The sheer size of the China A-share equity market, along with China's shifting economic profile, will have a tremendous impact on emerging markets indices - the inclusion of the whole A-shares market will push China's weight in the MSCI Emerging Markets Index up to 40.8%.
Discussing the implications, Robeco Chinese equities portfolio manager Victoria Mio told Financial Standard that the $8.8 trillion China A-share market accounts for 71% of the market capitalisation of all Chinese listed stocks, and that it has unusual characteristics compared to other public markets. For instance, retail investors account for 87% of the total A-share trading volume and 50% of the total free-float market cap.
"There's no other market like this, where retail investor participation is so high. And what does that mean? It means that there's a lot of alpha generation opportunities because the trading volume is so high and there's a herd mentality. Therefore there are plenty of opportunities on the upside and the downside," Mio said.
Mio noted many investors don't know much about the A-share market, even if they're already exposed to China via emerging markets or Asian equity strategies. She said that once the entire market is included in the MSCI EM Index, China's weighting will eventually surpass 50% in light of how many initial public offerings are on the way.
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"There's many IPOs coming. Many of these new companies will have very high growth rates, too, and it may eventually make sense to have an emerging markets ex-China strategy alongside a specialised China one," she added.
Growth opportunities in the market will also be broadened by President Xi Jinping's three-pronged "China Dream, Innovative China, Beautiful China" strategy. The first component, Mio explained, involves "increasing the gross domestic product per capita of the country, which will in turn result in more disposable income and consumption upgrades - from staples to luxuries, healthcare, entertainment and travel."
Innovative China, Mio continued, will involve the government creating a venture capital or private equity-esque vehicle to "incubate companies in the new technology space, such as internet companies and high-end manufacturing."
The final point, Beautiful China, will precipitate a tightening of environmental regulations, which will in turn affect governance standards at both state- and privately-owned companies.
Ultimately, Mio said the potential of a specialised A-share-inclusive strategy for investors is tremendous, but admitted it isn't easy to invest in the market.
"Most meetings I have are dominated by questions about this. There currently aren't a lot of institutionalised products in this market available, and investors are now having to ask themselves whether they can rely on existing EM strategies or whether to find a manager who understands the market from top to bottom."