With China's weight in global equity indexes increasing and its markets maturing, U.S. investors — from institutions to high-net-worth individuals — are increasingly asking if they should consider a dedicated all-China allocation.
Today, most investors are underexposed to Chinese equities but there are several solutions, among them overweighting fast-growing domestic firms traded as A shares or modifying current emerging market allocations to better reflect China's improving prospects.
Before exploring how to change a strategic asset allocation to include an all-China equity carve-out, it's worth answering the question, "Why should investors consider changing their approach to China?" First, Chinese equity markets, once dominated by government-controlled companies, are rapidly improving. Today, markets spanning Hong Kong to China A-share exchanges and the new Nasdaq-like Shanghai Stock Exchange Science and Technology Innovation Board are more vibrant, reflecting a modern economy spurred on by small- and midsize public companies that are not government controlled, foreign investment, increasing capital supply and investment in such innovative sectors as biotech, artificial intelligence and 5G.
In addition, corporate governance has improved, capital markets are being developed to become more attractive to listing companies and investors alike, and the Chinese consumer is increasingly buying domestic brands. Crucially, China also has the tailwind of index providers such as MSCI increasing their China benchmark weightings.