Investing in China

Stepping up change

As China grew to become the world’s second largest economy after the U.S., 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, whether individuals or 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)

Foreign investors’ holdings in China

Sources: Wind, as of March 2020. Foreign holdings of onshore equity & bond are estimated based on QFII holdings and bond holdings via CIBM Direct until 2013, and based on PBoC’s disclosure of foreign holdings of equity/bond starting from 2014.

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 USD150 billion inflows from overseas, just from rebalancing passive strategies tied to this benchmark over the 20-month inclusion period (ending November 2020). 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.

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 been relatively isolated market historically. 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 program.

Supporting the transition of China A-shares from a “nice to have” to a “need to have” asset class is the ongoing inclusion in major indices by key global providers. In 2018, MSCI started including A-shares in their indices. FTSE is set to follow suit and MSCI have announced a significant increase in their indices’ exposure to weights of A-shares for later this year. In many cases, A-shares are the only option for investors to gain exposure to quality Chinese companies with sustainable business model, low sensitivity to policy cycle, and high growth potential from consumption upgrading and technology advancement.

Why BlackRock for China

To help discover the opportunities these changes provide, you need a trusted partner who is not only an expert on China but can apply their knowledge, expertise and judgement in creating portfolios that can deliver the best of Chinese markets to you. BlackRock’s large and experienced team can provide you with a truly differentiated perspective on China and our breadth of solutions across active and index strategies give you a multitude of ways to access the market.