Erste Asset Management

The liberalisation of the Chinese equity market is a milestone

The liberalisation of the Chinese equity market is a milestone
The liberalisation of the Chinese equity market is a milestone
Share post:


The performance of Chinese equities in the first half of 2018 was a subdued one. The relevant indices were in negative territory across the board. However, now the tide might be turning. Some 230 Chinese A-shares have joined the important MSCI indices. Share prices have rebounded from year-lows. Gabriela Tinti, Fund Manager of ESPA STOCK GLOBAL EMERGING MARKETS, explains the relevance of the new A-shares to your portfolio and the general perspectives of the Chinese equity markets.
[post_poll id=”7246″]At the beginning of June, some 230 Chinese A-shares were taken into the global index MSCI. The weighting will be further increased on 1 September. Why is this widening of the investment universe so important?

The so-called A-shares are participations in Mainland Chinese companies that are quoted on the stock exchanges in Shanghai and Shenzhen. While foreign institutional investors have been able to buy such A-shares in the past, they had to do so as “qualified foreign institutional investor” (QFII), a status handled very restrictively. Only largely capitalised Chinese companies had been listed in Hong Kong (H-shares) for a while and had therefore been open to investment by anyone. The MSCI index has so far only admitted the A-shares that are already traded via the stock exchange platforms Shanghai-Hongkong-Connect or Shenzhen-Hongkong-Connect and that are not subject to QFII regulations. These platforms were being set up from 2014 onwards in order to open the market further to foreign investors and to facilitate their access to the capital market. From September, the investable portion of A-shares in the MSCI index will double. These are shares we can also buy for the ESPA STOCK GLOBAL EMERGING MARKETS fund.

Does this opening of the Mainland stock exchanges to foreign investors mean that the market will generally benefit?

The liberalisation of the market is a milestone. According to some estimates this step could trigger an inflow of up to USD 22bn worth of capital into Mainland China. More importantly, the weighting of A-shares in the MSCI indices will be gradually growing. This also allows us to reach certain conclusions with regard to the economy. In order to keep investors, China will have to further liberalise its economy, because the country needs foreign investors in order to ensure growth in quality. At the moment, only 2% of the A-shares market is held by foreign investors. You can therefore picture the potential.

The price development of the retail-heavy A-Share-Index is significantly more volatile than the HANG SENG-Index in Hong Kong.
Note: Past performance is not indicative of future development.

What benefits do A-shares offer to investors? Why are they so important?

 The Chinese A-share market is already the second-largest capital market in the world in terms of market capitalisation and liquidity, behind the NYSE. A-shares facilitate investments that would not be possible with H-shares or ADRs*. We are for example talking about smaller high-tech companies or sectors that benefit from the growing middle class and its consumer behaviour. That market is not where the big fish are. The share of small- and mid-caps is significantly higher than in other indices.

*ADRs (American Depository Receipts) are traded at the stock exchange in lieu of shares. They are certificates issued by US banks that hold the underlying shares in custody.

Should one now invest in Chinese equities, or is it advisable to wait?

I cannot personally issue a buy recommendation for shares. Interested investors would have to decide for themselves on the basis of their investment goals and risk appetite. I can only point out a few key parameters. The valuation of Chinese equities is currently at a 5Y low. The price/book value ratio of 1.7x for A-shares (as of June 2018; source: Bloomberg) is extremely low. Earnings increased on average by 13.8% in the first half of 2018. We saw particularly high growth at companies in the energy and commodities sector. Of course, there are many question marks: if the trade war between the USA and China continues to escalate, the damage will be noticeable for both sides and will also come with ramifications on the Chinese stock exchanges.

Investors expecting the further liberalisation of the Chinese capital market to create momentum can for example invest in the ESPA STOCK GLOBAL EMERGING MARKTES fund. Chinese equities currently account for 35% of assets under management of this fund. At 75%, Asia makes up the lion’s share of this portfolio.



Legal note:

Prognoses are no reliable indicator for future performance.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. 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 conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website A summary of the investor rights is available in German and English on the website and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.