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While China appears to be ascending into world superpower status sometime in the coming decades, a $100 investment in “global” equities allocates just $3.51 to the country if we track an index like the MSCI All Country World Index (ACWI).1 That’s not far from Canada’s weight, and it seems remarkably low for a country that is going head-to-head with the U.S. on the global stage.
It was only last year that MSCI added Chinese A-shares, companies listed in Shanghai and Shenzhen, to its MSCI Emerging Markets Index. That is late for an economy whose size surpassed the U.S. in 2014, at least on a purchasing power parity (PPP) basis (see figure 1).
Figure 1: China & U.S. Share of Global GDP
Covering China, wherever the listing
While some Chinese companies are available only in Shanghai or Shenzhen, others are listed solely in Hong Kong. Still others have American depositary receipts (ADRs) or are traded in Singapore.
Our TSX-listed exchange-traded fund, WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), tracks the ICBCCS S&P China 500 Index, covering stocks in all those bourses. Its index is currently over 50% in local A-shares. MSCI, by contrast, is only starting to add A-shares securities up to a 5% inclusion factor in 2018, a small starting point. It’s high time China has its own S&P 500, especially if President Xi Jinping has anything to say about it.
Going Out
Deng Xiaoping, ruler of China from 1978 to 1989, famously advised his country to “hide your strength, bide your time.” China’s great goal for the last four decades — development, development, development — was to happen quietly, with fingers crossed that the U.S., Japan and Western Europe wouldn’t get too frightened.
The hiding and biding is over. Xi’s 2017 Davos speech, replete with all the platitudes about smiling outreach, set the template for an acceleration of “Going Out,” Beijing’s euphemistically termed colonialism in central Asia, Africa and in client states as far as Latin America.
Recall that the big issue for about two minutes in 2015 was Britain’s fence-sitting on joining the Asian Infrastructure Investment Bank (AIIB), China’s answer to the IMF, World Bank and other such supranational bodies. The U.K. held strong for a bit, until fear of missing out caused it to relent and join the infrastructure bank. Development banks have multiplied through the years, and the AIIB is the new kid on the block, so the IMF will try to keep up.
And while U.S. politics splinters into ever more hostile factions, Europe too is distracted by its own fragile fabric. Canada, meanwhile, has spent all of 2018 reassessing its relationship with the U.S. and Mexico. Britain? Tied up with Brexit. Meanwhile, the Asian hegemon flexes muscle. Look at the three votes against Syrian air strikes: China, Russia and Bolivia, one of several South American puppet governments of Beijing. It is clear that China is going to do what China wants to do.
Spreading its influence across the world’s largest land mass — and beyond — is the new goal, and the IMF is going to help the cause, adding resources for the Belt and Road Initiative, as if China needs money. This is the new Marshall Plan, and with the U.S. “donation” to the IMF three times larger than China’s,2 the West is paying for its own relative decline.
Beijing is sitting on a $3.1 trillion foreign exchange reserve fortress, is the global leader in mobile payments, is home of the Amazonesque Alibaba and Tencent, ranks number two in international patent applications and on and on.3 And the U.S., Canada, Japan, France — all of the usual suspects — are funding the IMF, thus training the Chinese in their industrialization efforts.
Allocate accordingly.
Xi, ruler for life, intends to plant a figurative flag as the global leader of the 21st century. Again, China’s weight in MSCI ACWI is 3.5%, the same amount as France.4 If the future China looks anything like the U.S. in the 20th century or Britain in the 19th, 3.5% of the pie is off the mark.
To track China’s S&P 500, WisdomTree has TSX-listed CHNA.B
1Source: MSCI ACWI, as of 12/31/17.
2Source: “IMF Members’ Quotas and Voting Power, and IMF Board of Governors,” 4/15/18. China’s quota is 6.4% of the total, while the U.S. has the largest quota, at 17.5% of the total.
3Source: Statista, for 2017.
4Source: MSCI, as of 12/31/2017.
Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio. This blog originally ran on the WisdomTree website on August 3, 2018 and is reproduced here with permission.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Fund focuses its investments in China, including A-shares, which include risk of the RQFII regime and Stock Connect program, thereby increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. The Fund’s exposure to certain sectors may increases its vulnerability to any single economic or regulatory development related to such sector. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. The Fund will be required to include cash as part of its redemption proceeds which introduces additional risks, particularly due to the potential volatility in the Chinese market and market closures. The Fund invests in the securities included in, or representative of, its index regardless of their investment merit and the Fund does not attempt to outperform its index or take defensive positions in declining markets. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
