The Chinese market in 2020 outperformed the developed market and it is largely attributed to its response to Covid-19. The unemployment rate has been rising precipitously since the onset of the crisis whilst the Chinese economy is showing signs of recovery but to them the health crisis is largely over.
There are two major markets for Chinese shares. Onshore market refers to the equity markets located in China for example companies listed on the Shanghai or Shenzhen stock exchange (e.g CSI 300 index). These are called onshore because it is segregated from the rest of the global financial system.
Offshore commonly refers to Hong Kong which is made up of 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.
The strict rules on moving capital onshore and offshore segregates the local equity markets from the rest of the world and has historically kept China out of the major international equity benchmarks. There has been some movement in the right direction starting with MSCI adding China to the emerging market index in 2018.
How to invest in the Chinese market?
Investors have a number of options to gain exposure to Chinese equities.
- 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
For those that can only invest in shares listed on the ASX and want the option to have immediate liquidity there is only 1 ETF which gets the job done.
China Index ETF
iShares China Large-Cap ETF (ASX IZZ) is one of the most liquid exchange traded fund investors can use to gain exposure to Chinese equities. IZZ tracks 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). 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 highlights the 10 largest positions of the fund. IZZ has a relatively concentrated exposure with the top 10 position comprised of more than 55% of the total value. The remaining 40 companies account for 45% of the fund.
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 but Alibaba is not yet included in the index.
- Telecommunication: China Mobile is the largest mobile provider in the world and have the largest market share in China
- Major State Banks: CCB, ICBC and Bank of China
- Insurance: Ping An and China Life
- Petrochemicals: CNOCC
iShares China ETF performance
|Fund and Index||Country Exposure||YTD||6 Months||1 Year|
|ASX IZZ ETF||China||-6.65%||-2.16%||2.79%|
|ASX 50 Index||Australia||-14.34%||-14.75%||-9.70%|
|Hang Seng Index||Hong Kong / China||-16.85%||-10.44%||-11.32%|
|S&P 500 Index||United States||-6.55%||-2.35%||10.93%|
It is obvious when you contrast the performance of the China index fund with australian companies and other global benchmarks (such as S&P 500) that the returns are quite different. Aside from the fact sometimes it can be an outperformer, it’s always good to have non-correlated returns in the portfolio.
Alternative China Equities Exposure
Emerging Market ETF
We have written in detail about a diversified China exposure through Emerging Market ETF. Emerging market exchange traded funds are a sector based fund which invests across range of emerging markets and in where China represents one of the largest country allocations (at more than 20%).
Hang Seng Index
Ideally we prefer direct exposure via the Hang Seng index. Hang Seng is one of the most well known equity indexes in the region and earliest index providing investors exposure to China.
Hang Seng is made up of 50 largest companies listed in Hong Kong and unlike IZZ not just Chinese companies. For example it includes HSBC, a UK / HK domiciled bank. The index is more diversified across number sectors with no single exposure larger than 10% of the index.