PANEL: After the storm

The crash in share prices may have unnerved some investors, but the Chinese authorities are continuing with their plans for renminbi internationalisation and mutual fund recognition. We asked a number of experts for their views.

WAYNE SHUM, HEAD OF INSTITUTIONAL BUSINESS, BOCHK ASSET MANAGEMENT

What advice would you give to investors who have exposure to Chinese equities and are unsettled by the recent volatility? 
Investors should maintain a long-term focus to ride out the recent market volatility. While the Chinese economy is indisputably slowing down, it is still growing considerably faster than any other major economies. In fact, some recent economic/fundamental data for selected sectors/industries in China seems encouraging and definitely do not suggest a doom-and-gloom situation. These include rising housing prices, increasing retail sales and so on. When investing in China, it is inevitable for investors to adopt some sort of a top-down approach, given that China is still predominantly a policy-driven economy. The key is to identify the next growth sectors/industries and stay long-term. 

Who has more to gain from mutual fund recognition? Mainland Chinese managers or Hong Kong managers?
We believe mutual fund recognition will continue to evolve and ultimately benefit the mutual industries in both China and Hong Kong. From the outset, the Hong Kong-based funds will have immediate access to a much larger market in China, while the mainland-domiciled funds will likely be able to use Hong Kong as a stepping stone to showcase their onshore track record to international investors. 

How does the recent volatility in China affect the government’s plans to internationalise the renminbi? 
We don’t expect the renminbi internationalisation will be reversed as it is the strategic policy of the government. The recent market volatility may perhaps affect the pace of the renminbi internationalisation, but should not have any significant impact on its direction. 

BING LI, HEAD OF ASSET MANAGEMENT, ICBC EUROPE

What advice would you give to investors who have exposure to Chinese equities and are unsettled by the recent volatility? 
The correction is largely due to high leverage and speculation in the market. Our advice is to limit exposure to this market until the deleveraging process reaches an end, even though we only provide investment products and solutions focusing on the Chinese onshore bond market. 

Who has more to gain from mutual fund recognition? Mainland Chinese managers or Hong Kong managers? 
In the short run, the demand from foreign investors for renminbi-denominated assets will be negatively impacted. The demand of Chinese investors to diversify their portfolios into the global market will exceed the demand of foreign investors to pursue renminbi assets, which could be more favourable for Hong Kong managers. In the long run, more and more foreign investors will allocate money into renminbi-denominated assets, especially after the renminbi is included into SDR [special drawing rights] basket and the Chinese market is included into world indices in the future, which could benefit Chinese managers. 

How does the recent volatility in China affect the government’s plans to internationalise the renminbi? 
Internationalisation is unlikely to be affected. Key areas are the renminbi FX rate and the onshore bond market. Chinese authorities have to consider the trade-off between the depreciation pressure of the renminbi FX rate arising from more relaxed renminbi FX policy and the benefit of gaining world currency status. Fortunately, China has huge foreign exchange reserves as a buffer to counter against the capital outflow challenge.

THOMAS KWAN,CHIEF INVESTMENT OFFICER, HARVEST GLOBAL INVESTMENTS

What advice would you give to investors who have exposure to Chinese equities and are unsettled by the recent volatility?
We believe 2015 has been a challenging year but there is light at the end of the tunnel for the economy. While the latest PMI [purchasing managers index] reading was on the face of it unhelpful, it does not give the whole picture. Some of the high frequency data points suggest there are early signs of stabilisation. We are also seeing an uptick in the important real estate sales and expect to see infrastructure spending accelerate. So we believe stabilisation has already emerged in the third quarter and will see improvement going into the final quarter and the first quarter of 2016. Although overall we are still cautious, we believe markets have discounted a lot of the risks of a hard landing. Moreover, we are seeing good value in a number of areas and medium-term growth opportunities in areas related to the Internet+, Industry 4.0 and One Belt One Road policies.

The recent volatility in the Chinese equity market was related to the build-up and subsequent unwinding of leveraged positions and this process is at, or near, its end. We see good value in China H-shares and selectively in China A-shares, although note that the mid-cap A-shares segment is still slightly expensive. Our advice would be to build positions using the value available in H-shares and the breadth of opportunity selectively in A-shares.

Who has more to gain from mutual fund recognition? Mainland Chinese managers or Hong Kong managers?
Chinese mainland investors have very little exposure to international asset markets and the Chinese domestic market has just started to open up to foreign investors. As such, over the next few years, we expect the flow of funds in and out of China (via mutual fund recognition) will provide tremendous opportunities for both mainland and Hong Kong managers. 

How does the recent volatility in China affect the government’s plans to internationalise the renminbi?
The Chinese leadership has been quite explicit that there is no change in the roadmap.

RICHARD TANG, CHIEF EXECUTIVE, ICBC CREDIT SUISSE ASSET MANAGEMENT

What advice would you give to investors who have exposure to Chinese equities and are unsettled by the recent volatility?
Despite the recent volatility, the year-to-date movement in China equities actually has been less than it could have been, and given the abrupt surge in the first half of this year, in a way it is not undesirable for the market to correct. Even if you believe the market will go through multi-year growth, there will still be healthy market adjustments during the upward trajectory. It also provides opportunities for investors to buy quality names on dip. The key is to maintain investment discipline and do your homework.

Who has more to gain from mutual fund recognition? Mainland Chinese managers or Hong Kong managers?
It is still too early to tell, but ultimately both sides will gain, given the wider scope of investor audience. At the current stage, Hong Kong managers may have more to gain, given it will be the first time they gain direct access to the mainland retail market (while many China managers already offer onshore products through RQFII). Timing-wise, mainland investors would be more interested to look at international diversification opportunities than before.

How does the recent volatility in China affect the government’s plans to internationalise the renminbi?
Short-term market volatility should not affect the government’s plan for renminbi internationalisation. However, it has provided a lesson for us to see the importance of transparent communications and engagement with the international audience during the process.

©2015 funds europe