INVESTING IN CHINA

What’s covered?

• Why is the onshore Chinese equity market becoming hard to ignore?
• Why is China’s bond market poised to change relatively quickly?
• Read our latest China market and index insights
• See our range of funds exposed to China’s growth potential

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Stepping up change

As China grew to become the world’s second largest economy after the US, foreign investors often struggled to benefit from the country’s full range of growth opportunities. This story is changing quickly, as policymakers seek to liberalise access to Chinese stock and bond markets while making them more squarely aligned with international standards. This has material implications for all investors, from individuals right through to large, sophisticated institutional investors. Much is changing in China, and the cost of ignoring this emerging opportunity might prove too high, especially over the longer term.

Foreign investors’ holdings in China
(as % of onshore market)

Sources: Wind, as of December 2018. Foreign holdings of onshore equities & bonds are estimated based on QFII holdings and bond holdings via CIBM Direct until 2013, and based on PBoC’s disclosure of foreign holdings of equities/bonds starting from 2014.

A quality equity decision

The onshore Chinese equity market is becoming increasingly hard to ignore for investors. With more than 3,000 listed companies, A-shares - which are listed in Shanghai and Shenzhen - give investors access to what has historically been a relatively isolated market. Eased restrictions and continuing market liberalisation now mean international investors can trade A-shares and manage liquidity easily through the Stock Connect program without the hassle of going through the previous quota system.

The increasing inclusion of China A-shares in major international indices is supporting the transition of Chinese equities from a “nice to have” to a “need to have” asset class. In 2018, MSCI started including A-shares in their global emerging market benchmarks, and will be increasing the weight of A-shares throughout 2019. In many cases, A-shares are the only option for investors to gain exposure to quality Chinese companies with sustainable business models, low sensitivity to policy cycles, and high growth potential from consumption upgrading and technological advancement.

Bond buyers welcome

The ascension of China’s bond market has largely lacked foreign participation – only about 3% of the US$12 trillion market is in foreign hands. This is poised to change relatively quickly, underpinned by better access channels and greater alignment with international standards.

As of April 2019, the Bloomberg Barclays Global Aggregate Index, a major tracker of global bond performance, added Chinese sovereign and bank policy bonds to its mix. We estimate the inclusion could bring at least US$150 billion of inflows from foreign investors over the 20-month inclusion period (ending November 2020), just from rebalancing passive strategies tied to this benchmark.¹ At the current market value, this would represent about 6% of the global index. Our estimate could be conservative, especially if China’s bond market, already the second biggest in the world, maintains its current growth path. Also, this estimate does not reflect likely inflows from active strategies, which could be significant but are harder to predict.

^1. For illustrative purpose only. There is no guarantee that any forecast made will come to pass.

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