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Tapping Into a Broader Range of Investment Opportunities As China Market Opens Up

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Tapping Into a Broader Range of Investment Opportunities As China Market Opens Up Avenir - main text Gotham Sub text CMYK For professional / institutional investors only Tapping into a broader range of investment opportunities as China market opens up RISK FACTORS This is a financial promotion for The FSSA China Strategy. This information is for professional clients only in the UK and EEA and elsewhere where lawful. Investing involves certain risks including: • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested. • Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund’s investments and could cause the Fund to defer or suspend redemptions of its shares. • Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk. • China market Risk: although China has seen rapid economic and structural development, investing there may still involve increased risks of political and governmental intervention, potentially limitations on the allocation of the Fund’s capital, and legal, regulatory, economic and other risks including greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities. • Concentration risk: the Fund invests in a relatively small number of companies which may be riskier than a fund that invests in a large number of companies. • Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies. For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund. If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice. Introduction The China equity market includes a myriad of share classes, China’s onshore stock market, particularly the A-shares each with distinct characteristics. ‘Offshore’ Chinese equities segment, is much larger than the offshore component, with are listed on overseas stock exchanges such as New York more than 3,900 companies listed on the Mainland exchanges, and Hong Kong and denominated in foreign currencies, while compared to around 1,600 listed offshore. ‘onshore’ Chinese equities are listed on the Shanghai and Shenzhen Stock Exchanges and denominated in RMB. Tapping into a broader range of investment CMYK opportunities as China market opens up November 2020 Foreign Number of investment Currency Total Market Cap stocks restrictions Chinese companies incorporated in mainland China Yes, but A Shares and listed on the Shanghai and Shenzhen stock RMB 3,876 exchanges easing Onshore US$10.5 trillion Chinese companies incorporated in mainland China B Shares and listed on the Shanghai and Shenzhen stock USD 94 No exchanges Chinese companies incorporated in mainland China 288 H Shares and listed in Hong Kong HKD No State-owned Chinese companies incorporated US$1.3 trillion 176 Red Chips outside mainland China and listed in Hong Kong HKD No Offshore Chinese companies incorporated outside mainland 839 P Chips China and listed in Hong Kong HKD No Chinese companies incorporated outside mainland US$3.2 trillion 262 N Shares China and listed in New York USD No Total China Market US$14.9 trillion 5,535 Source: Hong Kong Exchanges and Clearing (HKEX), NASDAQ, as at 31 October 2020 Evolving China market access A closed economy and a history of capital controls meant trade selected A-share stocks on a daily basis without needing that foreign investors have previously had few opportunities to apply for individual quotas, or be subject to minimum lock-up to participate in China’s onshore market. As a result, China periods and capital repatriation limits. It also allowed Mainland A-shares are largely underrepresented in global portfolios, investors to diversify their equity holdings and foreign exchange though this is starting to change. exposure by purchasing Hong Kong-listed stocks. The launch of the Qualified Foreign Institutional Investor (QFII) Toward the end of 2016, the Shenzhen and Hong Kong stock programme in 2002 permitted a small number of overseas exchanges were similarly linked via Stock Connect. At the investors to purchase China A-shares. However, trading was same time, aggregate trading quotas were removed. Daily subject to strict preapprovals, licenses and quotas. trading limits have remained; though in early 2018, daily Restrictions have eased over time; and by the time of the launch quotas quadrupled from RMB 13 billion to RMB 52 billion for of the Renminbi-QFII (RQFII) programme in 2011, the number Northbound trading and from RMB 10.5 billion to RMB 42 billion of qualifying investors and eligible securities had expanded for Southbound trading. significantly. Stock Connect now covers around 85% of the market In 2014, the launch of the Stock Connect platform marked capitalisation of the Shanghai and Shenzhen exchanges – or a step-change for overseas investors. With Stock Connect, around 1,300 companies. Foreign ownership of China A-shares access to the China A-share market became much more has risen steadily (total shareholding value of Mainland 1 straightforward. companies via Stock Connect has grown to RMB1,952 billion ) and trading volumes have reached record highs. Initially, Stock Connect provided a link between the Shanghai and Hong Kong stock exchanges, allowing foreign investors to Stock Connect Stock Connect RMB42 billion Northbound trading: Southbound trading: Hong-Kong-based investors, Mainland China-based investors, daily trading RMB52 billion daily trading securities listed on the trading securities listed on the quota trading quota Shanghai and Shenzhen stock Hong Kong stock exchange exchanges 1 Source: Hong Kong Exchanges and Clearing (HKEX) as at 31 July 2020 2 Lipstick Midnight Tapping into a broader range of investment CMYK opportunities as China market opens up November 2020 60 Stock Connect Average Daily Trading Volume (HKD bn) SB record of NB record of HKD60.2bn RMB191.2bn on 50 on 6 Jul 2020 7 Jul 2020 10.9% 202.1 40 9.0% 9.1% 9.0% 8.7% 8.0% 17.2 7.9% 7.3% 18.9 6.8% 6.4% 6.1% 6.1% 5.7% 5.8% 30 5.3% 5.4% 5.6% 4.8% 4.8% 3.9% 3.7% 118.6 114.8 93.7 10.2 106.3 2.2% 2.3% 8.3 20 1.7% 12.3 15.6 91.9 9.7 1.4% 1.3% 89.2 10.5 0.8% 84.7 8.6 8.0 67.5 6.8 11.2 9.6 10.1 57.4 3.8 56.8 53.9 52.9 6.8 52.8 51.3 4.3 4.3 10 43.6 7.5 3.6 6.9 37.0 40.9 42.2 37.8 34.4 6.3 30.6 6.5 32.0 26.6 5.0 3.0 21.1 72.3 21.6 4.0 13.2 3.7 21.4 23.9 17.9 8.0 6.2 5.3 19.2 10.7 10.9 13.5 2.6 9.1 10.8 40.3 7.9 6.9 6.4 6.0 8.6 1.1 1.5 10.1 11.0 9.7 39.8 34.9 7.4 7.9 0.5 6.7 7.9 7.7 24. 6 30. 3 31.3 30.2 29.8 1.4 1.9 2.4 2.9 5.0 4.5 6.2.02 4.0 4.8 13.8 13.8 15.3 21.4 21.6 0 6.5 11.8 2.8 5.1 4.0 3.1 3.6 4.1.72 4.2 5.7 6.2 9.8 12.4 1Q 17 1Q 19 1Q 15 1Q 16 1Q 18 2Q 17 3Q 17 4Q 17 2Q 19 3Q 19 2Q 15 3Q 15 2Q 16 3Q 16 2Q 18 3Q 18 4Q 19 4Q 15 4Q 16 4Q 18 Jul 20 Apr 20 Jan 20 Jun 20 Feb 20 Mar 20 May 20 (1) Shenzhen Southbound Shenzhen Northbound Total average daily trading volume Shanghai Southbound Shanghai Northbound (1) Percentage of Southbound turnover of Hong Kong Market Source: Hong Kong Exchanges and Clearing (HKEX), as at 31 July 2020. China A-share inclusion in equity indices As China continues to open up its to 20% and expanded coverage to Index. China A-shares now comprise economy and its capital markets, foreign include large-cap, mid-cap and ChiNext approximately 6% of the FTSE Emerging investors have started to allocate securities. Index and 0.7% of the FTSE Global All China A-shares to client portfolios, and According to MSCI data, Chinese equities Cap Index. benchmark index providers have been could eventually comprise more than As two of the main benchmark index taking note. After a multi-year consultation 50% of the MSCI Emerging Markets providers for the industry, these period and a year-long planning interval, Index, with more than 20% weighted developments mark an inflection point for MSCI added approximately 230 China in China A-shares. For the MSCI China Chinese equities. Although full A-share A-shares to the MSCI Emerging Markets Index, the domestic equity component inclusion is unlikely to happen quickly, Index over a two-phase process in May could increase to almost 40%. the next five years should see a steady and August 2018.
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