For most Western investors, two distinct means of accessing China exist: via the offshore market, notably Hong Kong, and the mainland via A-shares. There are noticeable characteristics to both routes. Many new-tech giants are headquartered off the mainland, while there is a preponderance of State-Owned Enterprises (SOEs) listed in Shenzhen and Shanghai.
Randy Zhou (Head of research and portfolio manager at Power Sustainable Investment Management, Mackenzie Investments)
Frank Tsui (Managing director, senior fund manager & head of ESG investment, Value Partners)
Fei Tan (Equity manager research principal, Mercer)
Faisal Rafi (Head of investment research, RisCura)
Claire Shen (Head of China equity research, WTW)
John Lin (Portfolio manager - China equities, AllianceBernstein)
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China-labelled investment strategies currently tend to reflect those differences, with the majority of funds focused either offshore or onshore. But the 2022 CAMRADATA China Roundtable began by asking if the future is Greater China strategies, covering the entire region.
“It comes down to where investors have their skill-set,” said Claire Shen, head of research for China equity strategies at WTW. “In theory, a broad opportunity set is ideal. In reality we find limited investors can do both China A and offshore China well.”
Shen said A-shares in particular are a good complement to asset owners with global Emerging Markets portfolios: “Skilful ‘All China’ investors have differentiated holdings in the offshore China book, which will not lead to doubling up the EM exposure.”
She noted that offshore exposure offered opportunities in big tech and biotech whereas the mainland one was a broader, more complete sector set.
Fei Tan, a manager researcher at consultancy and fiduciary manager, Mercer, said the firm believes that eventually there will be a “blurring of the lines” between the onshore and offshore markets. But Tan described the number of asset managers capable of covering both markets as “slim pickings” at the moment as the “All China” universe (referred to as Greater China here) is a relatively new asset class without a long track record, whereas China A-Shares are more well established. To complement the “All China” allocation, some investors have started carving out China from the EM universe by investing in EM ex China mandates, although this is similarly a nascent asset class.
Faisal Rafi, head of research at RisCura, an investor consultancy with a major client base in Africa and its own China equity fund of funds, was adamant that the best skill was in Greater China and the manager track records existed to prove it.
He said that the purpose of investing in EM was to find the best companies regardless of geography. He agreed with Tan, however, that these are early days for carving out China. Rafi noted that some EM managers might be reluctant if China had previously made an outsized contribution to overall EM fund returns. “And asset allocators have to decide if they want more exposure to this particular economy or less given the geopolitical risks,” he added.
"...asset allocators have to decide if they want more exposure to this particular economy or less given the geopolitical risks."
By the same token, however, Rafi gave the special skill-set required to invest in Chinese companies as one reason justifying the carve-out: “China is different,” said Rafi.
RisCura itself has customised its China benchmark, tilting towards A-shares to compensate for existing offshore Chinese companies in global and emerging market benchmarks. “All our China managers have the liberty to go anywhere,” said Rafi.