China has provided an increasingly substantial contribution to the global economy in recent years. This unprecedented economic development has helped anchor its place as an emerging market superpower.

By Thomas Taw, Head of iShares Investment Strategy, Asia-Pacific, BlackRock

China has undoubtedly provided an increasingly substantial contribution to the global economy in recent years. This unprecedented economic development has helped anchor its place as an emerging market (EM) superpower, both regionally and globally. The investable landscape across bond and equities is vast and growing, and will continue to offer great opportunities for on-shore and off-shore investors alike going forward. Like any emerging market, there have been and will continue to be, bumps along the road.

U.S.-China Trade Tensions

(Thomas Taw highlights the on-going trade tensions between U.S. and China and the potential impact that easing of tensions could have for emerging markets; as of November 2018.)

In 2018, the biggest speedbump came in the shape of the U.S.-China trade tensions. Strains between the two economic superpowers bubbled throughout 2018 and escalated further in September, when the U.S. Trade Representative (USTR) finalized a list of products for $200 billion worth of imports from China to be subject to additional tariffs at an initial rate of 10 percent. Washington noted a potential increase to 25 percent in 2019 on the specified imports, whilst China retaliated in kind on $60 billion worth of imported U.S. goods1.

There had been some light on the horizon into the end of the financial year, with both parties seemingly eager to reach a resolution, or at least to halt any further escalation of tensions. President Donald Trump and Premier Xi Jinpin engaged in a ‘long and very good call’ on December 29 that will hopefully set the stage for progression for an agreement2. This followed the December 1 announcement by the respective leaders for a 90-day truce halting any subsequent increase to tariffs3. Further discussions with regards to the ongoing trade saga took place in Beijing on January 7-9 this year between the Trump administration and the Chinese government in a further attempt to arrive at a mutual agreement that would be acceptable to both countries’ economic interests4.

Implications for investors: Any easing of trade tensions on a bilateral basis between the U.S. and China could be seen as a catalyst for upside to broad EM, EM Asia, and Chinese equities. Whilst market returns leading up to the New Year were generally bleak, investors who are looking to increase China exposure in their portfolios could consider the equity de-rating as a great opportunity to increase exposure with sentiment being so poor and valuations looking attractive.

China A-Shares Inclusion in Global Indexes

(Thomas Taw highlights past and proposed changes relating to China A-shares inclusion in global indexes and the potential impact this could have on inflows to China’s A-share market; as of November 2018.)

In August last year, MSCI completed the second tranche of its initial 5 percent inclusion factor for China A-shares into the MSCI China, the MSCI Emerging Markets and the MSCI ACWI Indexes5. On September 26, MSCI announced plans to potentially increase the weighting of Chinese A-shares in MSCI indexes from 5 to 20 percent in 2019 (subject to consultation)6, with FTSE following suit shortly after by divulging its plans for China A-shares to be included in their global indexes in June7. Such trailblazing developments are examples of index providers taking an active part in integrating the world’s second largest equity market into global investor benchmarks; and by doing so, widening the window of opportunity for overseas investors who are keen to tap into this up and coming ‘new dawn’ for China’s onshore equity market.

Implications for investors: MSCI's latest proposal to increase its weighting for China A-shares in its indexes could lead to an additional $15 billion of passive inflows into China's A-share market with potentially more from active flows, which had comprised the majority of the inflows during the initial inclusion in May 20188. Whilst most investors did expect an increase in the index weight of A-shares after its initial inclusion, this new development appears much speedier than prior market expectations.

FTSE's inclusion, according to its own estimates, could result in approx. $10 billion of passive inflows9. Investors concerned with how this flow could impact volatility for onshore Chinese equities can take solace in the knowledge that this market historically has traded upwards of a $70 billion per day, and thus would not cause any major price impact. Conversely it should not be seen as an arbitrage opportunity, but as another major step towards capital liberalization.

While the onshore Chinese equity market has traditionally been dominated by local retail investors, it is expected that there will be an increase of cash inflow to the China A-share market from foreign investors who are beginning to view the Chinese market as a viable and stable investment landscape into the next decade. Investors should take into account that all the above-mentioned proposals are subject to consultation with global investors and are yet to be finalized.

Accessing China’s Evolving Markets Using ETFs

Exchange Traded Funds (ETF) could be a convenient way for investors to gain exposure to China’s evolving markets. The simple building block nature of an ETF allows investors to effectively diversify their existing portfolios by adding specific market and/or industry exposures. Other benefits of ETFs include:

  • Transparency: ETFs are relatively straightforward and transparent in their investment objective, as well as also highly transparent in their holdings
  • Accessibility: ETFs offer access to market exposure of a variety of asset classes, both broad and specific
  • Liquidity: ETFs are highly liquid, and can be bought and sold during the trading day
  • Cost efficiency: ETFs generally have a lower management fee compared with an active fund invested in the same market and/or assets

Want More?

If you have any questions about this topic or would to find out more about how you could use ETFs in your investment portofolio, please email This email address is being protected from spambots. You need JavaScript enabled to view it.

1‘China Mini-Series: Trade Tension Escalations: Implications for investors’, BlackRock; data as of 31 October 2018.
2‘Trump hails call with China's Xi, says trade talks are making good progress’, CNBC 29 December 2018 [https://www.cnbc.com/2018/12/29/trump-hails-call-with-chinas-xi-says-trade-talks-are-making-progress.html]; accessed 9 January 2019.
3‘U.S. and China Call Truce in Trade War’, The New York Times, 1 December 2018 [https://www.nytimes.com/2018/12/01/world/trump-xi-g20-merkel.html]; accessed 9 January 2019.
4‘US-China trade talks wrap up in Beijing as hopes of a deal build’, CNBC, 9 January 2019 [https://www.cnbc.com/2019/01/09/us-trade-delegation-wrapping-up-meetings-in-china-hopes-of-deal-build.html]; accessed 9 January 2019.
5‘China Mini-Series MSCI A-Shares Inclusion: To 5% and Beyond’, BlackRock; data as of 30 September 2018.
6‘Source: ‘The US$100bn MSCI EM Shift’, UBS; data as of 27 September 2018. For illustrative purpose only. There is no guarantee that any forecast made will come to pass.
7‘FTSE Russell to Add Chinese Stocks to Its Indexes From 2019’, Bloomberg, 26 September 2018 [https://www.bloomberg.com/news/articles/2018-09-26/ftse-russell-to-add-chinese-stocks-to-its-indexes-from-next-year]; accessed 9 January 2019.
8‘Source: ‘The US$100bn MSCI EM Shift’, UBS; data as of 27 September 2018. For illustrative purpose only. There is no guarantee that any forecast made will come to pass.
9‘FTSE Russell to Add Chinese Stocks to Its Indexes From 2019’, Bloomberg, 26 September 2018 [https://www.bloomberg.com/news/articles/2018-09-26/ftse-russell-to-add-chinese-stocks-to-its-indexes-from-next-year]; accessed 9 January 2019.

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