Markets by Trading view

Is Shanghai’s New CSI A50 Index An Opportunity For Foreign Traders?


China has launched the CSI A50 Index in Shanghai in an attempt to shore up interest in the country’s strategic industries from global investors and traders after a few years of sluggish performance.

Earlier this month, the CSI A50 started trading with an index that is less dominated by the financial sector than other indices in China, notably the CSI300 and SSEC. The CSI A50 leans more towards industries that the Chinese government considers to be of strategic interest – including healthcare and energy. Three of the largest constituent companies of the new index are Kweichow Moutai Co, Jiangsu Hengrui Medicine Co, and battery maker Contemporary Amperex Technology Co.

According to Yu Quan, Senior Quantitative Trader at SYG Technologies in Shanghai, interest has so far been muted from quants – however money managers are looking to create CSI A50-tracked funds. “The launch of this index did not get a lot of attention, since it is a big cap index which is not popular for quant traders,” he said. However, at least seven mutual fund companies, including Shanghai-based Fullgoal Fund Management and Hong Kong’s E Fund Management, have already applied to the Chinese regulators for a licence to launch funds tracking the new index.

Will foreign funds follow? It is certainly the case that China needs to offer something new to foreign investors after several years of poor returns. The CSI 300 Index is down by almost a fifth in the last twelve months, with the SSE Composite Index down by just under 10% across the same period.

That said, the new index is hardly likely to be a silver bullet. Just look at the performance of some of the companies that make up the index over the last year. Kweichow is down 10%. Luzhou Laojian has seen its share price decline by over 30%. Contemporary Amperex is down by over 35%. It is not only bad news – Jiangsu Hengrui is up almost 10% – but it does not suggest that the new index will be easy money by any stretch.

Foreign investors have been struggling in China ever since the outbreak of the coronavirus pandemic, particularly given the government locked the country down for almost a year more than other developed countries, putting a huge restriction on economic activity and growth. China is also embroiled in a huge property market slump that is threatening to send shockwaves across the entire economy.

Youth unemployment figures have become a state secret, with Beijing refusing to publish the statistics since they hit a record high of 21.3% in June. Some analysts have even suggested that China could be en route to “Japanification” – low growth, weak inflation, rock bottom interest rates, high levels of private and public debt, market and regulatory rigidity, and demographic decline. Add to this the fears that some foreign companies have about investing in China – such as its workers being targeted or its profits being arbitrarily seized – and the investment picture is not too promising.

Will this new index be enough to prompt renewed interest in Chinese markets. Probably not in itself, although it does at least demonstrate that the Chinese authorities are looking at new ways to appeal to foreign investors. Perhaps a better way to encourage more activity on Chinese markets would be to drop the threat of restrictions on short-selling and other types of trading, which quants traders in Shanghai have identified as an obstacle to growth.

Despite these obstacles, and the wider economic problems that the country is facing, the new index could be part of the answer for China as it seeks to lure back foreign investors.

A Bloomberg editorial yesterday suggested that China could be the contrarian trade of 2024. Over the last twenty years, there have only been five occasions when Chinese stocks have been as cheap as they currently are compared to government bonds. On those five occasions, stocks then rallied by an average of 57% over the subsequent twelve months. Could similar returns be in store for those currently investing in Chinese stocks and the CSI A50 index?

Only time will tell, of course, what Chinese markets have in store for traders in 2024. Much will depend on whether the Chinese Finance Minister, He Lifeng, can finally get a grip on the country’s economy and move past the turbulence of the last three years. Regardless, the launch of the CSI A50 Index does show that authorities in China are exploring new initiatives to entice more capital, foreign and domestic, into its markets and strategic companies. That can surely only be a good thing for traders with an interest in Chinese markets.

Author: Harry Clynch

#China #Shanghai #CSIA50 #Trading

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