For many years, Chinese authorities preferred to keep foreign funds out of its capital markets. But the government has had a change of heart in 2019, by opening up avenues for foreign funds to come in.

Earlier in 2019, the Foreign Investment Law was passed. It comes into effect in 2020, offering greater rights and better protection to offshore money managers. Policymakers have also improved the mechanism for margin trading and short-selling, and in August the securities regulator nearly doubled the number of stocks eligible for short selling and margin financing, by scrapping a previous automatic margin call threshold rule.

But gaining access to the country’s double-digit economic growth rates and the majority share of the country’s corporate capital has always been possible via Chinese company listings in Hong Kong and the US, which is where Tencent and Alibaba heavyweights operate.

South African pension funds get their fix via their investments in Naspers, which holds a significant stake in Tencent.

But the concentration risk in these markets has become a growing concern, with Tencent hogging Hong Kong, ruling the roost on the JSE and messing with the mandates of European funds following the recent Prosus listing.

So the significance of relaxing the rules by Chinese authorities lies in the fact that global asset managers can buy into the country’s A-class shares where Tencent yields now power.

These domestic-focused companies only cater to the Chinese people and transact in a local currency, and with China being the third-largest consumer market in the world with household consumption expenditure at around $5.6-trillion, there is money to be made.

And investors are spoilt for choice with the 3,600 class A listings between Shanghai and Shenzhen, boasting $7,903-billion assets under management, making it the third-largest equity platform on the planet. Assets under management in the US and in Honk Kong (N and H shares) of $1-trillion look pale by comparison.

According to data from RisCura, China is already the single largest market in the MSCI Emerging Markets Index at around 30%, based on its Hong Kong-listings alone, the A-Share market, which is many times larger, was never recognised. This changed in February when the share class made its debut, with a small allocation of 2.6% to the index, but MSCI announced plans to increase this factor to 4.1% in November.

Class A shares also feature in the MSCI China and MSCI All Country World indices. The graph How China A-shares will be included by MSCI.

Source: Schroders and MSCI, Data as at 4 September 2019.

Given the difficulty of accessing the mainland markets in the past, and minor benchmark allocation, the level of foreign ownership in the A-shares market remains low at 3%.

But the inclusion — albeit small — has grabbed the attention of managers around the world, and money is on the move. HSBC Global Asset Management launched its HGIF China A Fund for investors on 25 September, seeking exposure to the China A-share equity market.

In July, Barings, one of the world’s leading financial services firms launched a private fund management company in Shanghai. Swiss investment firm UBS Asset Management was granted a private fund management license in the same month.

Blackrock expanded its Asian equity fund to cater for the share class, and just this week the South African Financial Services Conduct Authority approved global investment firm Schroders application for a China equity fund for local investors.

Doug Abbot, who heads Schroders South Africa says this particular market is extremely liquid, which adds to the appeal, but as retail investors account for more than 80% of trading volume, it tends to be volatile in nature.

“This is because retail investors typically have shorter investment time horizons and respond more to market events, resulting in more buying and selling of shares and higher market volatility, “ he says.

He adds that it is one of the few markets where active investment strategies are still making its mark. “It is attractive for active fund managers who can take advantage of inefficiencies in the market,” he says.

“The median China A-shares fund manager has outperformed the MSCI China A Onshore benchmark in four of the last five years.”

Abbot adds that inflows to the market have gained momentum since the start of the year, despite US-China trade tensions.

Andrew van Biljon, Investment Manager at,RisCura, however, warns that investors should remain cautious.

He says corporate governance and quality of disclosure amongst some Chinese companies remain sub-standard and given the significant mood swings of retail investors, active management strategies remain key to this environment. 

But his could all change for the better with the influence and resources that come from large institutional investments.

“We typically recommend that investors with SA equity investments invest no more than 5% of their whole portfolio. It’s not a large allocation, but it’s enough to generate extra returns without putting their whole portfolio at risk,” he says.

The schemes allow international investors to access mainland listed stocks through the Hong Kong stock exchange (Northbound investment). At the same time, they allow onshore investors in China to invest into the Hong Kong equity market (Southbound investment). Their introduction was critical in MSCI’s decision to include A-shares in its indices.

This is taking place in a three-step process, during which some large-cap stocks listed on ChiNext, the Nasdaq-style board of the Shenzhen Stock Exchange, and China A Mid Cap shares will also be included. In addition, other index providers such as FTSE Russell have started phased implementation of some China A-shares in their global indices. BM are you