The restrictive regulatory framework of onshore market worries some international investors as well. In order to protect retail investors, onshore regulatory requirements limit the pool of borrowable stocks for single-stock short-selling – a method which helps uncover the true value of stocks. There are also restrictions on pricing in initial public offerings (IPOs) which mask the market value of newly-listed stocks. The registration-based IPO process also means that the securities regulatory authority must approve applications before they can list.
The dawn of a new era
China has been earnest in opening up the onshore market to global investors. In recent years, Chinese authorities have been gradually relaxing restrictions to allow foreign investors to enter the market. We expect that there will be a more diverse array of investors in the domestic market, with sophisticated, institutional investors taking up a bigger presence. We believe A share inclusion into global indices is another catalyst that will help institutionalise the A share market and make it more efficient.
There are also hopes that the regulatory landscape of onshore market may improve. The recently-launched Scientific and Technology Innovation Board (STAR) in Shanghai has many regulatory innovations. If done well, these innovations on the STAR Market may be rolled out to other stock exchanges.
A unified approach is the way forward
With the distinction between onshore and offshore markets dwindling, we believe investors should focus on combining the best opportunities in both onshore and offshore markets and adopt a unified China approach. We believe such an approach will enable more efficient alpha generation and can lead to favourable returns.
This is because we believe that offshore Chinese equities provide abundant high-quality names and investors should consider them as important building blocks in their allocation to China. At the same time, we believe unique opportunities and wide universe of onshore markets deserve attention. We believe a selective approach at the moment will add the most value, but as its market features are evolving towards higher institutional participation and efficiency, we believe A shares will provide more opportunities over time.
All these would mean that an all-China approach make more sense as investors look to tap into the best opportunities that Chinese listed companies have to offer. It also gives them the best exposure to China’s phenomenal growth. We believe investors should leave it to experienced managers as they are likely to make better stock selection with their deeper knowledge of both onshore and offshore markets.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Mike Shiao is Chief Investment Officer for Asia ex-Japan equities at Invesco.
^1 Sources: FactSet, MSCI, Goldman Sachs Investment Research. Data as of end 2018.
^2 Source MSCI China Index captures large- and mid-cap representation across all China share classes. It initiated the inclusion of ADRs in November 2015 and that of Chinese domestically traded A shares in May 2018. Upon full inclusion, A shares will account for around 40% of MSCI China Index.