KBND - China Onshore Vs. Offshore Equity: Understanding Their Unique Exposure
2023-04-23 06:27:00 ET
Summary
- China equity market is huge. It’s the second largest in the world by total market capitalization. Diverse opportunities come with the sheer size of the market.
- In the offshore market (largely Hong Kong-listed and US-listed China companies), a similar shift from financials and real estate towards consumptions can also be observed.
- The exposure offered by China onshore market and offshore market has been transforming. Investors are no longer getting only exposure to large banks via the FTSE China A50 Index and the FTSE China 50 Index.
By Emerald Yau, Head of Equity Index Product Management, Asia
China equity market is huge. It’s the second largest in the world by total market capitalization[1]. Diverse opportunities come with the sheer size of the market.
To determine which part of the market is best suited for an investor’s portfolio, one needs to understand what’s on the table in the onshore (A Share) market vs. the offshore (non-A Share) market. While opportunities can be complementary, the exposures available are different. To examine the exposure, let’s look at FTSE Russell’s two China equity flagship indices – the FTSE China A50 Index and the FTSE China 50 Index.
The FTSE China A50 Index represents 50 largest Chinese A Share companies. The constituent weights are adjusted for foreign ownership limits. The FTSE China 50 Index represents 50 largest Chinese companies listed in Hong Kong as P Chips, H Shares, and Red Chips. The constituents are subject to weight capping mechanism to avoid over-concentration. Both indices are subject to treatment of sanctioned equity index constituents .
FTSE China A50: transforming with China’s growth
Perhaps the picture of China being a financial-heavy, state-owned enterprise-controlled economy is still imprinted in some investors’ mind. But China has changed.
In fact, only two of the top ten constituents in the FTSE China A50 Index are bank and insurance companies. Meanwhile, six companies across Consumer Staples and Consumer Discretionary industries are among the top 10 chart, totally over 30% of the index. This includes Kweichow Moutai, a leading baijiu producer company that holds the largest weight in the index.
More distinctively, the financial weight peaked around 67% in 2014 but has been treading down to below 27% currently as China transforms from an investment-driven to a consumption-driven economy model. Together with this shift, the rise of middle-income families further leads to consumption upgrade in China with a focus on premium domestic brands.
As a result, consumer companies are increasingly gaining exposure in the composition of the FTSE China A50 Index. That includes distiller companies like Kweichow Moutai, Wuliangye Yibin and Luzhou Laojiao that are not available outside of A Share market, as well as large food product provider and household appliance company.
But A Share market is more than just consumption exposure. The market is transforming in locked step with China’s direction of growth. Healthcare development is reflected in the FTSE China A50 Index’s composition, so is China’s decarbonization goal.
Growing healthcare spending and advancement in healthcare technology are supporting the growth of Innovative biotech companies and pharmaceuticals companies in China. Healthcare exposure in the FTSE China A50 Index has gone from 0% in 2012 to now 4 companies with 7% index weight in total.
On the other hand, China aims to become carbon neutral by 2060. The political agenda push to become “greener” translates into heavier reliance on renewable energy, electric vehicles, and rechargeable battery technology. Top constituents in the FTSE China A50 index include strategic hydropower company China Yangtze Power, solar solutions supplier LONGi Green Energy Technology, battery technology leader Contemporary Amperex Technology, and electric vehicle company BYD ( BYDDF )( BYDDY ).
While the A Share market still has 27% weight in financials, the vast market offers way more interesting opportunities. The FTSE China A50 Index remains a relevant index to the broader A Share market that helps investors tap into China’s growth focus and potential including consumption, healthcare, and decarbonization.
FTSE China 50: a new economy play
In the offshore market (largely Hong Kong-listed and US-listed China companies), a similar shift from financials and real estate towards consumptions can also be observed. However, the composition in the offshore market is rather different in the sense that it provides access to some of China’s fastest growing digital consumers companies and technology companies such as Tencent ( TCEHY ), Alibaba ( BABA ), Meituan Dianping ( MPNGF ) and JD.com ( JD ).
Zooming in to the Hong Kong-listed China companies across P Chips, H Shares and Red Chips, new economy exposure has risen sharply in recent years, particular because of the growth of such companies and the homecoming[2] of the heavily technology focused N Shares.
Technology advancement progress is exceptional in China. The rising focus on technology R&D investment translates directly into innovation. For example, Tencent, the largest constituent in the FTSE China 50 Index, is way more than the WeChat messenger app. Tencent is the creator of the super app trend, and its service is used by over 92% of China’s population – or 1.3 billion people. 3
Riding on the global digitalization trend, e-commerce is another fast-developing area in China that is well-represented by the FTSE China 50 Index. Alibaba and JD.com are the leaders in the field, and both have a staple place in the index’s top 10 chart.
While there is a lack of large renewable energy companies listed in the offshore market, there has been a significant decline of non-renewable energy exposure in the FTSE China 50 Index, from 23.5% exposure in 2008 to now below 5%.
It is true that many of the new economy companies have been hurt in past few years due to stricter policy measures in China’s pursue to common prosperity. However, in the National People's Congress ((NPC)) held in March 2023, the message was clear: a firm commitment to pursuing the state’s opening-up policy. The pro-business pragmatism can mean a much-needed breather for new economy companies from the stricter policies seen in recent years.
The environment has therefore turned more supportive to digital consumption and technology companies. Valuation of FTSE China 50 Index is low with P/E ratio at 8.73 comparing to its 20-year average of 10.43, providing a reasonable entry point.
China A50 + China 50 = complementary exposure
The exposure offered by China onshore market and offshore market has been transforming. Investors are no longer getting only exposure to large banks via the FTSE China A50 Index and the FTSE China 50 Index. Rather, consumptions, technology, healthcare, and decarbonization are the new normal.
While each market offers unique exposure that can suit different investors’ needs, together, the FTSE China A50 Index and the FTSE China 50 Index paint a complementary picture of the most powerful companies in China.
[1] Source: Statista; as of October 2022. Includes stocks listed Shanghai Stock Exchange, Shenzhen Stock Exchange, and Hong Kong Exchange and Clearing.
[2] N Share homecoming refers to companies used to trade in the US only are now also listed in Hong Kong as P Chips.
3 Source: Tencent 2022 Q4 annual results: For Immediate Release (tencent.com)
© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
China Onshore Vs. Offshore Equity: Understanding Their Unique Exposure