Investing in China

What’s covered?

• Why China’s bond market is poised to change relatively quickly?
• Why the onshore Chinese equity market is becoming hard to ignore?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Investments in China are subject to certain additional risks, particularly regarding the ability to deal in equity securities in China due to issues relating to liquidity and the repatriation of capital.

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, given difficulties accessing onshore markets. 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 high, especially over the longer term.

There is no guarantee that a positive investment outcome will be achieved.

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

Sources: Wind, as of March 2020. Foreign holdings of onshore equity & bond are estimated based on Qualified Foreign Institutional Investor (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$14 trillion market is in foreign hands.¹ We believe 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 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.² This would be impacted by movement in the China bond market and also, this estimate does not reflect possible inflows from active strategies, (strategies focused on outperforming the market in comparison to a specific benchmark), which could be significant but are harder to predict.

A quality equity decision

We believe the onshore Chinese equity market is becoming increasingly hard to ignore for investors. With more than 3,500 listed companies,³ 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 through the Stock Connect program, launched by the Hong Kong, Shanghai and Shenzhen exchanges to facilitate more streamlined trading of their listed securities.

Supporting the transition of China A-shares to a more international asset class is their 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 has 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 a durable business model, low sensitivity to policy cycle, and high growth potential from the upgrade to China's consumption market and technology advancement.

¹ Wind, March 2020
² Bloomberg Barclays, June 2020
³ Wind, June 2020

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