japanese market developed. “We believe that what’s happening in China is very similar to what happened with Japan,” Ahern said. “They opened up and allowed liberalization of the currency [and] access to foreign investors.” In 2001, MSCI created the Asia ex Japan Index to reflect the country’s unique role in Asia’s capital market.
“[China] is moving in the direction of Japan,” said Santos. “[Japan] is thought of separately from the rest of Asia [and] separately from other developed countries. We think [that in] time, that will also be the case with China. It’ll just become its own separate allocation.”
