Investing in Islamic China A shares – side stepping regulatory risks
It is now a well-known fact that since Chinese regulators first pulled the plug on Alibaba’s IPO of Ant Financial in late 2020, investing in China has not been an easy ride with multiple rounds of regulatory crackdowns that involved various areas of the economy. Some sectors that were hardest hit were related to internet, education, property, and healthcare. China’s push for common prosperity has led to investors favouring new economy sectors such as renewables, electric vehicles, semiconductors and high-end industrial manufacturing that are more aligned to the government’s national objectives. A quick look at the constituents in Dow Jones Islamic A-share 100 index indicate that these are few sectors that are well represented.
Source: S&P Dow Jones Islamic Market China A 100 index fact sheet, as of February 28, 2022.
In contrast, there was little exposure to sectors that were under pressure from the regulatory crack such as those in the internet and property sectors. The simple reason for this was most Chinese internet companies are listed offshore either in Hong Kong or the United States, while most property companies do not meet the Shariah requirement of total debt divided by trailing 24 month market capitalisation of less than 33%1 . This has led to the onshore Islamic A-shares2 outperforming the conventional China market (as represented by MSCI China) as can be seen below:
1 This requirement is based on S&P Dow Jones Islamic Market Indices Methodology https://www.spglobal.com/spdji/en/documents/methodologies/methodology-dj-islamic-market-indices.pdf
2 Onshore Islamic A-shares are represented by the Dow Jones Islamic A-share 100 Index
Source: Bloomberg, 4 Mar 2022
This year, China markets have gotten off to a poor start on the back of worries over rising global interest rates as Global Central Banks led by the US Federal Reserve move to counter rising inflationary pressures. Geopolitical risk arising from the Russia-Ukraine conflict and the lingering Covid-19 pandemic adds to further concerns.
Amidst this rising back drop of volatility, investors could fare better by allocating into the A-shares market with an Islamic investing approach that weighs more heavily to sectors supported by national policies in China, where growth is more domestic focused. The Islamic A-shares market as represented by the Dow Jones Islamic Market China A 100 Index has vastly outperformed the conventional MSCI China Index in recent times and could continue to do so given continued market volatility
Source: Bloomberg , 4 March 2022
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