China makes A-shares accessible to the global market

China makes A-shares accessible to the global market
China makes A-shares accessible to the global market
© iStock.com
Created by | Published on | Topics: Equities, Markets Download as PDF
Tags:
Share post:

China has been increasingly opening up to the global market. Last year the Renminbi was taken into the currency basket of the International Monetary Fund in October 2016. Now, another step towards liberalisation has followed. China has cleared A-shares for international trade via trading platforms.

What are A-shares?

A-shares are securities issued by Chinese companies that are listed in Chinese currency, the Renminbi, at the stock exchanges in Shanghai or Shenzhen. Previously only Chinese citizens were allowed to trade these shares. This was due to the restrictive economic policy pursued by China, which was supposed to protect the domestic economy from foreign investors and their influence. From 2002 onwards, the first foreign investors were permitted to invest within the framework of the “Qualified Foreign Institutional Investors” (QFII) System. The programme entailed a substantial amount of terms that could only be complied with by very large international investors. Many of the most successful Chinese companies are listed at the Hong Kong Stock exchange or in the USA and have been accessible to international investors for years.

In spite of the opening of China, its equity market regulations still contain sizeable barriers to entry. Different categories of shares are available on the stock exchange, depending on the respective group of investors (domestic vs. foreign). In contrast to A-shares, B-shares are listed in foreign currency (Hong Kong dollar and US dollar) and can also be traded by foreign investors. The implementation of the trading platforms Shanghai-Hong Kong Connect (2015) and Shenzhen-Hong Kong Connect (2016) were important steps towards a liberalised market access. A-shares are currently only available on these two platforms.

What is new?

The Chinese equity market now ranks as second-largest financial centre in the world. As far as liquidity is concerned, it has long surpassed the US stock exchanges. Every year since 2013, the admission of Chinese companies into the MSCI indices[1] has been discussed, given that the quickly growing capital market in China continues to become more and more relevant. This year, MSCI has decided to take 222 A-shares into the Emerging Markets index in two steps in May 2018 and August 2018. At the moment, China accounts for a weighting of 28.55% in the MSCI Emerging Market index (please refer to chart no.1) on the basis of its companies listed in Hong Kong and the USA. Thus, China is already the most heavily weighted country in the MSCI Emerging Market index. At first, the additional weighting of A-shares will only account for 0.73% for 2018. This equals only 5% of all shares in the Chinese overall market.

A symbolic step

Accepting the A-shares is imbued with significant symbolic meaning. In the long run though, the economic effects are enormous as well, because the full implementation of these A-shares would translate into a weighting of 18% in the MSCI Emerging Markets index (based on current data). As a result, the weighting of China would increase to more than 40% (please refer to chart no.2). So far, MSCI has not indicated any schedule for full inclusion beyond the aforementioned time line. For Korea and Taiwan, the path to full inclusion of all shares took between six and nine years.

Country weighting of the MSCI Emerging Markets index

Source: MSCI, data as of 30th June 2016

Source: MSCI, data as of 30th June 2016

 

Conclusion

The full inclusion of China will depend on how fast China is opening itself to the international capital market and is creating lower barriers to entry for all investors. In spite of the liberalisation of A-shares, the Chinese government has capped the purchase of A-shares by foreign investors at a total of 10%. This way, the Chinese government continues to limit the influence of foreign shareholders. That being said, the liberalisation of A-shares is very positive and could be a step towards a liberalisation of the entire country. China continues to harbour great growth potential. As a result of gradual liberalisation of the market and the inclusion of the Renminbi in the currency basket of the IMF, the relevance of China for the global economy has increased again.

 

[1] MSCI Indices are equity indices that represent the development of equities in 23 developed and 23 emerging economies.

 

RESPOND TO THE ARTICLE

Gabriela Tinti took over the position as Head of Desk Equities Austria at Erste Asset Management in November 2020. Prior to that, she was Senior Fund Manager in Erste Asset Management's Equities team since 2008. She focuses on companies from the global emerging markets and on property companies. Gabriela Tinti has worked in finance since 1988.

At the beginning of her career, she was with a commercial bank, where she gained a wide range of experience in capital markets, retail and institutional banking, international finance, and corporate finance. In 2002 she moved to the asset management industry.

MORE ON THE SUBJECT

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH.Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version.Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site www.erste-am.com within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.