Emerald Yau
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.
Top 10 constituents in the FTSE China A50 Index.
| Constituent | Industry | Subsector | Weight (%) |
|---|---|---|---|
| Kweichow Moutai (A) (SC SH) | Consumer Staples | Distillers and Vintners | 14.67 |
| Contemporary Amperex Technology (A) (SC SZ) | Consumer Discretionary | Auto Parts | 6.36 |
| Wuliangye Yibin (A) (SC SZ) | Consumer Staples | Distillers and Vintners | 4.91 |
| China Merchants Bank (A) (SC SH) | Financials | Banks | 4.54 |
| Ping An Insurance (Group) Company Of China (A) (SC SH) | Financials | Life Insurance | 3.17 |
| China Yangtze Power (A) (SC SH) | Utilities | Alternative Electricity | 3.10 |
| BYD (A) (SC SZ) | Consumer Discretionary | Automobiles | 2.98 |
| Shenzhen Mindray Bio-Medical Electronics (A) (SC SZ) | Health Care | Medical Equipment | 2.42 |
| Luzhou Laojiao (A) (SC SZ) | Consumer Staples | Distillers and Vintners | 2.41 |
| China Tourism Group Duty Free (A) (SC SH) | Consumer Discretionary | Specialty Retailers | 2.30 |
| Total Top 10 Weight | 46.84 |
||
Source: FTSE Russell; as of March 31, 2023. Past performance is no guarantee of future performance. Please see the end for important disclosures.
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-drive 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.
Rise in middle class population in China translates into better spending power - Growth of China Middle Class
Source: J.P. Morgan Asset Management Guide to China 1Q 2023. Past performance is no guarantee of future results. Please see the end for important disclosures.
As a result, consumer companies are increasing 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.
Rising consumer weight, with falling financials exposure in the FTSE China A50 Index - ICB Industry Breakdown
Source: FTSE Russell, as of March 31,2023, year-end data used between 2012 and 2022. Represents the ICB Industry breakdown in the FTSE China A50 Index. Consumer combines Consumer Discretionary and Consumer Staples ICB industries. Commodity-related & Industrials combines Basic Materials, Energy and Industrials ICB industries. Past performance is no guarantee of future results. Please see the end for important disclosures.
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.
FTSE China A50 Index is increasing exposed to the following themes
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, Alibaba, Meituan Dianping and JD.com.
Zooming in to the Hong Kong-listed China companies across P Chips, H Shares and Red Chips, new economy exposure has risen shapely 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]
China's R&D spending is increasing, so is innovation - Research and development expenditure (% of GDP)
Source: World Bank Development Indicators, as of 2020 end. Past performance is no guarantee of future results. Please see the end for important disclosures.
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.
Top 10 constituents in the FTSE China 50 Index
| Constituent | Industry | Subsector | Weight (%) |
|---|---|---|---|
| Alibaba Group Holding (P Chip) | Consumer Discretionary | Diversified Retailers | 10.25 |
| Tencent Holdings (P Chip) | Technology | Consumer Digital Services | 9.64 |
| Meituan Dianping (P Chip) | Technology | Consumer Digital Services | 9.34 |
| China Construction Bank (H) | Financials | Banks | 5.79 |
| JD.com (P Chip) | Consumer Discretionary | Consumer Discretionary | 4.95 |
| Baidu (P Chip) | Technology | Consumer Digital Services | 4.37 |
| Industrial and Commercial Bank of China (H) | Financials | Banks | 4.24 |
| Ping An Insurance (H) | Financials | Life Insurance | 4.11 |
| NetEase (P Chip) | Consumer Discretionary | Electronic Entertainment | 3.46 |
| Bank of China (H) | Financials | Banks | 3.15 |
| Total Top 10 Weight | 59.30 |
||
Source: FTSE Russell; as of March 31,2023. Past performance is no guarantee of future performance. Please see the end for important disclosures.
Notable increase in consumer and technology weights in recent years in the FTSE China 50 Index -
ICB Industry Breakdown
Source: FTSE Russell, as of March 31,2023, year-end data used between 2012 and 2022. Represents the ICB Industry breakdown in the FTSE China 50 Index. Consumer combines Consumer Discretionary and Consumer Staples ICB industries. Commodity-related & Industrials combines Basic Materials, Energy and Industrials ICB industries. Past performance is no guarantee of future results. Please see the end for important disclosures.
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.
Valuation of FTSE China 50 Index is at a reasonable level vs. long-term average - 12-Month Foward PIE
Source: FTSE Russell, as of March 31,2023. Past performance is no guarantee of future results. Please see the end for important disclosures.
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.
Unique opportunities in A Share market vs. offshore market can create complementary exposure in an investor's portfolio - ICB Industry Breakdown
Source: FTSE Russell, as of March 31,2023. "Hypothetical Composition" represents a composite index of 50% FTSE China A50 Index plus 50% FTSE China 50 Index. Past performance is no guarantee of future results. Please see the end for important disclosures.
[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)
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