How Ordinary U.S. Investors Own a Piece of China

China’s enormous stock market, long off-limits to international investors, is now part of many a mom and pop investor’s portfolio outside the country. That’s because the world’s major equity index compilers began including Chinese stocks in their gauges. As a result, funds that track those indexes -- for instance, the $51 billion Vanguard FTSE Emerging Markets exchange-traded fund -- have loaded up on so-called A-shares that trade in Shanghai and Shenzhen. Now, U.S. President Donald Trump’s administration is examining whether to keep government pension funds from investing in Chinese equities.

About 1.89 trillion yuan, or $265 billion, of mainland equities as of March, according to the People’s Bank of China. Cash has poured into the $7.4 trillion market over the last few years as China moves to open up its capital markets, with overseas accounts now holding almost as big a stake as China’s own mutual funds. One big driver: Passively managed investment strategies, which have become some of the most popular ways to get exposure to global stocks and bonds. Funds that seek to replicate an index now oversee about $8 trillion in the U.S., ceding control over where they put this money to work to the companies behind their benchmarks. The decision by three big indexers -- MSCI Inc., S&P Dow Jones Indices and FTSE Russell -- to add A-shares to their flagship benchmarks has given many investors their first exposure to China.