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China’s underdog market surges

The Shenzhen Composite is one of the best-performing markets in Asia this year.

Weighed down by a slowing economy and worries over structural reforms, China stocks have been left in the dust this year by their international competitors.

The Shanghai Composite, considered to be the mainland’s benchmark, is down 5% on the year. Stocks in Hong Kong haven’t performed much better.

But there is one index that has bucked the trend. In Southern China, the tiny Shenzhen Composite has spiked 16% since January, and is among the best performers in Asia.

Why the divergence?

While most of the companies traded in Shanghai are large, state-owned enterprises, the Shenzhen market is dominated by small and mid-sized companies.

The Shenzhen stock exchange is also heavy with small firms in the technology industry, which draws investors seeking exposure to companies with very high growth potential.

Michael Liang of Foundation Asset Management in Hong Kong said that Shenzhen’s key to success has been to capitalize on the “universal” excitement over tech companies.

In other words, think of Shenzhen as China’s Nasdaq.

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