Embracing the globalization of Chinese equities

Being the second largest capital market and the second largest economy in the world, China is underrepresented in most of the international benchmarks which is unparalleled with its significance to the world economy. With increased accessibility to Chinese domestic equities market, one of the largest index compliers received broad support from international investors with whom they consulted and recently announced to include China A-shares into its benchmark indexes.

1. Liberalization of capital markets fostering globalization of China assets

The impact of the inclusion in the initial stage is expected to be modest due to the limited inclusion factor. Nevertheless, the decision shows that China A market has gained recognition from international investors and cannot be neglected. The globalization of Chinese securities is inevitable and in progress. The opening up of China’s capital market has been accelerated in the past few years, as evidenced by the launch of QFII, RQFII and Stock Connect programs. CSRC Vice Chairman Mr. Fang Xinghai mentioned that they would consider increasing Connect daily quota and reforming QFII quota system for better foreign access[1].

Once the capital market of China is liberalized, it is believed that Chinese equities will become more prominent in the portfolios of global assets allocators in order to reflect the importance and influence of its economy and financial markets. With the expectation of China’s gradual increase in weighting in international benchmarks, global investors are called to pre-position themselves for the irreversible trend of China assets globalization. A board base index and related investment products which can better represent the Chinese economy would be an ideal building block of global and/or regional equity portfolios.

2. S&P China 500 Index – in response to increasing market demand for “Total China” index

Against the backdrop of broadened capital flows between domestic China and international markets, the demand for benchmarks that integrate the China onshore and offshore listings has been increasing. In response to market demand, the S&P China 500 Index was launched to offer a more complete China coverage by including both onshore and offshore Chinese equities.

S&P China 500 Index covers 500 the largest and most liquid Chinese companies regardless of their listing venue, including the entire universe of Chinese equities, such as A, B, H, Red Chip, P Chip and Chinese securities listed in the U.S. or any other overseas exchanges.

Compared to other major China indices, S&P China 500 offers a more diversified sector exposure (Figure 1). It is much less concentrated in Financials (23%) comparing to FTSE A50 (64%), CSI 300 (35%), MSCI China (25%) and HSCEI (72%) as of May 31, 2017. More weights are distributed to new economy sectors, such as I.T. (19%) and consumer discretionary (13%).

Figure 1: S&P China 500 Has More Diversified Sector Exposure vs. Existing Major China Indices

Comparison of industry distribution

By GICS1sectors weight (%)

Benefited from its diversification in markets and sectors exposure, S&P China 500 has demonstrated better risk-adjusted returns (Figure 2). During the period from 31 Dec, 2008 to 31 May, 2017, the S&P China 500 generated an annualized return of 10.9% and Sharpe ratio of 0.48, both are the highest among the major China indices.

Figure 2: S&P China 500 Demonstrated Better Risk-Adjusted Return

1: Calculation starts from 31-Dec-08 to 31-May-17. “No of Stocks” data as of 31 May 2017. All data are converted to USD.

2: S&P China 500 (USD), based on back-test performance, annualized net total return.

Source: Bloomberg, FTSE, MSCI, HSI, CSI, S&P Dow Jones Indices; please refer to index disclaimers and index performance disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

The S&P China 500 offers a more comprehensive market coverage while approximating the sector composition of the broader Chinese equity market make it a better proxy for Chinese economy.

DISCLAIMERS

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INDEX PERFORMANCE DISCLOSURE

The S&P China 500 was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com. Please read S&P Dow Jones Indices LLC’s DISCLAIMERS.