China A-shares inclusion may lead to a rise in valuations
In June 2016, the MSCI slashed its proposal to include China A-shares in it’s emerging market index citing 3 major obstacles in its path. By the end of June 2017, the MSCI is expected to again review its decision regarding the inclusion of China A-shares into its Emerging Market Index (EEM) (VWO).
This market is simply too big to ignore and inclusion of some weighting of A shares is inevitable – MSCI
If the decision goes through and the MSCI does include China A-shares into its emerging market index, we should see valuations rising for these shares.
Part of the world’s 2nd biggest stock market
Currently, the Shanghai and Shenzhen stock exchange listed shares represent a $7 trillion market, the second biggest in the world. The MSCI is currently in discussion with asset managers about the inclusion of a select list of 169 A shares from this universe into its EM index. Currently, China A-shares are quoted in Chinese renminbi (RMB) and are only available to Chinese residents and as part of the Hong Kong Shanghai Stock Connect program. Inclusion into the index would broaden the investor base eligible to invest in these shares, thereby lending to increased liquidity and valuations.
(as of May 19)
|Deutsche X-trackers Harvest CSI 300 China A-Shares ETF||ASHR||14.22||1.65||3.96%|
|iShares MSCI China A ETF||CNYA||15.07||1.69||4.09%|
|Kweichow Moutai Co Ltd||600519||30.85||7.01||33.06%|
|Ping An Insurance Group Co of China Ltd||601318||11.16||1.81||16.75%|
|China Merchants Bank Co Ltd||600036||8.14||1.23||17.65%|
|Shanghai Pudong Development Bank Co Ltd||600000||6.36||0.93||-6.54%|
|China State Construction Engineering Corp Ltd||601668||9.26||1.49||3.48%|
|Agricultural Bank of China Ltd||601288||5.84||0.81||11.60%|
|Midea Group Co Ltd||000333||16.72||3.51||30.87%|
|Bank of Communications Co Ltd||601328||5.67||0.59||3.48%|
|China Minsheng Banking Corp Ltd||600016||5.92||0.82||-13.24%|
ETFs invested into China A-shares currently
Currently, US-based investors who seek to gain exposure to these Chinese stocks (FXI) (YINN) can do so by investing into any of the China A-shares tracking funds. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) and the iShares MSCI China A ETF (CNYA) are two such US-listed exchange-traded funds invested in China A-shares. Stocks such as Kweichow Moutai Co Ltd, Ping An Insurance Group Co of China Ltd, China Merchants Bank Co Ltd, Shanghai Pudong Development Bank Co Ltd, China State Construction Engineering Corp Ltd, Agricultural Bank of China Ltd, Midea Group Co Ltd, Bank of Communications Co Ltd, China Minsheng Banking Corp Ltd figure amongst the top 10 holdings of both these funds. The table above gives a sneak preview into the current valuations of these stocks.