It is becoming easier for foreign investors to access the Chinese market, both through onshore and offshore channels, according to Funds Europe’s China Investor survey 2020 conducted in partnership with Standard Chartered.
This has been a prime factor driving respondents’ decisions to increase their investment flows into China. Some 69% highlight ease of access to onshore channels (the Qualified Foreign Investor, or ‘QFI’) and 63% highlight ease of access through offshore channels (such as Stock Connect and Bond Connect) as being key to driving their investment strategies in the Chinese market.
China’s regulators have streamlined the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes, removing the need for foreign investors to apply for investment quota and bringing these two regimes together under the QFI programme from November 1. Foreign investors will also have access to a wider range of products in China’s Interbank Bond Market (CIBM)
The survey affirms the position of Stock Connect and (more gradually) Bond Connect as access channels of choice for many international asset managers and institutional investors, offering simple registration and fast entry for those who previously found it challenging to execute their investment ambitions in China through the QFII or RQFII schemes.
With the part inclusion of China A-shares in the MSCI Emerging Markets Equities Index from May 2018, this has driven a surge of investment into China through Stock Connect, the equities trading link between China’s mainland markets and the Hong Kong Stock Exchange.
Despite economic disruption created by the coronavirus pandemic, the Stock Connect access channel generated record revenue of 1,354 million Hong Kong dollars (around US$175 million) during the first nine months of 2020 - a 79% rise year-on-year according to data from Hong Kong Exchanges and Clearing.
Northbound trade through Stock Connect reached a new high with average daily trading volume of 191.2 billion renminbi ($28 billion) on July 7, 2020.
Stock Connect has also driven rising Southbound investment into equities listed on the Hong Kong Stock Exchange, with average daily trade volume reaching a record 60.2 billion Hong Kong dollars on July 6, 2020.
Stock Connect currently covers a major share of mainland and Hong Kong listed companies by market capitalisation (76%), but still less than 30% of the total number of listed companies. However, coverage is being extended, with inclusion of eligible A-shares listed on the Shanghai Star Market into Stock Connect from February 1, 2021.
Index inclusion has also encouraged northbound investment flows into local currency government bonds and policy bank bonds via Bond Connect, following the phased introduction of these bond securities in the Bloomberg Barclays Global Aggregate and the JPMorgan Emerging Market Bond indices which began in 2019.
Average daily trading activity through Bond Connect rose to 19.5 billion renminbi for the first nine months of 2020. Foreign participation in the CIBM has increased by more than 250% since the launch of Bond Connect in July 2017, according to Bond Connect Company Limited data. However, with less than three per cent of total CIBM assets in foreign ownership, there is significant opportunity for this to grow further.
To assess the relative importance of these access channels to international investors, survey respondents were asked to rank each access channel in order of importance from 6 (most important) to 1 (least important). These were then ranked in order on the basis of their weighted-mean calculated from respondent scores.
Survey results indicate that Stock Connect is the dominant channel on the basis of current usage, reflecting the strong growth in both northbound and southbound trading activity discussed above. However, the QFI channel remains important to foreign institutional investors and is ranked in second place.
Alongside these channels, foreign institutional investors continue to tap fixed income yield through investing in renminbi-denominated bonds issued offshore, particularly in Hong Kong. This complements offshore and onshore access to China’s bond markets respectively through Bond Connect and CIBM Direct.
In two years’ time, respondents indicate that overseas investors will continue to favour this multi-channel approach, with no single channel meeting all of investors’ requirements including efficient FX hedging, funding flexibility and low transaction costs.
Stock Connect will remain the dominant channel for investing in equities, with northbound investment flow through Bond Connect also continuing its strong growth.
However, investors will continue to invest through QFI channels and in renminbi-denominated bonds issued in offshore financial centres. CIBM Direct retains its attraction – particularly for central banks, pension funds and other prominent foreign investors which value the yield opportunities and risk management tools offered through this investment channel.
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