Institutional investors increasingly are splitting out China equities from their emerging market equity allocations to gain more exposure to alpha opportunities and better manage environmental, social and governance risks.
Global allocators from Europe and Australia recently have created dedicated exposures to China A shares, despite the increasing weight of China shares in major emerging market equity indexes.
In June, FTSE Russell completed the first stage of its China A-share integration into its FTSE Emerging All Cap index, increasing China's weight to 6% and adding 1,051 new large, medium and small-cap companies. Starting in 2018, MSCI Inc. began to include China A shares in its MSCI Emerging Markets index. The index had more than 1,500 China A shares, which constituted 5% of the index, as of Aug. 30, alongside a 37.4% exposure to China through the offshore market.
However, FTSE Russell announced Dec. 4 that it will remove eight Chinese companies from its global and China A indexes in response to a White House order banning investments in Chinese companies deemed to be supporting the country's military. The action will take effect Dec. 21, following the FTSE Global Equity Index Series quarterly review, and more companies could be removed at a later date.
The MSCI China A Onshore index gained 23.4% year to date to Oct. 30 and 3.9% over the last three years annualized. The MSCI China A International index delivered 24.7% year to date and 5.4% in the last three years annualized. Meanwhile, the MSCI Emerging Market index added 0.87% year to date and 1.94% over the three years annualized.
Investors cited China A shares' outperformance over broader emerging markets as one of the motivations to create separate China portfolios.
Sources added that China's economy is expected to surpass the U.S. as the world's largest economy by 2030. For long-term global investors, that outlook is expected to create opportunities. Domestically, they view China as an inefficient equity market dominated by retail investors — and one where institutional investors using active strategies can find alpha.