China has one of the most under-represented and under-serviced financial markets. Yet beneath the veneer of abundant treasures, the ‘China opportunity’ remains contentious. TF Cheng, head of Greater China business, BNP Paribas Investment Partners asks, is it hype or reality?
In recent months, Chinese regulatory changes have dominated the headlines. The qualified foreign institutional investor schemes (QFII and RQFII) were significantly relaxed, the renminbi became an official reserve currency, the Shenzhen-Hong Kong Stock Connect is set to create waves when it goes live this year, and the Chinese interbank bond market opened up to foreign investors. The talk is that the Chinese authorities are paving the way for the onshore A-share and bond markets to be included by global index providers such as MSCI and JP Morgan.
It appears the ‘China opportunity’ is opening up to the world at an unprecedented pace. Or has it, really?
While there is no doubt that China’s capital markets have become more accessible to foreign investors, the world has yet to respond. Concerned by China’s economic slowdown, renminbi depreciation pressures, stock market volatility and credit uncertainties, foreign investors have lacked interest.
Moreover, attempts by foreign asset managers to tap Chinese investors’ interest in overseas investments have been challenging. Outbound investment channels such as the qualified domestic institutional investor schemes (QDII and RQDII) and the qualified domestic limited partner (QDLP) scheme have all but been suspended or frozen to stem capital outflows and limit renminbi depreciation.
So while the ‘China opportunity’ remains a top priority in the minds of most foreign asset managers, the road to making it a reality is proving tricky. How should we tap these opportunities?
BNP Paribas Investment Partners (BNPP IP) believes that the effort – but also the rewards – involved in capturing the investment potential of China would be Olympian: we need strength (long-term vision and the best skill-sets), stamina (perseverance and the nerve to ride the ups and downs) and agility (a nimble mindset and execution/business model).
Getting the China strategy right is critical to long-term success in the region and this means figuring out how to operate within a challenging and ever-changing regulatory and market environment.
As a firm, we need to invest in our intellectual capital to understand the needs and changing preferences of Chinese investors, as well as the drivers behind Chinese regulatory change and reforms. One example of BNPP IP’s commitment to knowledge is our partnership with Tsinghua University’s school of economics and management in establishing the Centre for Globalisation of Chinese Enterprises in July 2015. Through this tie-up, BNPP IP has developed and sponsored independent thought leadership research papers about international companies entering China and Chinese companies expanding globally.
BNPP IP has also employed a Greater China senior economist, whose sole responsibility is to research and write about the development of Greater China for global investor audiences.
BNPP IP also seeks to understand and meet the needs of Chinese investors at first hand. There is a surge in the appetite of Chinese investors for overseas investments due to the depreciation of the renminbi, falling onshore bond yields and stock market volatility. However, their first forays into overseas investments may not take the form of stocks and bonds. For example, many Chinese mainland insurance companies are seeking to invest in overseas property. BNP Paribas can draw on its real estate franchise in Europe to facilitate these investments.
We also recognise the need to provide customised solutions. This means accounting for ‘home bias’; Chinese-issued foreign bonds, or Chinese firms listed overseas, are deemed to be more investible for first-time Chinese investors venturing abroad, for example.
These efforts can take place only with the appropriate cross-border channels legally in place, which is a specialised skill-set in itself. BNPP IP has a senior team of cross-border solutions specialists to help overcome these specific challenges.
THE FOREIGN INVESTOR
Conversely, foreign investors are still coming to terms with the reality of ‘Chinese beta’. When onshore Chinese shares and bonds are eventually included in global indices, allocation to renminbi-denominated asset classes will become a structural beta decision.
In anticipation, benchmarked institutional investors are already including renminbi products in their portfolios. BNPP IP believes there will be a structural long-term flow and we aim to capture this trend by incorporating renminbi allocation decisions within our regional and global investment strategies.
Apart from conventional open-ended market platforms, we have seen rising numbers of foreign, sophisticated investors or smart monies such as endowment funds using private equity or closed-ended funds to access China’s mainland onshore market.
Private equity vehicles are able to invest directly in small and medium-sized enterprises, which tend to be shut out of the mainstream capital markets. Based on these observations, BNPP IP intends to launch products in other alternative asset classes in future.
In addition, BNPP IP’s alternative investment and incubation unit, BNP Paribas Capital Partners, has taken a minority stake in a multi-asset class investment manager, Orion Partners, based in Hong Kong. BNPP IP is working with Orion Partners to develop alternative investment products for retail and institutional investors including a consumer-focused private equity fund and an Asian infrastructure debt fund.
EXPERIENCE AND INNOVATION
BNPP IP’s commitment to ‘getting China right’ is demonstrated by our taking the ‘first mover’ lead in Greater China in recent years. Our local joint venture with Haitong Securities, HFT Investment Management, was one of the earliest Sino-foreign joint ventures in asset management. We were one of the first foreign institutions to be awarded QFII status and several units of the firm have received RQFII licences.
The Stock Connect programme initiated in 2014 has also opened up opportunities for the company’s funds to invest directly into China. In April 2014, BNPP IP was the first foreign asset manager to be registered in the Shanghai Free Trade Zone as a wholly foreign owned enterprise (WFOE). This has allowed the company to consider establishing onshore cross-border investment channels such as the QDLP scheme. The WFOE set-up received industry accolades for its pioneering efforts in early 2016.
BNPP IP has also embarked on a hiring programme to acquire top cross-border Chinese talent. In the long term, BNPP IP aims to strengthen its position as a cross-border Greater China investment specialist with onshore expertise on a par with that of domestic asset managers.
A long-term commitment is crucial for global asset managers in China. The promise of China is for real, but there are obstacles. The biggest risk is to be unprepared for the upsides. If you are not positioned to take the opportunities when they come, trying to catch up may prove an even tougher challenge.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
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©2016 funds europe