The China equities alphabet soup

China is an economy that is still undergoing a profound transformation in which consumer-oriented sectors are gradually replacing heavy industry and low-cost manufacturing as the country’s economic engines. 

China’s continued economic growth is likely to be driven by:

• Rapid urbanisation and growth of the middle class;
• Rising income in this flourishing new middle class;
• The largest millennial generation population in the world;
• A burgeoning domestic technology sector; and
• Rising living standards for all Chinese.

In 2024, the IMF predicts China’s economic growth will be 4.6%, much higher than many developed nations. Within China, the “Two Sessions” in March will be a key event to watch as that is where local policymakers will set the GDP growth target for the year. The market sees “around 5%” as a plausible target. 

Despite its growth trajectory, and the expectation that China will become the biggest economy in the world, many portfolios do not have exposure to China, or if they do, it is not local exposure.

There are differences in how you access Chinese equities.

The China equities alphabet soup

• A-shares are companies incorporated and listed in China. Foreigners can only access all these stocks with a QFII or RQFII licence – of which there is only a handful in Australia and VanEck has one of them. There are nearly 4,000 A-shares and it is by far the largest China equity category. Some but not all A-shares can be simultaneously accessed by the Stock Connect platform in Hong Kong.
• H-Shares are the next most common, there are around 300 of these and they are available through the Hong Kong exchange.
• P-Chips are privately controlled companies that are also available on the Hong Kong exchange. 
• Red Chips are state-controlled companies listed in Hong Kong.
• N-Shares are listed on the New York exchange.
• ADRs are American Depository Receipts and are a popular way for investors to invest in foreign (ex-US) companies, including China, on the US exchange.

Due to accessibility, funds with the alphabet of China equities, excluding A-Shares, became the norm. For investors wanting to access ‘China growth’, this exposure is not optimal because you are overlooking the biggest category of China equities. 

Many companies are only listed on mainland China's two major stock exchanges, the Shanghai and Shenzhen exchanges. Combined, those exchanges form the second-largest share market in the world after the US. The difficulty for Australian investors wanting to invest in this growth opportunity is gaining access to mainland A-shares. VanEck gives investors unequivocal access to China A-Shares via its RQFII licence allowing for deeper and broader access and generally better risk management. Only a handful of Australian fund managers can offer this access and without it, your China exposure may be limited.    

VanEck has two ETFs that provide investors a way to access A-share investments.

1. VanEck FTSE China A50 ETF (CETF) - Australia's only dedicated China A-shares market benchmark exposure. It is the most cost-effective ETF exposure to China A-shares in the Asian region. CETF is diversified across companies and sectors, comprising the largest and most liquid mainland China companies considered leaders in their sectors and pillars of the Chinese economy.
2. VanEck China New Economy ETF (CNEW) - gives investors easy access to China A-shares and the enormous potential growth opportunities in what are described as China’s ‘New Economy’ sectors.

• • • Technology;
    • Healthcare;
    • Consumer discretionary; and
    • Consumer staples.

CNEW Invests in 120 fundamentally sound and attractively valued companies assessed on 24 fundamental indicators across four analytical categories:

• • • Growth;
    • Value;
    • Profit; and
    • Cash flow.

The Year of the Dragon could be the year for China-A-Shares.