China’s Economy vs. Market Cap: A Global Imbalance

China’s Economy vs. Market Cap: A Global Imbalance

As global investors consider opportunities in emerging markets, China presents a unique paradox. China’s economy is the world’s second largest, contributing nearly a fifth of global GDP. Yet its stock market accounts for only a small fraction of global equity value.

This graphic, created in partnership with MSCI, explores this gap between China’s economy and the stock market and how it compares to other countries.

China’s Economy & Market Cap in Context

China is not the only country to have a GDP weight that is larger than its market cap weight. In many other major countries, economic size outweighs stock market prominence.

However, China stands out because of the scale of its gap, whereas other countries have weightings that are much more closely aligned.

Country	GDP Weight	Market Cap Weight
China	19%	3%
India	4%	2%
UK	4%	3%
France	3%	2%
Italy	2%	1%

What causes this 16 percentage point gap, and what does it mean for investors?

Factors Influencing China’s Stock Market

Due to foreign ownership restrictions and state-owned enterprises, the proportion of China’s stock market that is freely available for public trading is reduced. 

MSCI’s indexes reflect this freely tradable portion, also known as the free float market capitalization. This aims to ensure the indexes are investable, diversified, and accurately represent the market. Ultimately, this means China has a low market cap weighting in a global context.

Is China Underrepresented in Portfolios?

Beyond looking at where a company is incorporated or primarily listed, investors can gauge country weights in other ways. For instance, MSCI also explored the geographic sources of company revenues. 

Companies listed in the U.S., Japan, and Taiwan were partially allocated to China because they earned revenue in the country. With this analysis, China has a 10% weighting globally.

Notably, investing according to revenue exposure would be much more complex and could overlook local economic, regulatory, and political factors. However, this view does underscore how China’s 3% market cap weight in global benchmarks can underrepresent economic realities.

Investors wanting to align more closely with macroeconomic fundamentals may want to consider a standalone or larger allocation to China.

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