Global Investors Pile Into Chinese A-shares… Are they too late?

chinese a-shares

On June 4th 1989, the students of Mainland China said, Enough. After a decade of western ideas seeping into their country, they wanted reform.

The students made their stand on June 3rd and 4th in Tiananmen Square. What followed was a massacre.

Though the official Chinese count was ‘only’ 241 dead with over 7,000 injured, many believe the death toll was in the thousands. Fifteen months after Mainland China’s Tiananmen Square incident in 1989 I spent a month living, traveling and understanding China from a first hand account. No books needed. No interpretation needed. Just me and my fellow 41 students from Augustana College.

Tiananmen Square

China Is the Second Largest Economy In The World. But Does That Make It A Great Investment?

At 19 years old I had already visited a dozen countries but nothing like China. Alive and awake is what I mostly thought living there for that short time.

There were many moments from that trip that shifted and change my life permanently.

There was this one moment that told me everything I needed to know about what China was about and what the world was about to get. I knew at that moment I was going to be an Asian Studies Major and live in Asia after college.

So what happened?

I bought a hat.

A Mao hat to be exact. And I bought it from a stall selling Chinese souvenirs to the steady stream of travelers that made it to Xi’an.

China’s Making The Transformation From Third World To First World in One Generation

I bought the hat for six Renminbi, about one US Dollar at the time.  The Chinese seller started out at 12 but I actually wasn’t interested. When he keep dropping the price and then I realized he was talking about one US Dollar. I said yes.

We made the exchange.

Not one stall later, which looked exactly like the one I just left, the stall owner asked how much I paid for my hat.

I said, 六元人民币 (Liu yuan renminbi).

As a side note, my dyslexia turned out to help me learn Chinese kanji. Apparently small images like Kanji were easier for my brain to learn than 26 roman letters strung together in what looked like random order to me.

He said, he’d give me eight Renminbi.

I asked why. He said that he could sell it for 12 or even 15.

China Is More Capitalist Than America

That was China in October 1990. Capitalism was alive and thriving.

Fast forward to today.

The company behind the MSCI indices around the world is adding China to their MSCI Emerging Markets Index.

There has been A LOT of talk about how trillions of dollars are going to flow into Chinese A shares, the shares that are not traded on the Hong Kong stock exchange but are in Mainland China.

The idea is that you want to buy the “A” Shares before the trillions flow in.

Trillions of Dollars Soon To Flow Into Chinese A-Shares

There have been hundreds of articles written why you should jump in and just let your money double and triple.

Entire “pick of the month” newsletters have been built and marketed to you in the past six months just focusing on Chinese A-shares.  

And mainstream media has picked up on “can’t lose” event.

Here’s one article that talks about global investors piling into Chinese A shares. And here’s another article talking about how Chinese exchanges are readying themselves for an inflow of activity that will be multiples higher.

And then on June 1st the floodgates opened, trillions flowed in and billionnaries were made… right?

Should You Buy Chinese A-Shares… Or Is This One Investment Narrative To Pass On?

So the questions is, is it true? Is owning Chinese A-shares good for your wealth?

After all the narrative is that this is a once in a lifetime event. An event that a savvy investor wants to get in front of. An event that is going to be so powerful that you might just want to buy an entire “Chinese pick of the month newsletter” for it.

BUT, are the people buying the newsletters and the A-shares… are they buying a great narrative but a lousy sector or is this really a once in a lifetime event?

So I went digging and what I found was shocking.

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Let me show you what the weight of evidence reveals to us.

Below is a price chart of Chinese A-shares via ticker symbol KBA. As you can see they have been trending higher for the past two years. So far so good.

KBA - Chinese A-shares

Are Chinese A-Shares Safer Or More Dangerous Than The Regular Ones?

The next thing I wanted to know is whether A-shares were out performing the regular old Chinese large cap shares that the world has been able to buy for the past 14 years.

Below compares the two type of shares.

If the black line is trending higher below then that means the A-shares are outperforming the regular shares that the world has had access to for 14 years. But if the line below is falling then that means the A-shares are underperforming the regular old shares.

See for yourself. And notice if the line below is trending higher or lower.

A-share divided by Chinese Large Cap shares

As your eyes can clearly see, the A-shares have continued to under-perform the regular old shares for the past two and half years.

Now you have to remember, the regular old Chinese shares are safer to own. They have higher liquidity, have a track record three times longer and are part of a much larger sector (read: safer). So all things being equal the regular old shares are safer to own.

Is New Better? Is Exotic Better? Are A-Shares Better?

So if I’m going to own a smaller segment with more price volatility then I better be getting paid for it. And A-share owners are’t!

Perspective is everything when it comes to investing.

It turns out the time to have gotten into A-shares was from mid 2014 to mid 2015. In that short time period A-shares jumped 150%.

But since then they have been underperforming almost everything… emerging markets, regular old Chinese shares, the S&P500, the global market index and even Europe.

The ‘to buy or not to buy’ the A-shares is a small example why investors have to learn how to know how to separate investment narrative from “is this really what’s best for me?” Because if investors aren’t able to do that, they are going to get hurt more often, surprised more often and left holding the bag more often.

But there is a way to avoid this.

And it doesn’t’ come through more information or better stories. It comes through shifting your perspective so you can see what is really happening in the markets and what’s best for your money.

To be able to ask and answer, “Is this really what’s best for my money?” is the difference between losing 12% when the market falls 58% or losing 45% when the market falls 58%.

Fortunately perspective shift can be trained.

In Your Corner,

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RC Peck, CFP

P.S. Curious how perspective change can shift your investments, income and wealth. Book a call here and let’s talk about how vulnerable your approach might be to a sudden about face in the market.



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