The case for China A-Shares

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HEDGEFUNDIE
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The case for China A-Shares

Post by HEDGEFUNDIE » Thu Dec 27, 2018 11:48 am

China mainland-listed stocks (A-Shares) traded on the Shanghai and Shenzhen exchanges collectively total $8.5T (in June 2018, compared to the MSCI Emerging Markets Index which represents $1.8T in market cap).

US investors have generally been locked out of owning A-Shares but early this year MSCI announced that it will gradually begin adding more A-Shares to their EM index. I believe it is time for US investors to give this market another look.

Reasons to own A-shares as a separate allocation in your portfolio:

1. If you follow the “buy the haystack” philosophy, the true global haystack includes a lot more Chinese stocks than the major indices currently include. Owning A-shares as a separate allocation will get you closer to true global market cap weight.

2. A-Shares exhibit low correlation to US total market, lower than Emerging Markets funds:
https://www.portfoliovisualizer.com/ass ... ingDays=60

3. As the major indices continue to add A-shares to their portfolios, volatility should decrease and risk-adjusted return should improve.

4. Multiple ETFs exist (ASHR, CNYA, KBA) offering TLH opportunities.

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Re: The case for China A-Shares

Post by samsdad » Thu Dec 27, 2018 11:55 am

Would this be a good time to throw in those Forbes and Fortune articles we’ve discussed before?

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Re: The case for China A-Shares

Post by am » Thu Dec 27, 2018 12:07 pm

I remember reading about gov. Market manipulations, lack of transparency and corruption. Maybe this contributes to the lack of correlation :D ?

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Re: The case for China A-Shares

Post by columbia » Thu Dec 27, 2018 12:10 pm

I thought VWO added class-A shares in 2015...

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Re: The case for China A-Shares

Post by hdas » Thu Dec 27, 2018 12:11 pm

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Re: The case for China A-Shares

Post by nisiprius » Thu Dec 27, 2018 12:18 pm

?????

1) Surely the Vanguard Emerging Markets Index Fund has included A shares for some time? Like maybe since 2016? Vanguard's statement of the fund's strategy and policy says
Someone at Vanguard wrote:The fund employs an indexing investment approach designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index
2) If the FTSE Emerging Markets All Cap China A Inclusion Index doesn't match Hedgefundie's "true global haystack" I'm sure that it isn't because of an arbitrary dislike on FTSE's part, but rather that it is not easy to decide on what is the "true global haystack," and that opinions differ. There is hay in the world that is in any haystack.
Last edited by nisiprius on Thu Dec 27, 2018 12:44 pm, edited 1 time in total.
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Re: The case for China A-Shares

Post by Dialectical Investor » Thu Dec 27, 2018 12:20 pm

columbia wrote:
Thu Dec 27, 2018 12:10 pm
I thought VWO added class-A shares in 2015...
The transition was complete in September 2016. Since then, the fund has tracked the FTSE Emerging Markets All Cap China A Inclusion Index.

The prospectus notes the unique risk of A shares: "China A-shares risk, which is the chance that the Fund may not be able to access a sufficient amount of China A-shares to track its target index. China A-shares are only available to foreign investors through a quota license or the China Stock Connect program."

In this case, the OP is discussing MSCI, though, not FTSE.

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Re: The case for China A-Shares

Post by LadyGeek » Thu Dec 27, 2018 12:52 pm

hdas wrote:
Thu Dec 27, 2018 12:11 pm
There's already a thread about this. :greedy
That discussion appears to be the case against China A-shares: Why is it ok to avoid Chinese A Shares?

This discussion is the case for China A-shares.
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Re: The case for China A-Shares

Post by samsdad » Thu Dec 27, 2018 1:02 pm

hdas wrote:
Thu Dec 27, 2018 12:11 pm
There's already a thread about this. :greedy
Some selections from that thread from various posters, other than yours truly:
I don't want them. The bulk of the Chinese stock market (by market capitalization) are huge state-owned firms. There is a lack of corporate governance, dubious rule of law, and no transparent standard accounting rules. In other words, you're indirectly funding the Chinese Communist government, the assets you think you're buying may not be there, and everything is subject to manipulation, from the corporate to government level. I'd like to control my exposure to that type of risk by limiting it to emerging markets, and for a small portion of my portfolio.
Even though foreigners may now invest in A-shares, there is a monthly limit on repatriation of funds to foreign countries.
This reminds me of the 'non-traded' REIT's that some financial advisors always seem to want to push. You can invest in it, but when you want your money back, it may be a case of 'Sorry Charlie'.
If China does not extend its own people basic freedoms, and still jails people if for no reason other than they disagree with the government or practice a religion, what chance do you think there is that they will let foreign investors exert real influence on their capital markets without control from the Chinese government?
China A shares are not transparent enough yet. The whole market is too nebulous to recommend anyone invest in. What do you really own?
I think it's definitely not time to invest in China A shares, or anything else in China for that matter. The recent (of this year) Fortune or Forbes article I previously cited in other threads makes it clear that China is not becoming more transparent and less manipulated. If I can find it easily, I'll excerpt it again.
__________
EDIT: Here, a 2015 Fortune article:
China’s Shanghai Composite is dominated by state-owned companies—the top ten valued companies are all state-owned. The Communist Party floats only a small percentage of a company’s equity on the stock exchange while keeping control of the rest. So a core part a company’s valuation—who decides corporate control, or a company theoretically being up for sale—isn’t factored into Chinese stock prices.
http://fortune.com/2015/09/02/heres-wha ... ck-market/

And here, from a January 25, 2018 Forbes article:
Under President Xi Jinping, China's economic policy has shifted toward enhancing the organization and financial sources of state owned enterprises, and away from liberalizing the currency and financial sector. Strides that were made toward internationalizing the RMB and bringing about a more market-based financial system have been reversed.
https://www.forbes.com/sites/sarahsu/20 ... 7a4a477359

Also remember that Xi is no longer term-limited, HEDGEFUNDIE. This doesn’t sound like a great investment at all, actually.
Last edited by samsdad on Thu Dec 27, 2018 1:36 pm, edited 2 times in total.

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Re: The case for China A-Shares

Post by dumbmoney » Thu Dec 27, 2018 1:07 pm

Non-Chinese investors are restricted in owning Chinese shares, and Chinese investors are restricted in owning non-Chinese shares. So this market is walled off from the global stock market. That's why the weight in benchmark indexes is, correctly, lower than market cap weight. This isn't a problem or concern for the passive index investor.
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Re: The case for China A-Shares

Post by fennewaldaj » Sat Jan 12, 2019 12:53 am

HEDGEFUNDIE wrote:
Thu Dec 27, 2018 11:48 am
China mainland-listed stocks (A-Shares) traded on the Shanghai and Shenzhen exchanges collectively total $8.5T (in June 2018, compared to the MSCI Emerging Markets Index which represents $1.8T in market cap).

US investors have generally been locked out of owning A-Shares but early this year MSCI announced that it will gradually begin adding more A-Shares to their EM index. I believe it is time for US investors to give this market another look.

Reasons to own A-shares as a separate allocation in your portfolio:

1. If you follow the “buy the haystack” philosophy, the true global haystack includes a lot more Chinese stocks than the major indices currently include. Owning A-shares as a separate allocation will get you closer to true global market cap weight.

2. A-Shares exhibit low correlation to US total market, lower than Emerging Markets funds:
https://www.portfoliovisualizer.com/ass ... ingDays=60

3. As the major indices continue to add A-shares to their portfolios, volatility should decrease and risk-adjusted return should improve.

4. Multiple ETFs exist (ASHR, CNYA, KBA) offering TLH opportunities.
Doesn't point #3 mean that in addition to volatility decreasing correlation will increase? Presumably the reason correlation has been low is due to foreign ownership being low.

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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sat Jan 12, 2019 1:04 am

fennewaldaj wrote:
Sat Jan 12, 2019 12:53 am
HEDGEFUNDIE wrote:
Thu Dec 27, 2018 11:48 am
China mainland-listed stocks (A-Shares) traded on the Shanghai and Shenzhen exchanges collectively total $8.5T (in June 2018, compared to the MSCI Emerging Markets Index which represents $1.8T in market cap).

US investors have generally been locked out of owning A-Shares but early this year MSCI announced that it will gradually begin adding more A-Shares to their EM index. I believe it is time for US investors to give this market another look.

Reasons to own A-shares as a separate allocation in your portfolio:

1. If you follow the “buy the haystack” philosophy, the true global haystack includes a lot more Chinese stocks than the major indices currently include. Owning A-shares as a separate allocation will get you closer to true global market cap weight.

2. A-Shares exhibit low correlation to US total market, lower than Emerging Markets funds:
https://www.portfoliovisualizer.com/ass ... ingDays=60

3. As the major indices continue to add A-shares to their portfolios, volatility should decrease and risk-adjusted return should improve.

4. Multiple ETFs exist (ASHR, CNYA, KBA) offering TLH opportunities.
Doesn't point #3 mean that in addition to volatility decreasing correlation will increase? Presumably the reason correlation has been low is due to foreign ownership being low.
Fair point. All the more reason to buy in now while the correlations are low!

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Re: The case for China A-Shares

Post by wije » Sat Jan 12, 2019 4:44 pm

HEDGEFUNDIE wrote:
Thu Dec 27, 2018 11:48 am
US investors have generally been locked out of owning A-Shares but early this year MSCI announced that it will gradually begin adding more A-Shares to their EM index. I believe it is time for US investors to give this market another look.
Earlier I saw a post of yours saying "In no case should you invest in Chinese stocks, that is a great way to lose 80% of your money." Why the change?

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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sat Jan 12, 2019 4:56 pm

wije wrote:
Sat Jan 12, 2019 4:44 pm
HEDGEFUNDIE wrote:
Thu Dec 27, 2018 11:48 am
US investors have generally been locked out of owning A-Shares but early this year MSCI announced that it will gradually begin adding more A-Shares to their EM index. I believe it is time for US investors to give this market another look.
Earlier I saw a post of yours saying "In no case should you invest in Chinese stocks, that is a great way to lose 80% of your money." Why the change?
That OP was looking for a low risk place to keep a large windfall in China. Stocks (whether Chinese or otherwise) are not the appropriate investment for that kind of use case.

Here I am talking about increasing the diversification of a US-centric portfolio.

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Re: The case for China A-Shares

Post by triceratop » Sat Jan 12, 2019 8:33 pm

One prior discussion that goes in the opposite direction of many posts so far in this thread: Avoid Emerging Markets due to stricter securities regulation in Developed Markets? Lessons from SZSE..Maybe not?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sun Jan 13, 2019 3:13 am

triceratop wrote:
Sat Jan 12, 2019 8:33 pm
One prior discussion that goes in the opposite direction of many posts so far in this thread: Avoid Emerging Markets due to stricter securities regulation in Developed Markets? Lessons from SZSE..Maybe not?
👍

Skeptics should read this recently published academic research as well:

http://people.stern.nyu.edu/jcarpen0/pd ... Market.pdf
Counter to common perception, stock prices in China are strongly linked to firm fundamentals. Since the reforms of the early 2000s, stock prices are as informative about future profits as they are in the US. Moreover, although the market is segmented from international markets, Chinese investors price individual stock characteristics much like other global investors: they pay up for size, liquidity, and long shots. Chinese investors even discount for market risk. Post-crisis, SOEs have lower price informativeness and lower returns than privately- owned firms. For international investors who can access it, China’s stock market has offered high returns and low correlation with other equity markets. We conclude that this market is functioning as efficiently as equity markets in other large economies and has the potential to play an important role in capital allocation.

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Re: The case for China A-Shares

Post by samsdad » Sun Jan 13, 2019 7:05 am

From page 3 of the paper you cited:
Total foreign ownership still amounts to less than $200 billion.
To put that in perspective, the Vanguard Total Stock Market fund has $726.4 billion invested in that one fund alone (all classes, incl. ETF).

Something is preventing more foreign investment. That something is how the Communist Party of China treats their market as its own piggy bank, and how any foreign firms have to give away their intellectual property to the Party, among other issues. Moreover, recent report suggest modern-day gulags/re-education camps have risen inside China, and what amounts to slave labor underlies at least a portion of the economy.

These issues as I noted above and elsewhere aren’t gong away or diminishing from what I see.

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Re: The case for China A-Shares

Post by nedsaid » Sun Jan 13, 2019 11:10 am

samsdad wrote:
Thu Dec 27, 2018 1:02 pm
hdas wrote:
Thu Dec 27, 2018 12:11 pm
There's already a thread about this. :greedy
Some selections from that thread from various posters, other than yours truly:
I don't want them. The bulk of the Chinese stock market (by market capitalization) are huge state-owned firms. There is a lack of corporate governance, dubious rule of law, and no transparent standard accounting rules. In other words, you're indirectly funding the Chinese Communist government, the assets you think you're buying may not be there, and everything is subject to manipulation, from the corporate to government level. I'd like to control my exposure to that type of risk by limiting it to emerging markets, and for a small portion of my portfolio.
Even though foreigners may now invest in A-shares, there is a monthly limit on repatriation of funds to foreign countries.
This reminds me of the 'non-traded' REIT's that some financial advisors always seem to want to push. You can invest in it, but when you want your money back, it may be a case of 'Sorry Charlie'.
If China does not extend its own people basic freedoms, and still jails people if for no reason other than they disagree with the government or practice a religion, what chance do you think there is that they will let foreign investors exert real influence on their capital markets without control from the Chinese government?
China A shares are not transparent enough yet. The whole market is too nebulous to recommend anyone invest in. What do you really own?
I think it's definitely not time to invest in China A shares, or anything else in China for that matter. The recent (of this year) Fortune or Forbes article I previously cited in other threads makes it clear that China is not becoming more transparent and less manipulated. If I can find it easily, I'll excerpt it again.
__________
EDIT: Here, a 2015 Fortune article:
China’s Shanghai Composite is dominated by state-owned companies—the top ten valued companies are all state-owned. The Communist Party floats only a small percentage of a company’s equity on the stock exchange while keeping control of the rest. So a core part a company’s valuation—who decides corporate control, or a company theoretically being up for sale—isn’t factored into Chinese stock prices.
http://fortune.com/2015/09/02/heres-wha ... ck-market/

And here, from a January 25, 2018 Forbes article:
Under President Xi Jinping, China's economic policy has shifted toward enhancing the organization and financial sources of state owned enterprises, and away from liberalizing the currency and financial sector. Strides that were made toward internationalizing the RMB and bringing about a more market-based financial system have been reversed.
https://www.forbes.com/sites/sarahsu/20 ... 7a4a477359

Also remember that Xi is no longer term-limited, HEDGEFUNDIE. This doesn’t sound like a great investment at all, actually.
This was an excellent post. You can't really avoid China as an International investor but I would want to underweight their shares. First, I think China is late 1980's Japan on steroids. For all of the Japanese overinvestment, they did not build ghost cities, I think there are something like 50 of them in China. Second, without getting political, let's just say I am very wary right now and the direction I am seeing things taking is setting off alarm bells. Third, in the difference between Japanese and Chinese products, I would rather own Japanese and I will leave it at that. Plus Japan has more respect for rule of law and intellectual property.
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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sun Jan 13, 2019 11:24 am

samsdad wrote:
Sun Jan 13, 2019 7:05 am
From page 3 of the paper you cited:
Total foreign ownership still amounts to less than $200 billion.
To put that in perspective, the Vanguard Total Stock Market fund has $726.4 billion invested in that one fund alone (all classes, incl. ETF).

Something is preventing more foreign investment. That something is how the Communist Party of China treats their market as its own piggy bank, and how any foreign firms have to give away their intellectual property to the Party, among other issues. Moreover, recent report suggest modern-day gulags/re-education camps have risen inside China, and what amounts to slave labor underlies at least a portion of the economy.

These issues as I noted above and elsewhere aren’t gong away or diminishing from what I see.
You are conflating two issues:

1. Government involvement in the economy
2. Ethical concerns about some companies in China

For #1, I really don’t see a distinction between how the Communist Party directs its economic policy and how the US Treasury and Fed directs our economic policy. The 2008 bailout, QE , not to mention the supportive federal housing policy that led up to the crisis - How can anyone say with a straight face that our system is not government-directed? Both countries’ governments have the same goal - steady, moderate economic growth. The levers they pull are somewhat different, but in terms of high-level policy their aims are very similar.

For #2, do you invest in ESG (environmental, social, and governance) funds? No? Then what’s the problem?

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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sun Jan 13, 2019 11:30 am

samsdad wrote:
Thu Dec 27, 2018 1:02 pm

EDIT: Here, a 2015 Fortune article:
China’s Shanghai Composite is dominated by state-owned companies—the top ten valued companies are all state-owned. The Communist Party floats only a small percentage of a company’s equity on the stock exchange while keeping control of the rest. So a core part a company’s valuation—who decides corporate control, or a company theoretically being up for sale—isn’t factored into Chinese stock prices.
http://fortune.com/2015/09/02/heres-wha ... ck-market/
Just one thought on this tidbit. State-owned enterprises are state-owned. Shocker. But guess what, in the US dual-stock structures where founders control majority voting rights are also common. Facebook, Alphabet, etc. Investors are smart enough to separate control rights from economic rights, and pay differently for each. No difference in China.
Last edited by HEDGEFUNDIE on Sun Jan 13, 2019 11:59 am, edited 1 time in total.

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Re: The case for China A-Shares

Post by samsdad » Sun Jan 13, 2019 11:37 am

HEDGEFUNDIE wrote:
Sun Jan 13, 2019 11:24 am
samsdad wrote:
Sun Jan 13, 2019 7:05 am
From page 3 of the paper you cited:
Total foreign ownership still amounts to less than $200 billion.
To put that in perspective, the Vanguard Total Stock Market fund has $726.4 billion invested in that one fund alone (all classes, incl. ETF).

Something is preventing more foreign investment. That something is how the Communist Party of China treats their market as its own piggy bank, and how any foreign firms have to give away their intellectual property to the Party, among other issues. Moreover, recent report suggest modern-day gulags/re-education camps have risen inside China, and what amounts to slave labor underlies at least a portion of the economy.

These issues as I noted above and elsewhere aren’t gong away or diminishing from what I see.
You are conflating two issues:

1. Government involvement in the economy
2. Ethical concerns about some companies in China

For #1, I really don’t see a distinction between how the Communist Party directs its economic policy and how the US Treasury and Fed directs our economic policy. The 2008 bailout, QE , not to mention the supportive federal housing policy that led up to the crisis - How can anyone say with a straight face that our system is not government-directed? Both countries’ governments have the same goal - steady, moderate economic growth. The levers they pull are somewhat different, but in terms of high-level policy their aims are very similar.

For #2, do you invest in ESG (environmental, social, and governance) funds? No? Then what’s the problem?
Every government of course has involvement in their own economy. But to equate what goes on here vs in Beijing is a point we'll just have to disagree on. I think it's not just a difference in degree, but in kind as well.

I've read your post a few times now and am lost as to what you're referencing in your second point. Then again, I'm sick as a dog and am laying on the couch medicated.

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Re: The case for China A-Shares

Post by HEDGEFUNDIE » Sun Jan 13, 2019 12:04 pm

There is this tendency to see the Chinese government as this big boogeyman that is out to get us, including the small investor.

To be honest they are just a bunch of old dudes who fought their way to the top of a biggest bureaucracy in the world, and their reward is to manage the chaotic interests and demands of 1B+ people who have an increasing taste for the good things in life. The leadership is keenly aware of what can happen if they don’t satisfy these demands - China has been through more revolutions in its history than I can count.

As a US investor, gaining market cap exposure to China (10% of global equities) is hardly the craziest idea.

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Re: The case for China A-Shares

Post by nedsaid » Sun Jan 13, 2019 12:11 pm

HEDGEFUNDIE wrote:
Sun Jan 13, 2019 12:04 pm
There is this tendency to see the Chinese government as this big boogeyman that is out to get us, including the small investor.
There is a grain of truth to this idea. You might ask their neighbors or explore the issue of free navigation on the high seas. Also issues of lack of respect for intellectual property and human rights. I would have leaned more towards your view a few years ago but recent trends are rather alarming. I am not liking what I am seeing from their leadership and I will leave it at that.
A fool and his money are good for business.

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