The Case for China

- Why invest in China?

• China is still one of the world’s fastest growing economies after decades of elevated GDP growth and with a government target of no less than a 6.5% annual rate until 2020.  China has in less than 40 years become a global leader in a range of industries. Take Huawei as an example. Huawei was founded in 1987. Ten years ago, Ericsson had twice the revenues of Huawei. By 2015, the relation had reversed.

Huawei R&D spending was 10 billion USD in 2015, which was about 2.5 times that of Ericsson.

Huawei has 175 000 employees (of which 45% in R&D), and was the World’s top patent seeker for the second straight year in 2015.

• China is the dominant economic force in Asia and its significance is set to grow further. Western-designed equity index benchmarks don’t reflect China's actual market size and its importance to the global economy.
  
                 
  

- What advantages can an all-inclusive China fund offer?

• There are multiple exchanges where shares of Chinese companies are traded. The offshore market, composed of H-shares, Red Chips and P-Chips listed on the Hong Kong stock exchange and American Depository Righs (ADRs)  listed on US exchanges, account for 26% of the total Chinese market. The Chinese domestic or onshore market – the A-shares – trade on the Shanghai and Shenzhen stock exchanges and make up the remaining 74%. The domestic Chinese market offers a significantly wider selection of companies than what is offered through traditional China funds investing in MSCI China benchmark-related stocks. The A-share market has grown to become the second largest market in the world and accounts for 10% of global market capitalization or 7 trillion USD.  The A-share market is based on a wide spectrum of industries and includes a large exposure to many rapidly growing sectors such as consumer products and services, healthcare, technology, and clean energy.  The A-shares are now accessible to international investors through the Stock Connect program which links the mainland and Hong Kong equity markets.
  
                                      

• Valuations between the different stock markets may diverge significantly over time. After the stock market correction in 2015, the valuation of A-shares has become much more attractive as it has been lagging western markets and is now trading with a significant discount. A substantial number of Chinese companies have dual listings on the mainland and in Hong Kong and the valuations can differ significantly. The possibility to choose the instrument to invest through can be rewarding.

The China A-share market offers substantial diversification benefits as the CSI300 index shows low correlation with other major indices such as MSCI World or Asia ex Japan over an extended time period. This makes it a great tool for portfolio diversification.

• Chinese internet companies have in the past listed on US exchanges or in Hong Kong. By contrast, many tech companies have their only listing on the mainland. There are reasons to believe that there will be a host of new companies in emerging technologies listing on the domestic exchanges as China has set  high targets in its “Made in China 2025” plan. China’s 156 high tech zones account for 12% of GDP and 16% of exports. These innovative clusters are supported by the government through preferential treatment to drive innovation, commercialization, industrialization, and internationalization. The Shenzhen stock exchange has become the preferred listing option for many of the companies in emerging technologies.

It is a distinct advantage not being limited by the listing preferences of the companies when sourcing the best investment opportunities.