For professional / institutional investors only TAPPING INTO A BROADER RANGE OF INVESTMENT OPPORTUNITIES AS CHINA MARKET OPENS UP Tapping into a broader range of investment opportunities as China market opens up | November 2018 RISK FACTORS This document is a financial promotion for The First State China Strategy. This information is for professional and institutional investors only in the 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: Changes in exchange rates will affect the value of assets which are denominated in other currencies. • 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: Investing in the Chinese market involves risks such as legal, regulatory and economic risks. The securities markets in China may be subject to greater uncertainty than investments in more developed countries. • Concentration risk: Investments are made in a relatively small number of companies or countries which may be riskier than if investments are made in a larger number of companies or countries. • Emerging market risk: Emerging markets may not provide the same level of investor protection as a developed market; they may involve a higher risk than investing in developed markets. Reference to specific securities or companies (if any) are included to explain the investment strategy and should not be construed as investment advice, or a recommendation to invest in any of those 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. 1 Tapping into a broader range of investment opportunities as China market opens up | November 2018 Introduction stock exchanges such as New York and China’s onshore stock market, particularly Hong Kong and denominated in foreign the A-shares segment, is much larger The China equity market includes a currencies, while ‘onshore’ Chinese than the offshore component, with myriad of share classes, each with equities are listed on the Shanghai more than 3,600 companies listed on distinct characteristics. ‘Offshore’ and Shenzhen Stock Exchanges and the Mainland exchanges, compared to Chinese equities are listed on overseas denominated in RMB. around 1,200 listed offshore. Foreign Total Number investment Currency market cap of stocks restrictions Chinese companies incorporated in mainland A Shares China and listed on the Shanghai and Shenzhen RMB 3,556 Yes, but easing stock exchanges US$6.4 Onshore Chinese companies incorporated in mainland trillion B Shares China and listed on the Shanghai and Shenzhen USD 99 No stock exchanges Chinese companies incorporated in mainland H Shares HKD 262 No China and listed in Hong Kong State-owned Chinese companies incorporated US$2.4 Red Chips outside mainland China and listed in Hong HKD 164 No trillion Offshore Kong Chinese companies incorporated outside P Chips HKD 694 No mainland China and listed in Hong Kong Chinese companies incorporated outside US$1.0 N Shares USD 165 No mainland China and listed in New York trillion US$9.8 Total China Market 4,940 trillion Source: Hong Kong Exchanges and Clearing (HKEX), NASDAQ, as at 31 October 2018 Evolving China market access and eligible securities had expanded The launch of the Shenzhen-Hong Kong significantly. Stock Connect followed at the end of Despite the size of China’s onshore 2016; and at the same time, aggregate However, it was the 2014 launch of the equity market, its shares are largely trading quotas were removed (but Stock Connect platform which marked underrepresented in global portfolios. A daily trading limits have remained). In a step-change for overseas investors. closed economy and a history of capital early-2018, daily quotas quadrupled With Stock Connect, access to the controls meant that foreign investors from RMB 13 billion to RMB 52 billion China A-share market became much have, in the past, had little opportunity for Northbound trading; and from more straightforward. to participate in the market. RMB 10.5 billion to RMB 42 billion for Although the launch of the Qualified Stock Connect provided a link between Southbound trading. the Shanghai and Hong Kong stock Foreign Institutional Investor (QFII) Stock Connect now covers around 80% exchanges, allowing foreign investors programme in 2002 permitted a of the market capitalisation of the to trade selected A-share stocks on a small number of overseas investors to Shanghai and Shenzhen exchanges – daily basis without needing to apply purchase China A-shares, trading was or around 1,400 companies. Foreign for individual quotas, or be subject to subject to strict preapprovals, licenses ownership of China A-shares has risen minimum lock-up periods and capital and quotas. steadily (total shareholding value of repatriation limits. It also allowed Mainland companies via Stock Connect Restrictions have eased over time; Mainland investors to diversify their has grown to RMB621 billion1) and and by the time of the launch of the equity holdings and foreign exchange trading volumes have reached record Renminbi-QFII programme in 2011, exposure by purchasing Hong Kong- highs. the number of qualifying investors listed stocks. Stock Connect Northbound Stock Connect Southbound RMB42 billion trading: Hong-Kong-based trading: Mainland China- daily trading RMB52 billion investors, trading securities based investors, trading quota daily trading listed on the Shanghai and securities listed on the Hong quota Shenzhen stock exchanges Kong stock exchange 1 Source: Hong Kong Exchanges and Clearing (HKEX) as at 31 October 2018 2 Tapping into a broader range of investment opportunities as China market opens up | November 2018 SB record of NB record of HKD43.8bn RMB36.2bn on on 6 Feb 2018 19 June 2018 60 Stock Connect Average Daily Trading Volume (HKD bn) 8.4% 6.4% 6.3%6.4% 51.4 6.1%6.0% 6.1% 6.0% 6.0% 50 5.8% 5.8%5.7% 5.5% 5.7% 5.4% 5.2% 5.2% 7.4 5.0%5.0% 5.2% 4.8% 43.8 4.8% 4.3% 4.0% 38.3 39.7 6.5 39.4 40 3.4% 37.4 3.1% 3.2% 3.1% 3.2% 3.2 34.7 35.4 4.9 2.3% 16.9 5.2 32.6 32.6 2.0% 5.9 1.8% 1.9% 4.5 4.8 6.6 1.5%1.7% 1.7%1.6% 1.5% 1.6% 29.6 1.3% 7.6 4.0 4.0 29.6 30 1.0%1.1% 1.2% 27.5 14.0 0.8% 0.9% 8.6 3.0 0.5% 0.6% 3.8 0.5% 23.9 10.0 7.9 23.1 3.5 10.2 6.1 6.8 21.5 5.8 11.4 19.5 3.3 11.1 11.3 18.6 18.9 9.3 20 17.2 17.5 2.3 8.0 9.5 11.4 15.9 15.4 15.9 1.7 2.2 10.4 10.0 8.8 8.9 12.4 4.4 14.1 1.4 1.4 8.3 9.8 1.7 7.9 8.7 11.7 12.0 1.0 7.1 5.4 4.2 6.1 6.8 7.6 7.2 9.4 9.4 0.5 9.9 7.1 8.6 8.9 6.6 10 7.7 7.2 7.5 7.6 7.4 7.3 7.8 7.4 0.5 6.9 5.6 6.6 6.4 1.6 6.4 6.3 5.0 4.8 1.0 2.4 5.6 5.3 5.7 8.0 3.8 4.4 4.1 16.0 16.0 1.5 14.2 1.7 1.8 5.0 4.6 4.1 3.9 13.8 13.1 0.8 0.8 11.1 1.7 2.4 4.1 3.8 1.7 2.9 11.3 11.6 12.4 12.5 13.011.918.2 10.8 10.5 2.1 2.6 2.1 4.0 2.9 1.6 2.1 8.9 9.3 7.6 7.8 7.0 2.0 2.5 6.7 5.9 6.2 5.6 5.5 5.8 5.8 5.0 4.8 4.7 5.9 5.4 5.7 5.6 6.4 3.6 3.8 3.3 3.5 2.5 3.3 3.4 3.7 3.7 3.6 4.3 3.7 4.2 0 8 7 6 5 8 7 6 5 8 18 17 16 15 18 17 16 15 18 18 17 16 15 r-18 r-17 r-16 r-15 v-17 v-16 v-15 v-14 c-17 c-16 c-15 c-14 g-17 g-16 g-15 p-17 p-16 p-15 n- n- n- n- n- n- n- n- Jul- Jul- Jul- Jul- Ja Ja Ja Ja Ju Ju Ju Ju Ap Ap Ap Ap Feb-1 Feb-1 Feb-1 Feb-1 Oct-17 Oct-16 Oct-15 Se Se Se Mar-18 Mar-17 Mar-16 Mar-15 No No No No Sep- Oct-18 De De De De Au Au Au May-1 May-1 May-1 May-1 Aug-1 Shenzhen Southbound Shenzhen Northbound(1) Total average daily trading volume Shanghai Southbound Shanghai Northbound (1) Percentage of Southbound turnover of Hong Kong Market (1) refers to Hong Kong Exchanges and Clearing (HKEX) Stock Connect, data as at 31 October 2018.