China: Too big to ignore

Navigating Chinese equities

This document is for the exclusive us of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2014/65/EU.

Access Markets February 2020 Access Markets | : too big to ignore 3 China: too big to ignore Despite being the second biggest market in the world and one of the fastest growing economies, foreign investment in China remains low. As a result of ongoing market liberalisation, inflows from foreign portfolio investors are likely to increase significantly over the next few years, particularly in the A share market. We believe it may be time to consider China as a standalone portfolio allocation.

... is not reflected in China’s huge economy... equity markets

#2 US #1 2.3% 330m tn % $21.4tn $21.4tn $34.3 55.6

VS. GDP GDP GDP growth1 Population1 Stock market2 % of MSCI (nominal)1 (at PPP*)1 (free float ACWI3 mkt cap*) #2 #1 China 6.1% 1.4bn ~$3.7tn 4.2% $13.6tn $27.3tn

1Source: IMF, World Economic Outlook, October 2019. *PPP = Purchasing Power Parity 2Source: MSCI, as at 31/12/2019. Data does not include ETFs and ADRs as they do not directly represent companies. Data includes only actively traded, primary securities on the country’s exchange. For China, data corresponds to combined market cap of HK, Shanghai and Shenzhen listings, based on total market capitalisation. (*) MSCI IMI indices. 3Source: Lyxor International Asset Management. Data as of 31/01/2020.

Why the discrepancy? Structural impediments have restricted free trading of shares, especially for foreign investors

Free float Not tradable

Inside ownership Capital markets structure Fragmentation ffThere is widespread inside ownership ffStock financing comprises only 5% of ffFragmentation also limits access to of Chinese shares Chinese companies’ balance sheets Chinese equities ff~2/3 of Chinese equity value is not ffUnlike the US stock market, most ffThey trade on several exchanges, with available for trading, unlike the US financing comes from bank loans varying levels of availability to foreign stock market and debt investors ffThe Chinese communist party and ffThe biggest sources of funding are ffThe largest segment trades on the other institutional investors hold bank loans and retained earnings mainland as A shares on the Shanghai controlling, permanent stakes in and Shenzhen stock exchanges many firms ffOver 80% of onshore trading volume ffIndex providers include only the free is by individuals (i.e. Chinese retail float of a company’s stock in index investors) weightings Access Markets | China: too big to ignore

ETFs are an easy way to access China, but multiple share classes and indices exist, each with their own unique features. This can make for an investment landscape which is complex and hard to navigate.

Understanding Chinese equity share classes A Shares B Shares H Shares Red chips P chips Overseas listings ff Incorporated in ff Incorporated in ff Incorporated in ff Securities of ff Non-government ff Incorporated mainland China mainland China state-controlled owned securities outside mainland ff Listed on Shanghai ff Listed on ff Listed on companies incorporated China or Shenzhen Stock Shanghai (in USD) Kong Stock incorporated outside mainland ff Includes ADRs (N Exchanges (in or Shenzhen Exchange (in HKD) outside of China shares listed in RMB) (in HKD) Stock ff Heavily weighted mainland China ff Listed on HK New York... etc.) ff Often non-state Exchanges towards Financials ff Listed on Hong Stock Exchange ff e.g. Alibaba on owned, from Kong Stock (in HKD) NYSE consumption Exchange (in HKD) ff e.g. driven industries ff e.g.

Red P e.g. A B H chips chips ADRs

CCY: RMB CCY: USD, HKD CCY: HKD CCY: HKD CCY: HKD CCY: USD

Mainland China exchanges exchange US exchanges

Anatomy of the Chinese free float equity market Key index facts ff43 stocks have dual listings on A&H exchanges (17% of the S U overall market capitalisation), mainly financials ffB shares represent only a marginal portion of Mainland China ADR equities (19 stocks) 11.7% Red ff~12% of the overall universe is ADR (21 stocks, including 6.5% M Alibaba) a

i n

l MSCI China a Top 10 constituents A n P d

All shares IMI

51.3% C Index

16.3% (~$3.7tn, 2998 stocks)

i Weight Sector g

n Class n

a (%) o

K

g ALIBABA GROUP HLDG ADR ADR 9.64 Cons Disc

n o

H H TENCENT HOLDINGS LI (CN) 7.42 Cons Svcs 14.0% H A 2.23 Financials B 0.1% PING AN INSIRANCE H H 1.77 Financials

KWEICHOW MOUTAI A A 1.72 Cons Staples

CHINA MOBILE RED CHIP 1.39 Comm Svcs

ICBC H H 1.35 Financials

PING AN INSURANCE A A 1.07 Financials

BAIDU ADR ADR 0.94 Comm Svcs

BANK OF CHINA H H 0.91 Financials

Sources: (*) Data based on MSCI China all shares IMI, MSCI, data as at 31/01/2020. 5

Mainstream equity indices digested

No. of Onshore or Market Shareclasses stocks Offshore Capitalisation ($bn)

Hang Seng (HSI) 50 Offshore HK Ordinary, H Shares, Red Chips 2,359

Hang Seng China Enterprise 50 Offshore H Shares 1,716 (HSCEI)

FTSE China 50 50 Offshore H Shares, Red Chips and P Chips 1,291

FTSE China A 50 50 Onshore A Shares 858

CSI 300 300 Onshore A Shares 1,980

A Shares listed on the Shanghai and MSCI China A Onshore 537 Onshore 2,124 Shenzhen indices A Shares under scenario of full integration into MSCI China A International 407 Onshore 1,282 MSCI EM A Shares which are included in MSCI MSCI China A Inclusion 234 Onshore 1,244 Emerging Markets Index A Shares which are listed on the Shanghai MSCI China A 378 Onshore and Shenzhen indices accessible through 1,244 Stock Connect H Shares, B Shares, Red Chips, P Chips, MSCI China 459 Both 2,132 ADRs and 5% float adjust A Shares

Source: MSCI, FTSE, Hang Seng Indexes, China Securities Index Company, Bloomberg, data as at 31/12/2019.

MSCI China ffThe strategic benchmark for Chinese equity allocation, integrating the full opportunity set and the building blocks of MSCI Emerging Markets & MSCI ACWI

Alphabet soup of share classes

H-shares (24.4%) Red-chips (10.7%)

A-shares (18.0%) MSCI CHINA B P-chips (~$2.1tn, (0.1%) (26.6%) 703 stocks)* ADR (20.03%)

All share classes are now included, incl. A Shares

1Source: MSCI, data based on index weights – for illustrative purposes only, data as at 28/01/2020, *data as at 31/12/2019. Access Markets | China: too big to ignore

MSCI China offers the greatest exposure to Tech disruptors ffFinancials are a major part of H-Share indices ffCommunication services’ heaviest weighting is in the MSCI China

Sector compositions differ across indices China’s BAT* = FAAMG of China** MSCI FTSE MSCI MSCI MSCI Market Cap. CSI 300 HSCEI China A China A China A Company Region China China A (USD bn – Jan 20) Int. 50 Onshore

Cons. Disc. 26.9 10.3 6.6 6.1 6.6 1.2 8.4 1 Apple USA 1,393 2 Microsoft USA 1,262 Cons. 3.8 12.1 14.2 2.6 14.1 25.7 11.6 Staples 3 Alphabet USA 1,001 Energy 3.5 2.1 2.3 - 2.4 1.2 1.8 4 Amazon USA 919 5 Facebook USA 621 Financials 20.5 38 26.5 46.4 26 56.3 26.9 6 Alibaba China 564 Healthcare 3.9 7.2 8.6 3.4 8.4 3.8 7.9 7 Tencent China 461 Industrials 5.7 11.3 12.8 2.7 12.8 7.7 12.1 8 Ebay + Paypal USA 166 9 Netflix USA 153 Inf. Tech 4.2 8.2 11.2 - 11.7 1.6 13.4 10 Salesforce USA 162 Materials 2.4 6.5 8 1.2 8.1 0.6 8.7 11 Booking holdings USA 60

Real Estate 5.7 - 4.5 7.3 4.6 - 4.7 12 Meituan Dianping China 76 13 Uber USA 63 Com. Serv. 20.8 2 2.5 18.3 2.6 0.7 2.3 14 JD.com China 56 Utilities 2.6 2.4 2.7 3.7 2.8 1.2 2.1 15 Baidu China 44

*BAT: Baidu, Alibaba, Tencent - ** FAAMG: Facebook, Amazon, Apple, Microsoft, Google. Source: MSCI, FTSE, Hang Seng Indexes, China Securities Index Company. Data as at end December 2019, ** sector here refers to Telecom Svcs., weightings may not add up due to rounding, Internet trends 2018 by Mary Meeker, data updated as at 28/01/2020

Exposure Trading currencies Replication type AuM1 TER*

Lyxor MSCI China Broad Chinese equities USD, EUR Indirect €58m 0.30%

Lyxor China Enterprise (HSCEI) Offshore H Shares USD, EUR, GBP Indirect €628m 0.65%

Lyxor Hwabao WP MSCI China A (DR) Onshore A Shares USD, EUR, GBP Direct €33m 0.35%*

Why choose Lyxor’s Chinese ETFs

Low cost Accomplished Dependable The cheapest Chinese €710m+ in assets 13+ years of experience equity ETF at 0.30% TER1 under management1 managing China ETFs1

1Source for all data unless otherwise indicated: Lyxor international Asset Management, Bloomberg, data as at 29/01/2020. *TER correct as of 29/01/2020. Knowing your risk It is important for potential investors to evaluate the risks described below Underlying risk and in the fund prospectus on our website www.lyxoretf.com The Underlying index of a Lyxor ETF may be complex and volatile. For example, when investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing Capital at risk the investor to a liquidity risk linked to costs such as cost of carry and ETFs are tracking instruments: Their risk profile is similar to a direct transportation. ETFs exposed to Emerging Markets carry a greater China’s BAT* = FAAMG of China** investment in the Underlying index. Investors’capital is fully at risk and risk of potential loss than investment in Developed Markets as they are investors may not get back the amount originally invested. exposed to a wide range of unpredictable Emerging Market risks. Replication risk Currency risk The fund objectives might not be reached due to unexpected events on ETFs may be exposed to currency risk if the ETF is denominated in a the underlying markets which will impact the index calculation and the currency different to that of the Underlying index they are tracking. This efficient fund replication. means that exchange rate fluctuations could have a negative or positive Counterparty risk effect on returns. With synthetic ETFs, investors are exposed to risks resulting from the use Liquidity risk of an OTC swap with Société Générale. In-line with UCITS guidelines, Liquidity is provided by registered market-makers on the respective the exposure to Société Générale cannot exceed 10% of the total fund stock exchange where the ETF is listed, including Société Générale. assets. Physically replicated ETFs may have counterparty risk if they use On exchange, liquidity may be limited as a result of a suspension in the a securities lending programme. underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.

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