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Extracting Alpha from China’s Equity Markets 

Raymond Chan 


Raymond Chan


Investors fixated on China's macro issues could miss the bottom-up opportunities in a market with more listed companies than the US, says our Asia-Pacific equities CIO. Rewards abound for investors who grasp the size and subtleties of fast-changing China.

A bottom-up story

When many investors think about China today, they focus on a few well-publicized macroeconomic concerns: property bubbles, non-performing loans in the banking system or the renminbi's weakness against the US dollar.
We see investing in China as a bottom-up story that can reward active investors
In our view, these are all valid issues, but we see investing in China as more of a bottom-up story—one that can reward active investors who understand the size and subtleties of a booming marketplace.

Consider that there are now more than 4,200 Chinese companies listed on stock exchanges around the world—mostly in Shanghai, Shenzhen, Hong Kong and the US—with a total market-capitalization size of $10 trillion.
With a total market-cap of $10 trillion, China has more listed companies than the US
That means there are more listed companies in China than in the US. As in the US, the sheer size of this group means there are always promising companies to be found. But unlike in the US, many inefficiencies still exist in China’s equity markets—and it is here where active managers have an opportunity to deliver alpha to investors.

Shanghai vs. Shenzhen

For example, China's equity markets—A-shares, H-shares and
Many inefficiencies exist in China’s equity markets—which is where active managers can find alpha
American Depositary Receipts (ADRs)—behave quite differently. The Shanghai and Shenzhen markets in particular are influenced more by local factors particular to their business climates: Shanghai is more represented by old-economy sectors, such as financials, while Shenzhen is dominated more by new-economy sectors, such as technology. Meanwhile, H-shares and ADRs are more influenced by overseas sentiment on China. This enables astute active managers who are focused on fundamentals to exploit these differences and add another source of alpha potential.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585,, 1-800-926-4456.


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