Mainland China has risen rapidly up the world stockmarket league, but even though overseas institutions can hold A-shares, they have been slow to invest. The country contributes 16 per cent of global GDP and its quoted companies comprise 9 per cent of world stockmarket values, but mainland Chinese listed shares constitute just 2.7 per cent of international investors’ equity fund allocations.
The number of A-shares listed on the Shanghai and Shenzhen stock exchanges has increased 25 per cent since 2017 to almost 4,000, with a total market value up 36 per cent to RMB70 trillion – USD10 trillion – in mid-2020. Only the New York Stock Exchange is larger by turnover than the two mainland Chinese exchanges combined.
Shanghai raised more equity finance than any other world exchange, with Shenzhen in second place, between January and May.
The markets were driven largely by retail investors but since 2018 China’s A-shares have been included in the MSCI global stockmarket indices used by international investors as a benchmark. There are now 712 A-shares included in these indices.
Institutional holdings have risen from 40 per cent of the A-share market in 2012 to more than 60 per cent now, but while the market ought to be too big for international investors to ignore, foreign participation remains low.
A-shares are issued by companies registered in mainland China, listed in Shanghai or Shenzhen, and quoted in renminbi. They can be bought by foreign investors, but very few firms make regular announcements in English, and although a third of companies are covered by at least three independent analysts, half are not covered at all.
Mainland China now has multi-level capital markets to meet the financing needs of different kinds of companies. Besides its Main Board with more than 2,500 corporations, there is a smaller-companies board with over 900 firms and the tech-focused ChiNext with another 800-plus shares, including stocks in the CSI 300 Index, the leading mainland benchmark.
In 2019 Shanghai launched the Star Market to showcase smaller technology companies: 58 per cent of its firms are in the IT sector. And while the daily price movement in other A-shares is restricted to 10 per cent up or down, Star’s limit is 20 per cent. A Star-50 index was launched in July.
Now ChiNext is being remodelled on the Star Market, following the same streamlined and market-driven processes for listing, flotation, underwriting, margin trading and takeovers.
Meanwhile the Shanghai Stock Exchange’s benchmark index is being overhauled to better reflect the country’s high-tech economy and retail investors’ higher risk appetite for small/mid-cap stocks.
Stockmarket volatility has risen because of the China-US trade dispute and coronavirus, but Beijing’s policymakers responded quickly, speeding up market-oriented reforms. By mid-year the A-share market had rebounded above its pre-pandemic level.
As the markets develop, regulators, investors and companies are paying closer attention to environmental, social and governance issues. A survey of 324 institutions found 87 per cent attaching importance to those issues and green investment, with mining, manufacturing and financial firms deemed to face the highest risks.
The number of market violations has risen as more companies listed but in June, China’s authorities agreed to apply zero tolerance to financial fraud.
First published 13 July 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Bob Liu.
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