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Illustration: Eniola Odetunde/Axios

China's economic growth has weakened to the slowest pace in nearly three decades this year, the result of a gradual shift to a new economy and a damaging trade war with the U.S.

Its mainland stock market, made up of largely domestic-facing companies, is having a banner year — in fact, it's been the best performing major stock index in the world.

What's happening: China's onshore stocks, dubbed A shares, have delivered more than 37% total return for investors this year, based on the FTSE A share 200 index, FactSet data show.

  • The A shares' return has towered over other regional markets and the U.S. in spite of the trade war and continued unrest in neighboring Hong Kong.

By the numbers:

  • China's benchmark Shanghai Composite Index has risen 19% year to date
  • Japan's Nikkei has gained 18%
  • MSCI's index of Asian shares, excluding Japan, has risen 13%
  • Hong Kong's Hang Seng is up 8%
  • The S&P 500 has gained 23%

What they're saying: China's A shares have been able to shine in large part because they reflect the growth of the Chinese private sector and middle-class consumers, Asha Mehta, senior portfolio manager at Acadian Asset Management, tells Axios.

  • "The underlying companies in the A share market are broadly quite different and the investors are very different," Mehta says, noting that 80%-85% of investors in the market are retail, rather than institutional investors.
  • Acadian was one of the first U.S. asset managers granted a license to trade China's onshore market locally in March 2018 and one of the first to develop a fund dedicated to the onshore market.

What it means: China's A shares also have gotten a big boost from the country's deregulation and market liberalization initiatives, the Chinese government's stimulus measures and particularly from increased weighting in MSCI's emerging markets index.

  • Yes, but: A major reason Chinese securities had previously been excluded from many global benchmarks, including MSCI, is that they have been prone to speculative activity, alleged government interference and a lack of governance.

The bottom line: China has the second-largest stock market in the world and is growing fast, but mainland Chinese stocks are still owned by very few outside China.

  • Despite continued tension, and congressional attempts to block American investment in Chinese securities, if A shares continue to perform like they have this year, they will likely see significant inflows.
Expand chart
Data: FactSet; Chart: Axios Visuals

What's next: China's A shares may have further to go, as inclusion in MSCI's emerging markets index has been a major driver of inflows and more stocks are set to be added.

  • MSCI announced Thursday that it would increase the A shares' weight in the EM index to 4.1%, drawing billions of dollars from both passive and active fund managers to the stocks.
  • After adding Chinese stocks to its global benchmarks in 2018, following years of deliberations, MSCI says it plans to increase A shares’ weighting to 20% of the index soon.
  • The MSCI EM index is tracked by around $2 trillion of funds.

Why it matters: MSCI inclusion is seen as a stamp of approval from the investment community that equities are safe.

  • If and when A shares are fully included in MSCI's indexes, a full 40% of the MSCI Emerging Markets Index would be made up of Chinese stocks.
  • Mehta tells Axios she thinks it could rise to an even higher level, potentially up to 50%.

Go deeper:

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