Access to the growth of the “New China” economy

BYes John Welling, Director, Stock Indices, S&P Dow Jones Indices

As the Chinese economy matures, consumer and service related industries become structurally more important. As the country’s stock market continues to be heavily exposed to “old economy” sectors, many market players are looking for alternative index solutions to participate more directly in China’s fastest growing sectors.

Launched in September 2016, the S&P Chinese New Sectors Index provides access to Chinese companies operating in specific sectors ready to benefit from the country’s transition to a consumer-oriented and service-oriented economy. The index includes all classes of Chinese shares, including A shares and offshore quotes (including those listed in the US), as well as companies domiciled in Hong Kong. In order to spread the exposure more evenly and improve liquidity, ceilings of 10% of individual stocks are applied semi-annually and selection is limited to large and liquid stocks.

This focus on the ‘new China’ offers substantial relief to slower growing sectors of the economy, which retain high exposure within existing and widely used Chinese stock indexes, such as the Hang Seng China Enterprises Index ( HSCEI).

Coin 2 New China

Slower growth in these “old economy” sectors has translated into lower stock returns, especially in recent years. Over the last five-year period, the S&P New China Sectors Index has returned over 25.3% per annum, while the HSCEI has only returned 10.8%, an outperformance that reflects the powerful drivers of the most dynamic economic sectors.

Coin 3 New China

What motivated the outperformance?

Analysis of top contributors shows that the outperformance was widely distributed, with tech giants Alibaba and Tencent contributing the most to the outperformance, while Kweichow Moutai and Meituan Dianping further illustrated the importance of growing consumption. The top 10 contributors accounted for just under half of the S&P New China Sectors index outperformance relative to the general index S&P China 500 during the most recent five-year period.

The attribution to industry, on the other hand, shows that the outperformance was largely concentrated in the sectors of the “new economy”. This result is even more apparent compared to the HSCEI, in large part due to its greater concentration in banks and other sectors of the “old economy”.

Exhibit 4a New China

Coin 4B New China

By focusing on consumer and service related companies, the S&P New China Sectors Index offers a high level of differentiation from traditional Chinese stock indices and more directly measures one of the key megatrends affecting the Chinese economy.

For more information, see our Discussion points overview of the S&P Chinese New Sectors Index.

Initially published by Indexologie, 02/19/21


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