Investing — China — Emerging Markets
Have You Ever Heard About STAR 50 and Hang Seng Tech Indexes?
Discover why it might be a good idea to invest in these Chinese NASDAQ challengers
China continues to emancipate from western technological indexes superiority. The first major milestone was achieved with the launch of STAR 50 index, soon followed by the Hang Seng Tech index. What could you expect from these Chinese indexes? Are they serious competitors to NASDAQ? And finally, where and how to buy them?
US Technology Indexes Supremacy
For those with an interest in investing, you must know the NASDAQ, the iconic stock exchange and second-largest US equity market, by volume traded, behind the New York Stock Exchange (NYSE).
The NASDAQ Composite Index includes more than 2,700 companies listed on the NASDAQ stock exchange. At the same time, the NASDAQ-100 index tracks the 100 largest, non-financial market cap of the NASDAQ Composite. Historically, the technology sector has been, and still is, a significant part of the NASDAQ-100.
NASDAQ-100 and NASDAQ Composite are US-centric. The former only lists American companies, whereas the latter includes some foreign stocks, thanks to ADRs (American Depositary Receipt). Until recently, ADRs were a convenient way for Chinese companies to be quoted on US markets, especially for well-known companies, such as Alibaba or Baidu. But things started going wrong with the China—US trade war and former President Trump’s plans to ban Chinese ADRs from US markets.
Hence the Chinese idea to create national, tech-oriented indexes. In other words, setting up domestic NASDAQ-100 competitors on Chinese stock exchanges.
The Chinese Tech indexes
SSE STAR Market: Where the Rising Star Companies Cluster
This is why the Shanghai Stock Exchange (SSE) created the Shanghai Stock Exchange Sci-Tech Innovation Board (SSE STAR) Market, helped by China’s economic reform agenda. In practice, it is possible to see STAR Market as a NASDAQ-style stock exchange.
The purpose of Shanghai’s STAR market is to ease investors’ access to the nation’s fast-growing technology companies, based on an attractive and healthy financial environment.
Since its inception in 2019, more than 200 Chinese companies went public on the STAR stock exchange, with a market capitalization above CNY 1.1 trillion (USD 169 billion) as of January 22, 2021. The NASDAQ Chinese competitor has attracted numerous high-tech companies, with plenty of IPO applications in recent months, despite COVID-19 pandemic. More than 500 companies are currently in registration progress.
The SSE STAR 50 Index
Since then, the SSE STAR 50 index has been launched. Seen as an equivalent to NASDAQ-100, it tracks the 50 securities with the largest market cap and good liquidity listed on the STAR market.
Currently, a Chinese stock must have been publicly traded on the STAR Market for at least six months to be included in STAR 50 index. The index sets a weight limit of 10% for a single component, and the sum of the weights of the 5 main constituents must not exceed 40%. Mostly coming from the IT sector, STAR 50 constituents highly focus on innovation and disruption, with an average 13% of revenue used for R&D expenses. See index methodology for details.
However, chances are you will not know any of the stocks in the STAR 50 index. Have you ever heard of Beijing Kingsoft Office Software, Montage Technology or Semiconductor Manufacturing International? Me neither.
The Hang Seng Tech Index
STAR 50 index was just the beginning. A few days after its inception, the Hang Seng Tech Index was launched. It tracks the 30 largest technology companies listed in Hong Kong markets with high business exposure to technology themes. Unlike the STAR 50, you will find well-known names, such as Alibaba, Tencent or JD.com. In the same way that STAR 50 index, Hang Seng Tech Index targets Chinese markets for innovative companies, with an 8% capping rule. See index methodology for details.
Where and How to Buy these Chinese Tech Indexes?
Passive investing is your best option. Although these indexes’ ambition is to compete with their US counterparts, they are still young. Then, ETF offer is scarce, and you can count them on the fingers of one or two hands.
For STAR 50 index, China ETF specialist KraneShares recently launched its KraneShares SSE STAR Market 50 Index ETF (KSTR) on NYSE Arca. And that is all for STAR 50 index!
Alternatively, the offer is broader for Heng Seng Tech index:
- iShares Hang Seng TECH ETF
- ChinaAMC Hang Seng TECH Index ETF
- CSOP Hang Seng TECH Index ETF
- KraneShares Hang Seng TECH Index ETF (waiting for SEC approval)
Unfortunately, things get a bit more complicated for European investors. Indeed, both Chinese indexes remain hard to reach regarding retail investment market rules in Europe (such as PRIIPS and UCITS guidelines). HSBC is the only one selling a Hang Seng Tech UCITS ETF, since December 2020.
A Final Word
Although the STAR market is geared towards the Chinese private tech sector, Hong Kong’s Hang Seng Tech, conversely, includes public stocks such as Alibaba or Tencent. In both cases, these new indexes clearly confirm that China is judiciously placing its pieces to move out of the sphere of US influence.
Anyway, they represent good options to diversify your Chinese equity allocation, off the beaten track of MSCI China, CSI 300 and so on. See my article on portfolio allocation optimization and why it matters.
Portfolio Allocation Optimization And Why It Matters
Now is a good time to be tactical & strategic with your portfolio
This article is for educational and entertainment purposes only and should not be considered as financial or legal advice. Not all information will be accurate but all the data is sourced. Consult a professional before making any significant financial decisions. This article should not be seen as an incentive to buy or sell any of the securities mentioned therein. The author has no position in any of the ETF mentioned.