Investing in China: Challenges and Rewards
In recent years, China has been experiencing massive economic growth. While adding Chinese stocks to a portfolio may help enhance its risk-adjusted returns, investors outside of China have traditionally had only limited market access. Now you can invest in both onshore and offshore Chinese markets to gain better exposure to the diversifying qualities of this asset class. Find out how.
Daniel Arsenault: According to the World Bank, the Chinese GDP hit $13 trillion recently. Now that is the level that the US hit roughly back in 2005 and represents 15% of the world's total output. Chinese stocks also have outperformed their global peers by about 3% per year for the last 15 years. Now based on this, we think investors should think very seriously about a dedicated China equity position in their portfolios.
First, let's talk about what it means to invest in Chinese equity. Because of the way the markets in China have developed, there are two share classes of Chinese stocks available. One of them is onshore which is Chinese companies that have listed their stocks in Mainland China, and then the other is offshore stocks which are Chinese companies that have chosen to list and shares outside of the Mainland. Generally in the US and Hong Kong.
Traditionally, most investors have only had access to offshore markets. The issue is that this creates incomplete coverage of Chinese stocks because many companies elect only to list in their local China markets. This listing difference has created a performance gap between onshore and offshore stocks.
When we look at the annual returns of the onshore and offshore markets, we see that growth definitely happens at different times. Now this is because there's a sector-weighting difference between each of the markets, and that's simply because the stocks that are listed in Mainland China are underrepresented in the offshore index.
Today, Canadian investors have access to both onshore and offshore markets. Now whether you are a seasoned China investor or you're considering getting into China equities for the first time, we would recommend that a mixed allocation between both investment types as the ideal approach.