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Interview

Investing in China: Key Themes to Watch

Goldman SachsChristina Ma, Liz
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  • Market Performance Overview

    • Hong Kong indices remain relatively flat year-to-date, while A-shares are up nearly 30%.
    • Underlying stock performance shows significant diversification and larger gains than aggregate indices suggest:
      • Tencent (HK) up over 50%.
      • Meituan (HK) up over 180%.
      • Moutai (A-share) up approximately 55%.
      • CATL (A-share) up approximately 180%.
    • Outperforming themes across both markets include domestic consumption, electric vehicles (EV), and renewable energy.

  • Key Financial Reforms and Listings

    • Launch of the STAR Market (Starboard) on the Shanghai Stock Exchange provides a domestic listing venue for tech and innovation companies, reducing reliance on US ADRs or Hong Kong listings.
    • The STAR Market saw 200 new listings year-to-date.
    • The market hosted the largest IPO in China in the last decade, a semiconductor company.
    • Future listings on the STAR Market and the ChiNext board (Shenzhen) are expected to broaden investor access to consumer and healthcare sectors.

  • Market Structure and Institutionalization

    • Despite 60% institutional ownership, 80% of trading volume in the Chinese market is driven by retail investors.
    • Market composition resembles the structure of South Korea in the 1980s and 1990s prior to further development.
    • China is actively pursuing market institutionalization to address this retail-heavy trading dynamic.

  • Household Wealth Allocation Disparity

    • China's household wealth composition contrasts sharply with the US, indicating significant upside potential for equity investment:
      • China: 65% in physical assets (property), 20% in cash/deposits, 7% in equities.
      • US: 25% in physical assets, 15% in cash/deposits, over 30% in equities.

  • Investment Channels for 2021

    • Institutional investors must navigate between two primary channels for market access: the Qualified Foreign Institutional Investor (QFII) channel and the Stock Connect channel.
    • Stock Connect remains the preferred channel for many due to ease of use.
    • Recent rule changes regarding QFII rules have increased its attractiveness, prompting a strategic review for clients regarding channel selection based on specific product and timing needs.