Interpreting China

Chinese equity markets – opportunities in difference

China A and H shares offer two routes to accessing the growth of Chinese corporates. On the surface, the difference is clear – A shares are issued by mainland incorporated companies and are listed in Shenzhen or Shanghai, while H shares are listed in Hong Kong, are more freely tradable for overseas investors, and follow international accounting and reporting standards. Shao Ping Guan, Senior Portfolio Manager, takes us through some of the nuances.

With the deep relationship between these two equity markets – and around 150 companies dual-listing – potential differences in valuation between markets are, of course, a keen point of interest for us as investors. Historically, dual-listed shares in mainland China and in Hong Kong of the same company have not always traded at par, and the Hang Seng A/H premium index is a good proxy to the relative valuations of these dual-listed shares. The index is now trading at 144, indicating that A shares are 44% more expensive than their H share equivalents. While this level is high, it is still far from the historical peak, spiking as high as 200 in 2008.

However, the Hang Seng A/H premium index focuses mainly on large cap companies in sectors such as banks, insurance, and energy. This is not, in our view, a good representation of the overall market valuation gap. Looking at past performance, the A/H premium has also not been a good indicator of relative performance of onshore and offshore markets. With more than 6,400 shares listed in mainland China and Hong Kong, and only around 150 Shao Ping Guan Senior Portfolio Manager stocks listed in both, the A/H Premium Index represents only a small part of the full opportunity set. And most Chinese companies are unique to their listing location, complementing each other and forming a holistic investable universe from a portfolio construction point of view.

A persistent valuation gap?

Our Allianz All China Equity strategy invests across the broadest China opportunity set and, barring any liquidity-related issues, we will invest in the cheaper share class of a dual-listed company. This reflects our view that over the long term, there will libely be gradual convergence between onshore and offshore markets in China. That said, we do not see this being arbitraged away easily in the short-term.

There are limited options to arbitrage these price differentials, as the cost and risk of shorting in the A-shares markets is prohibitive. In addition, the investor base and behaviour in the onshore and offshore markets are different – most offshore investors are global institutions, more sensitive to global sentiment and reactive to news from China that makes international headlines. Domestic China investors are predominantly retail and are thus more sensitive to domestic policy changes and day-to-day developments on the ground. The retail investor base in China tends to react more to short-term incentives and domestic policy than overseas institutions, while it also has fewer investment alternatives outside of the home market.

Performance synchronizing

The two markets have performed differently – the historical correlation between China A and China H is only 0.59, meaning 59% of the time these two markets have moved in different directions. The historical, single-year performance gap between different China markets has been as high as 83% in 2015 (chart below). Yet this divergence has been declining over time, suggesting that markets have become more synchronized, but are by no means in lock step. Indeed, taking a deeper look at the composition of the listed Chinese companies, it is clear that the index composition of MSCI China (mostly Hong Kong listings) is very different to that of MSCI China A Onshore (comprised exclusively of A-share listings). Hong Kong listed stocks are generally focused in in the areas of internet, financials, and state-owned enterprises (SOEs). In contrast, the A-share market provides broader sector exposure and, in our view, gives investors more direct access to exciting developments in “new economy” growth areas of the market – electric vehicles, artificial intelligence, healthcare, and green technology, for instance. Within the consumer area, mainland listings offer diverse representation from a variety of areas including food and liquor, advanced auto components, home appliances, and so on.

Difficult to time the different China markets: portfolio construction close to ‘region-neutral’
Calendar year return for different China equity markets Allianz Global Investors – exclusions overview

Source: Thomson Reuters Datastream, Allianz Global Investors, as of 31 August 2023. Index used for caclulations. Shanghai SE Corporate Index, Shenzhen SE Composite Index, Hang Seng China Enterprise Index and BNY Mellon China ADR Index. Investment includes risks. Past performance is not indicative of future performance. Individual performance will vary.

Implications for investors

We see ongoing efforts by China to improve connectivity between the two markets, with the launch of the Shanghai– Hong Kong Stock Connect in 2014 and Shenzhen-Hong Kong Stock Connect in 2016. Investors should understand the nuances between the two markets, and we believe China H shares offer good complements to the onshore China universe. A combination of both markets gives investors a proper balance between old and new economy stocks – a true representation of China’s future potential – while dispersion between the two markets can also present opportunities.

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    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

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