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China's onshore equity markets

May 14, 2018

China’s A-Share market may benefit significantly in the coming years from the relatively fast pace of economic activity.

In recent years, equity markets in China have lagged behind the spectacular growth of the economy. Various structural constraints made onshore equity markets relatively inefficient, while investment-led growth left little cash to distribute to shareholders.

Now, with the government pushing to liberalize the economy and shift to consumption-led growth, equity markets may be entering a new phase. Financial liberalization and the inclusion of China A-Shares in MSCI indexes may help improve the sophistication and efficiency of Chinese equity markets, potentially making them a more attractive investment proposition for global investors.

Reform efforts face significant hurdles, however, including the excessive growth of leverage and a credibility deficit after years of meddling with equity markets and mismanaging exchange rate policy.

Even considering these challenges, we believe China has several structural advantages—including increased financial market integration and economic rebalancing from investment to consumption—that may continue to support robust growth over the medium term. Chinese equity markets, still broadly untapped by global investors, may become more attractive because of these trends.

The China discrepancy
Equities vs. corporate earnings and GDP

Chart: The China discrepancy

Sources: Haver, CEIC and Bloomberg, March 2018
Note: The chart displays the Shanghai Stock Exchange A-share Index 6-month moving average, China GDP growth and China corporate earnings growth, all normalized to 100 beginning in year 2000.

Jeff Shen
Head of Emerging Markets and Co-Head of Scientific Active Equities
Jeff Shen, PhD, Managing Director, is the head of BlackRock's Emerging Markets and Co-head of Investments for BlackRock's Scientific Active Equity.
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Rui Zhao
Portfolio Manager, China Opportunities Fund
Gerardo Rodriguez
Portfolio Manager, Emerging Markets
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Gerald Garvey
Head of Long Horizon Research
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