Much has been written on the performance of the Chinese stock market. The strict rules on moving capital onshore and offshore has segregated the local equity markets from the rest of the world.
Onshore market is typically referred to the equity market located in China for example companies listed on the Shanghai or Shenzhen stock exchange (e.g CSI 300 index). These are referred to as onshore because it is segregated from the rest of the global financial system.
Offshore commonly refers to Hong Kong, either Chinese companies listed there or Hong Kong domiciled companies (Hang Seng Index). While nominally a Chinese territory, the financial system is independent of the onshore market where there are free movement of capital between Hong Kong and the rest of the world.
Investors can use a number of financial instruments in gaining exposure to the Chinese equity markets:
- China ETF: Index fund which tracks the performance of Chinese equities (either onshore / offshore or passive / actively managed)
- Active Managed Fund: A fund that invests in Chinese equities
China Large Cap ETF
iShares China Large-Cap ETF (ASX IZZ) is one of the most liquid ETF investors can use to gain exposure to Chinese equities. Specifically, IZZ track the performance of 50 largest Chinese companies listed in Hong Kong.
Key features of IZZ
- Benchmark: FTSE China 50 Index with quarterly rebalancing
- All performance are measured in HK Dollar (HKD) which is pegged to the US dollar (USD). Hence the ETF does not include inherent FX hedging. Fund performance of Australian investors will be affected by the daily changes in the Australian Dollar (AUD)
- Half yearly distribution
- Management fee of 0.74%
IZZ Top 10 Holding Snapshot
The snapshot above shows the top 10 positions in the IZZ fund. IZZ target exposure to the 50 largest Chinese companies in Hong Kong which means the fund has a relatively concentrated exposure. Top 10 positions account for more than 55% of the fund with remaining 40 companies account for the remainder assets.
The names in the Top 10 holding covers a range of important sectors of the economy:
- Technology: Tencent is the largest Chinese technology company on par with Alibaba
- Telecommunication: Largest mobile provider in the world with largest market share in China
- State Banks: CCB, ICBC and Bank of China
- Insurance: Ping An and China Life
- Petrochemicals: CNOCC, Petrochina and China Petroleum & Chemical Corporation.
Onshore Actively Managed China Fund
Investors looking for direct onshore Chinese equities exposure can use AMP Capital China Growth Fund (ASX AGF). AGF has an interesting history.
As we mentioned previously, the local financial system is shut off from the rest of the world and capital can only move in and out under strict conditions. Previously capital market reform allowed certain amount of inflows in to the A-Share market which allowed AMP to setup AGF.
- AGF invests in stocks listed directly on the Shenzhen and Shanghai exchanges tracking the S&P/CITIC 300 index.
- It is a total return fund with returns measured in Australian dollars.
- It has an active strategy which means that the underlying investments are selected according the fund managers view on companies/sector rather than tracking a specific index.
Unlike IZZ which is an ETF where the market price track closely to the underlying investments. Any discrepancy can lead to arbitrage opportunities.
AGF is essentially listed closed end fund. Any variation between between the listed price and net asset value of the underlying cannot be easily arbitraged. Hence AGF has a tendency to trade at a discount to the Fund’s NTA.
Alternative China Equities Exposure
We have written in detail about a diversified China exposure through Emerging Market ETF. Emerging market exchange traded funds are a sector based fund. The goal of EM ETFs is to invest in a cross range of emerging markets which China represent one of the largest country allocations (at more than 20%).
Funds like Vanguard (VGE) allows a more diversified position in investing in China along with other emerging markets.