ChiNext: The growth market that has defied Chinese equity trouble

ChiNext is closed market for foreign investors

In recent years China has opened up its capital markets making it easier for foreign investors to invest directly in mainland China equities listed in Shanghai and Shenzhen, but the ChiNext board is still closed land for most investors due to prohibitive rules. In effect it is only accessible for few foreign institutional investors. Luckily the ETF market is providing an opportunity for retail investors to get access to this market through the CSOP SZSE ChiNext ETF (Saxo ticker is 03147:xhkg) managed by CSOP Asset Management which is a Chinese regulated asset management firm based in Hong Kong with $10bn in asset under management as of December 2020.

The ETF consists of 160 securities with $110mn in assets and tracking the ChiNext Index and a total expense ratio of 1.16%. The ETF uses a combination of a physical representative sampling and a synthetic representative sampling strategy (swaps), which means that the fund is not holding the underlying index 1:1, but tries minimize the tracking error through sampling. This enables the fund to minimize tracking error while getting better liquidity conditions for investors.

The 10 largest positions in the fund constitute 49.3% of the funds market value with Contemporary Amperex Technology (CATL) being the largest position with 19.1% weight and also the biggest company in our battery equity basket. CATL is one of the world’s largest manufacturers of lithium-ion batteries and is becoming China’s crown jewel within the fast-growing and emerging battery industry which will be transformational and essential to the green transformation including electric vehicles. The ETF also provides exposure to China’s largest financial and stock information provider East Money Information with $1.8bn in revenue and growing 82% over the past year. The ETF also gives exposure to some of the most interesting medical technology and biotechnology companies in China.

The history of ChiNext and why it will play a major role

ChiNext was first discussed in August 1999 in the CPC Central Committee and the State Council during the height of the dot-com bubble. China was looking at the technological change in the US and especially what was going on with the Nasdaq exchange. In August 2000, China decided that the Shenzhen Stock Exchange should prepare to create a second board which should include innovative companies with key technologies in order to support growth industries. The ChiNext board was inaugurated on 23 October 2009. In 2020, more than 800 companies were listed on the ChiNext Market with the combined market capitalization approaching $1trn.