Chinese equities are rising to start 2017, and that includes A-shares, the Chinese stocks trading on mainland exchanges in Shanghai and Shenzhen. Several U.S.-listed exchange-traded funds (ETFs) offer access to A-shares, including the KraneShares Bosera MSCI China A ETF (KBA), which is up 7% year to date.
KBA, which tracks the MSCI China A International Index, is arguably a more accurate play on the still growing Chinese economy than some traditional China ETFs. For example, KBA holds 200 stocks, or nearly quadruple the amount found in the iShares China Large-Cap ETF (FXI). FXI, the largest China ETF listed in the U.S., only holds companies with a primary listing in Hong Kong, London or the U.S. (See also: Top 3 China ETFs for 2017.)
KBA allocates just over 49% of its combined weight to financial services and industrial stocks, but in the case of FXI, financials on their own represent 49.6% of the ETF's weight. KBA is also a more accurate play on the Chinese consumer, as consumer discretionary names are almost 12% of that ETF's weight, or nearly triple the consumer exposure seen in FXI. (See also: 5 Things to Know About the Chinese Economy.)
Shanghai and Shenzhen are two of the largest equity markets in the world, but many standard China ETFs exclude A-shares. Even with the vast potential offered by China's mainland equity markets, stocks there are not excessively valued. While A-shares traded at slight premiums to the widely followed MSCI Emerging Markets Index, mainland Chinese stocks traded at discounts to other big-name global benchmarks. At the end of January, the MSCI China A International Index sported a lower price-to-earnings ratio (P/E) than the MSCI EAFE Index, the MSCI All Country World Index and the MSCI USA Index, according to KraneShares data.
There are other catalysts for China A-shares, including increased allocations by local investors to domestic equities. The Chinese are fastidious savers, and the country has one of the highest savings rates among major global economies. However, data suggest that some investors there are paring cash positions to become involved in equities. (See also: High Debt and Savings Rates Hinder China's Economy.)
"We believe a reorientation of Chinese savers to the domestic stock market could have a dramatic impact," according to KraneShares. "Due to the diminished return profile of traditional saving vehicles, the stock market appears ripe for participation. There is evidence that this shift is already occurring, as 2016 saw an increase in the number of accounts on Chinese exchanges, both from institutions and individuals."
Another familiar potential catalyst looms large for A-shares – whether or not MSCI decides to lift A-shares to its major international benchmarks, something the index provider has considered for several years but has yet to do. "For example, the addition of these stocks should raise China's weight within MSCI EM from 26% to over 40%. The next evaluation will be made public in June 2017. It is estimated $272 billion could flow into the stocks tracked by the MSCI China A International Index from inclusion into the MSCI EM Index alone," said KraneShares. (See also: MSCI Rejects China for Emerging Markets Index.)