Investing in China? What You Should Know About Gaining Access to the Markets
Investors with exposure to China and those interested in gaining a foot into the country received some good news last month when it was announced that China’s GDP grew by 7.8% in the third quarter. The news was a sigh of relief for investors as China’s economy appears to have avoided the hard landing economists and investors had feared.
But while the question of stabilization in economic growth has been answered, at least for now, investors are left with the question of access: What is the best way to gain exposure to Chinese equities?
Ways to gain exposure
There are several viable ways to gain exposure to China’s stock markets. Among the methods include investing in A-shares and H-shares.
- A-shares are generally available for purchase only by local investors. However, Qualified Foreign Institutional Investors (QFII) can also invest in A-shares, with special permission by the Chinese government. Individual investors can access A-shares by purchasing an investment vehicle, such as an exchange-traded fund, with exposure to this market. However, some of these investment vehicles have been known to experience widely fluctuating premiums to their net asset value as a result of QFII restrictions and limitations.
- H-shares can be traded by anyone. Generally, many foreign investors gain exposure to the Chinese equity markets through H-shares.
Why investors should consider A-shares
We believe there are three compelling reasons investors should consider A-shares for their Chinese equity exposure.
1. Valuation compared with other emerging markets
Over the last decade, China A-shares, particularly in the financial sector, have been among the most undervalued in the emerging market space. For example, the largest 50 A-share companies, mostly financial firms, are currently trading 55% 1 below their average price-to-earnings (P/E) ratio since 2005. The P/E ratio values a company’s current share price compared to its per-share earnings. The P/E drop by large A-share companies is attributed to earnings growth, which is outpacing price appreciation, and not due to a decline in performance.
2.Valuation compared with H-shares
Currently, H-shares are trading at parity with A-shares, which are approaching their lowest levels relative to H-shares since 2006. H-shares have averaged a 13% discount to A-shares since 2006.1 As demand for A-shares increases, we could see this discount come back into play.
3.Low correlation to traditional Chinese investments
A-shares offer relatively low correlation to H-shares — the 3-year correlation, which measures how two securities move in relation to each other, as of Sept. 30, 2013, was 0.55.2 Investors who already own H-shares may want to consider adding an A-share investment to diversify their Chinese exposure.
Overall, we believe that if you’re interested in or already committed to this emerging market over the long term, then you should consider an investment vehicle that offers exposure to the A-share market.
For more information visit the Invesco PowerShares site, invescopowershares.com
1 Source: Bloomberg L.P. as of Sept. 30, 2013. H-share discount to A-share is represented by the Hang Seng China AH Premium Index.
2 Source: Bloomberg L.P. as of Sept. 30, 2013. A-shares are represented by the FTSE China A50 Index and H-shares by the FTSE China 25 Index.
Important information
The Hang Seng China AH Premium Index (“AH Premium Index”) tracks the average price difference of A-shares over H-shares for the largest and most liquid Chinese companies with both A-share and H-share listings (“AH Companies”).
The FTSE China A50 Index is a real-time index that provides exposure to the largest 50 A-share companies on a market-cap-weighted basis.
The FTSE China 25 Index is a real-time, tradable index which offers the optimal representation of China blue chip stocks. It includes the largest 25 Chinese stocks listed on the Stock Exchange of Hong Kong, ranked by full market capitalization.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.
The A-shares market in China is an emerging market with a limited operating history. Restrictions on the free flow of capital into the Chinese A-shares market may adversely impact liquidity and increase the volatility of prices of A-shares. The investment regulations in China are relatively new and their application and interpretation are relatively untested.
The Chinese government in the past has taken actions that benefited holders of A-shares. If A-shares continue to become more available to foreign investors, the Chinese government may be less likely to take such actions. Moreover, the laws, regulations, government policies and political and economic climate in China may change, and there can be no assurance that the Chinese government will continue to take similar actions in the future. Any such change could adversely affect the market conditions for A-shares.
Investments in the foreign securities, including emerging markets, involve additional risks, such as less reliable financial information, higher transactional costs, taxation by foreign governments, decreased market liquidity and greater market volatility and political instability.
Past performance cannot guarantee future results. An investment cannot be made in an index.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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Invesco Distributors, Inc. is a US distributor for retail mutual funds, exchange-traded funds, institutional money market funds and unit investment trusts. Van Kampen Funds Inc. is a sponsor of unit investment trusts. Both entities are wholly owned, indirect subsidiaries of Invesco Ltd.
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