Is it worth choosing direct China exposure?

Research finds institutional investors are seeking direct China exposure and it has paid off as China indices have made strong returns since the beginning of the year compared with emerging market (EM) indices, according to data.

Research by bfinance found there was increasing interest from institutional investors in onshore China A-Share and China All-Shares, those which blend onshore and offshore exposure, funds.

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China A-shares represent one of the biggest equity markets in the world but had previously been difficult to access by foreign investors. The shares, which represent the stock of mainland Chinese companies, were previously only accessible by mainland investors but have since been opened up to wider markets via the Qualified Foreign Institutional Investor (QFII) system.

According to FE Analytics, the MSCI China A-Shares index returned 6.6% since the start of 2020 to 26 June while the MSCI China All-Share returned 7.2%. This compared to losses of 6.9% by the MSCI Emerging Market index.

Performance of MSCI China A-Shares and China All-Share versus MSCI Emerging Market index since start of 2020 to 26 June 2020

However, there was a lack of long-term data available as the China A-Share index was only created in March 2018 as the sector became a viable investment. Its top weighting was to financials at 23.5% followed by consumer staples at 16.6% and Technology at 12.6%.

MSCI started to partially include large-cap China A-Shares in its EM index in May 2018 and, in the event of full inclusion, China equities would exceed 40% of the EM index which would be divided between 25.8% in China shares and 16.2% in China A-Shares.

Since its inception in March 2018, the MSCI China A-Shares index returned 9.8% while the MSCI China All-Share returned 11.2% and the MSCI Emerging Markets index returned 0.5%.

There were not currently any Australian-domiciled China A-share or All-Share funds available for retail investors.

Performance of MSCI China A-Shares and China All-Share versus MSCI Emerging Market index since 1 March 2018 to 26 June 2020