Chinese Equity ETP Due Diligence

Here Mid February 2013 Developed Markets are trading around a 50% premium to some Emerging Markets, the largest such premium since late 2009. And historically, premiums this large have generally been associated with Emerging Market outperformance over the next twelve months.

In China judging from commodity imports, the manufacturing industry seems to be picking-up indicating the economic outlook has improved significantly over the last few months.

An improvement in China’s economic outlook is likely to directly benefit China’s stock market, but also have an effect on economies like Brazil, a heavy supplier of Commodities to the Chinese Economy.

In the database there are now 115 ETPs providing exposure to many different slices of the Chinese Market.

Investors need to be familiar with the different types of Chinese shares.

In the domestic market for a start, there are two classes of share A and B that are trading on the Mainland stock exchanges in Shanghai and Shenzhen.

A-Shares are priced in CNY and are only available to Chinese citizens and qualified foreign institutional investors (QFII).

B-Shares are priced in USD in Shanghai and HKD in Shenzhen and are mainly for targeting foreign investors capital. B shares has historically been unpopular and hence illiquid trading at a discount to equivalent A shares. What limited appeal they have comes from the belief that the Chinese government will eventually relax restrictions on the convertibility of the renminbi and merge the two Main markets on an equivalent basis.

Consequently, most foreign investors choose to invest in China through companies listed elsewhere, often in Hong Kong where all shares can be freely traded by international investors.

There are three classes of mainland Chinese firms on the Hong Kong exchange:

H-Shares are firms that are incorporated in China but listed in Hong Kong;

Red-Chips are incorporated in Hong Kong but have substantial Mainland interests and are controlled by the Chinese government.

P-Chips are private Hong Kong-incorporated firms with substantial mainland interests.

S-Chips are companies incorporated outside the Mainland can also list on other exchanges apart from Hong Kong, the most popular choices being New York and. Such companies usually incorporate in an offshore jurisdiction such as the Cayman Islands or Bermuda. Generally, the hottest floats (such as search engine Baidu) have tended to end up in New York, while less glamorous businesses have listed in Singapore.

Investor should carefully investigate what share classes the underlying index is eligible to hold, before choosing an ETP.

Chinas new leadership has publicly stated that 2013 policy will be one of stimulating domestic consumption. And H shares and Red Chips are huge state-owned companies not necessarily outstanding businesses. 

For those for those seeking sector-specific exposure, it is worth to notice that Global X Funds, include all investable shares in their sector specific ETPs.

Plays:

Global X China Consumer ETF

Da Cheng CSI China Mainland Consumer Tracker

like0