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Investing in China

What’s covered?

  • Why is the onshore Chinese equity market becoming hard to ignore?
  • Why is China’s bond market poised to change relatively quickly?
  • Read our latest China market and index insights
  • See our range of funds exposed to China’s growth potential

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Stepping up change

As China grew to become the world’s second largest economy after the US, foreign investors often struggled to benefit from the country’s full range of growth opportunities. This story is changing quickly, as policymakers seek to liberalise access to Chinese stock and bond markets while making them more squarely aligned with international standards. This has material implications for all investors, from individuals right through to large, sophisticated institutional investors. Much is changing in China, and the cost of ignoring this emerging opportunity might prove too high, especially over the longer term.

Foreign investors’ holdings in China
(as % of onshore market)

Foreign investors’ holdings in China

Sources: Wind, as of December 2018. Foreign holdings of onshore equities & bonds are estimated based on QFII holdings and bond holdings via CIBM Direct until 2013, and based on PBoC’s disclosure of foreign holdings of equities/bonds starting from 2014.

A quality equity decision

The onshore Chinese equity market is becoming increasingly hard to ignore for investors. With more than 3,000 listed companies, A-shares - which are listed in Shanghai and Shenzhen - give investors access to what has historically been a relatively isolated market. Eased restrictions and continuing market liberalisation now mean international investors can trade A-shares and manage liquidity easily through the Stock Connect program without the hassle of going through the previous quota system.

The increasing inclusion of China A-shares in major international indices is supporting the transition of Chinese equities from a “nice to have” to a “need to have” asset class. In 2018, MSCI started including A-shares in their global emerging market benchmarks, and will be increasing the weight of A-shares throughout 2019. In many cases, A-shares are the only option for investors to gain exposure to quality Chinese companies with sustainable business models, low sensitivity to policy cycles, and high growth potential from consumption upgrading and technological advancement.

Bond buyers welcome

The ascension of China’s bond market has largely lacked foreign participation – only about 3% of the US$12 trillion market is in foreign hands. This is poised to change relatively quickly, underpinned by better access channels and greater alignment with international standards.

As of April 2019, the Bloomberg Barclays Global Aggregate Index, a major tracker of global bond performance, added Chinese sovereign and bank policy bonds to its mix. We estimate the inclusion could bring at least US$150 billion of inflows from foreign investors over the 20-month inclusion period (ending November 2020), just from rebalancing passive strategies tied to this benchmark.1 At the current market value, this would represent about 6% of the global index. Our estimate could be conservative, especially if China’s bond market, already the second biggest in the world, maintains its current growth path. Also, this estimate does not reflect likely inflows from active strategies, which could be significant but are harder to predict.

1. For illustrative purpose only. There is no guarantee that any forecast made will come to pass

iShares funds exposed to China

Featured Funds-1
Featured Funds-2

Capital at Risk. The value of investments  and the income from them can fall as well as rise and are not  guaranteed. You may not get back the amount originally invested.

Concentration Risk
Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events.
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Share Class to financial loss.
Credit Risk
The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due. If a financial institution is unable to meet its financial obligations, its financial assets may be subject to a write down in value or converted (i.e. “bail-in”) by relevant authorities to rescue the institution.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Derivatives Risk
Derivatives are highly sensitive to changes in the value of the asset on which they are based and can increase the size of losses and gains, resulting in greater fluctuations in the value of the Fund. The impact to the Fund can be greater where derivatives are used in an extensive or complex way.
Emerging Markets Risk
Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Equity Risk
The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.
Liquidity Risk
Lower liquidity means there are insufficient buyers or sellers to allow the Fund to sell or buy investments readily.
Currency Hedging Risk
Currency hedging may not completely eliminate currency risk in the Fund, and may affect the performance of the Fund.
Emerging Market Government Fixed Income Securities Risk
Fixed income securities issued or guaranteed by government entities in emerging markets generally experience higher ‘Credit Risk’ than developed economies.
Non-Investment Grade Risk
Non-investment grade fixed income securities are more sensitive to changes in interest rates and present greater ‘Credit Risk’ than higher rated fixed income securities.
Environmental, Social and Governance (ESG) Risk
The benchmark index only excludes companies engaging in certain activities inconsistent with ESG criteria if such activities exceed the thresholds determined by the index provider. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.
iShares MSCI China A UCITS ETF - Quota Limit
Should demand for the Fund exceed the quota granted to the investment manager for investment in onshore Chinese securities, the investment manager may be unable to obtain additional quota. This may result in subscriptions being suspended and the Shares of the Fund trading at a significant premium or discount to Net Asset Value on any stock exchange on which they are admitted to trading.
iShares MSCI China A UCITS ETF - Tax
The PRC/Ireland tax treaty provides for exemption from Chinese capital gains tax on sales of the Fund’s investment in China A Shares. Although the Fund is expected to be exempt, there is a risk that the PRC tax authorities could consider the Fund not to be eligible for the PRC/Ireland tax treaty and seek to collect such tax on a retrospective basis, which would affect the value of the investment.
iShares MSCI China A UCITS ETF - Renminbi RQFII
The Fund invests via the Renminbi Qualified Foreign Institutional Investor (RQFII) Investment Manager Program in China A Shares. It may be subject to changes to the policies and regulations of the RQFII program that may adversely affect the Fund or the RQFII quota and the ability to hold China A shares. The Fund is subject to the restrictions and requirements applicable to RQFII investments and to the following risks: regulatory, licensing, quota and repatriation risks, PRC, RQFII custodian and brokerage risks of the PRC, and foreign exchange risk and risk of conflict in the PRC RQFII quota allocation.

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