The WisdomTree China ex-State-Owned Enterprises Index aims to measure the performance of broad-based Chinese companies that have a minimum market capitalisation of $1bn.
Excluded are SOEs, which the firm defines as enterprises with more than 20% ownership by the government.
“Some investors believe that government ownership can negatively impact the operational aspects of a company because government-owned companies might be influenced by a broader set of interests, beyond generating profits for shareholders,” the firm said.
Information technology and consumer sectors (discretionary and staples) have overweights on the index due to the low amount of government involvement in the sectors.
The financial sector is underweight due to the high degree of government involvement, particularly when it comes to China’s big banks.
“Although state-owned Chinese banks are among the lowest-priced areas of the global markets, they remain the largest risk in owning China based solely on market cap,” the firm said.
However, several fund houses see opportunity in SOE reform. JP Morgan Asset Management believes SOEs could become one of the key investment themes in the coming years as “bolder reforms” pick up speed.
Similarly, EFG Asset Management believes SOE reform is gaining momentum and will result in industry consolidation, creating the next decade’s industry leaders.
A comparison of China indices
“Looking at dividend yield and price-to-earnings ratios of the various Chinese indexes above would lead an investor to believe that the non-state-owned part of the market is priced higher. But if considering profitability metrics like return on equity and return on assets, an investor could conclude that non-SOEs are more reasonably priced,” according to WisdomTree.