China’s domestic A share market is broad, deep, liquid and strong
ISSUE 2: FIVE REASONS TO INVEST IN CHINA SERIES
China’s ‘A Share’ market is the world’s 2nd largest stock market, with a market capitalisation of US$14.1 trillion (compared to Wall Street US$26.2 trillion, London US$3.8 trillion and Australia US$1.6 trillion) and over 4,500 listed companies (4,000 in the US). Shares worth more than 1 trillion yuan (US$154.6 billion) are regularly traded each day on the Shanghai and Shenzhen exchanges (retail trading accounts for 60-70% of daily turnover, mutual funds 20% and pensions/insurance 10%) making it one of the most liquid and actively traded markets in the world.
Investors in China’s A share market are offered opportunities to invest in a diverse selection of local companies from a wide range of sectors, including from the ‘old economy’ (financials, property, utilities, mining and energy) and the ‘new economy’ (consumer, healthcare, technology and renewable energy sectors). This includes some large household names (e.g. Haier, Midea, Moutai) and also smaller emerging companies who benefit from the Government’s emphasis on increasing competition, innovation, ESG (environmental, social and corporate governance) and greater transparency and regulation. Most A share listed companies generate over 90% of their revenues locally or domestically which makes them less vulnerable to economic downturns overseas and allows them to invest in innovation, growth and creating local employment.
Most economic commentators agree that China’s economy plays a prominent role in propelling the growth of the global economy and this offers enormous potential for local companies to continue the amazing domestic success story of the past 30 years. Over 85% of Chinese healthcare, consumer and information technology stocks are listed only on the A share market, meaning that foreign investors will have to increase their China exposure to access some of the world’s most innovative companies.
Skilled, active and local fund managers (particularly whilst borders are closed due to Covid) with a focus on fundamentals, industry and individual company research can exploit the inefficiencies in a retail-driven domestic market and deliver above average returns to foreign investors who otherwise find it hard to research and understand the market from overseas.